Oil prices are hurting countries like Venezuela

Remember that song by Blood Sweat & Tears?   

What goes up must come down Spinnin' wheel, got to go round
Talkin' 'bout your troubles, it's a cryin' sin
Ride a painted pony, let the spinnin' wheel spin...

It sure feels like a crazy spinning wheel in countries like Venezuela and Iraq, as we read in The New York Times:

While the price has been declining for months, forecasts have always been hedged with the assumption that oil would eventually stabilize or at least not stay low for long. But new anxieties about frailties in China, the world’s most voracious consumer of energy, have raised fears that the price of oil, now 30 percent lower than it was just a few months ago, could remain depressed far longer than even the most pessimistic projections, and do even deeper damage to oil exporters.

“The pain is very hard for these countries,” said René G. Ortiz, former secretary general of the Organization of Petroleum Exporting Countries and former energy minister of Ecuador. “These countries dreamed that these low prices would be very temporary.”

Mr. Ortiz estimated that all major oil exporting countries had lost a total of $1 trillion in oil sales because of the price decline over the last year.

Of course, blaming oil prices is a quick excuse.  The real problem in countries like Venezuela is mismanagement financed by high oil prices.  

Down in Venezuela, "Chavizmo" was built on the assumption that oil prices would be $150 forever.  It's not so pretty now that the price is closer to $50, as we see in CNN:

Venezuela has the world's largest oil reserves, but the country is essentially bankrupt. Last November it started importing, of all things, oil. There are shortages of practically every conceivable consumer product, from toilet paper to beer, from milk to antibiotics.

A shopping expedition is an exercise in frustration and endurance. Venezuelans have to stand in line for hours in the stifling tropical heat in pursuit of products that are more often than not completely out of stock.

As his predecessor did, Maduro blames the shortages on the opposition, on his political enemies, and on the rich. But the real reason why the economy is simply not functioning is that the government has introduced wrong-headed policies that defy all logic.

What started as an effort to alleviate poverty -- the most worthy of goals in a poor country -- turned into a failed experiment in populist-infused socialism. The government expropriated businesses, tried to control prices and markets, and generally disrupted the mechanisms of supply and demand to the point where producing anything became unprofitable.

The first and biggest target of government intervention was the state-owned oil company, PDVSA, which was used by the Chavez government as a funding source for social programs.

What was once an efficient, profitable, well-run business became a political tool run by party loyalists. Instead of investing in maintenance and production, the government wrung out all it could from its oil firm, using cheap oil to buy the loyalty of Latin American regimes, and using the profits to finance a multitude of unrelated projects.

If done with more foresight it might have worked, but in the end it all came crashing down. This all started during the years when oil prices spiked above $100 a barrel, bringing oceans of money, none of which was used to expand production and maintain equipment. The government broke the piggy bank.

Oil production has collapsed. And, making matters worse, much worse, the world price of oil, the lifeblood of the regime and the country, has fallen by about half. The country's cash flow problems were already serious before oil prices swooned. They will only get worse now.

We know from press reports that the late Hugo Chávez kept asking his countrymen to pray for a miracle, or a recovery from the cancer that eventually took his life.  In fact, Chávez was rather lucky in retrospect.  He is not around to see the mess that he created!

P.S. You can listen to my show (Canto Talk) and follow me on Twitter.

Remember that song by Blood Sweat & Tears?   

What goes up must come down Spinnin' wheel, got to go round
Talkin' 'bout your troubles, it's a cryin' sin
Ride a painted pony, let the spinnin' wheel spin...

It sure feels like a crazy spinning wheel in countries like Venezuela and Iraq, as we read in The New York Times:

While the price has been declining for months, forecasts have always been hedged with the assumption that oil would eventually stabilize or at least not stay low for long. But new anxieties about frailties in China, the world’s most voracious consumer of energy, have raised fears that the price of oil, now 30 percent lower than it was just a few months ago, could remain depressed far longer than even the most pessimistic projections, and do even deeper damage to oil exporters.

“The pain is very hard for these countries,” said René G. Ortiz, former secretary general of the Organization of Petroleum Exporting Countries and former energy minister of Ecuador. “These countries dreamed that these low prices would be very temporary.”

Mr. Ortiz estimated that all major oil exporting countries had lost a total of $1 trillion in oil sales because of the price decline over the last year.

Of course, blaming oil prices is a quick excuse.  The real problem in countries like Venezuela is mismanagement financed by high oil prices.  

Down in Venezuela, "Chavizmo" was built on the assumption that oil prices would be $150 forever.  It's not so pretty now that the price is closer to $50, as we see in CNN:

Venezuela has the world's largest oil reserves, but the country is essentially bankrupt. Last November it started importing, of all things, oil. There are shortages of practically every conceivable consumer product, from toilet paper to beer, from milk to antibiotics.

A shopping expedition is an exercise in frustration and endurance. Venezuelans have to stand in line for hours in the stifling tropical heat in pursuit of products that are more often than not completely out of stock.

As his predecessor did, Maduro blames the shortages on the opposition, on his political enemies, and on the rich. But the real reason why the economy is simply not functioning is that the government has introduced wrong-headed policies that defy all logic.

What started as an effort to alleviate poverty -- the most worthy of goals in a poor country -- turned into a failed experiment in populist-infused socialism. The government expropriated businesses, tried to control prices and markets, and generally disrupted the mechanisms of supply and demand to the point where producing anything became unprofitable.

The first and biggest target of government intervention was the state-owned oil company, PDVSA, which was used by the Chavez government as a funding source for social programs.

What was once an efficient, profitable, well-run business became a political tool run by party loyalists. Instead of investing in maintenance and production, the government wrung out all it could from its oil firm, using cheap oil to buy the loyalty of Latin American regimes, and using the profits to finance a multitude of unrelated projects.

If done with more foresight it might have worked, but in the end it all came crashing down. This all started during the years when oil prices spiked above $100 a barrel, bringing oceans of money, none of which was used to expand production and maintain equipment. The government broke the piggy bank.

Oil production has collapsed. And, making matters worse, much worse, the world price of oil, the lifeblood of the regime and the country, has fallen by about half. The country's cash flow problems were already serious before oil prices swooned. They will only get worse now.

We know from press reports that the late Hugo Chávez kept asking his countrymen to pray for a miracle, or a recovery from the cancer that eventually took his life.  In fact, Chávez was rather lucky in retrospect.  He is not around to see the mess that he created!

P.S. You can listen to my show (Canto Talk) and follow me on Twitter.