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Lower Oil Prices Hurt Venezuela's Budget

RENEE MONTAGNE, host:

A new prediction about the future of capitalism from Venezuela's president, Hugo Chavez. He says the current financial turmoil in the United States and elsewhere will lead to the end of American-style capitalism. He says Venezuela is prepared to weather the crisis. But Venezuela provides 10 percent of America's oil imports, and its oil-based economy is highly vulnerable to instability in the oil markets. So the recent drop in oil prices, now at around $75 a barrel, is likely to hit Venezuela hard. NPR's Juan Forero filed this report.

President HUGO CHAVEZ (Venezuela): (Spanish spoken)

JUAN FORERO: President Chavez says the United States is sinking like an elephant in a pool, that the economic tsunami of recent weeks is a signal that American capitalism is dying. But the sharp drop in the price of oil, a product of the worldwide economic meltdown, may whipsaw Venezuela harder than most oil producers. The price of a barrel of oil, after all, was $147 barely three months ago. Robert Bottome runs the Veneconomia newsletter in Caracas. And he says low oil prices could put an end to Venezuela's free spending ways.

Mr. ROBERT BOTTOME (Editor, Veneconomia): It pretty much puts the kibosh on the government economic strategy because what they've been doing for the last five years is, as oil prices went up, they would spend more and more. And we've had a consumption-led expansion of the economy, but no investment.

FORERO: That lack of investment also means Venezuela relies almost solely on oil for export earnings. And Venezuela imports more than ever before, everything from food to car parts to medicines. The Washington consulting firm PFC Energy said in a recent report that Venezuela needs the barrel to stay above $94 this year to pay for those imports. After mocking the Bush administration last month, Chavez has started to sound more cautionary.

President CHAVEZ: (Spanish spoken)

FORERO: In a recent speech, Chavez said he's taking charge and that Venezuelans need not worry. He's promised to cut salaries for top government officials. His government is also expected to push for a cut in production when OPEC leaders meet Friday in an emergency meeting. That production cut could generate higher prices. Economic analysts agreed that the crisis will not hit Venezuela soon. They note that the central bank has $40 billion in reserves, money Chavez can use in an emergency.

And the country's debt burden is not high. But those same analysts say the government has not shown it's about to slow spending, especially with important state elections coming up next month. Next year's national budget is significantly higher than this year's, and Venezuela has also pledged billions in aid to its allies. Espinasa is a former chief economist with the state oil company. He says the only way to soften the impact is by taking tough steps, like a big cutback to Chavez's international programs.

Mr. RAMON ESPINASA (Former Chief Economist, Petroleos de Venezuela): For the last five years, an ever-increasing oil revenue has allowed government to spend, both at the same time, at home and abroad. For the first time, it will have to choose what to prioritize.

FORERO: Of course, Venezuela could also pump more oil. But Espinasa says that's not possible. His studies, based on data from the International Energy Agency, show that Venezuelan oil production has fallen in recent years.

Mr. ESPINASA: Venezuela is producing at capacity, capacity that actually has been shrinking over the years.

FORERO: And he noted that internal gasoline consumption, heavily subsidized by the state, has risen steadily. All these factors may leave Chavez with some unpleasant options. Juan Forero, NPR News. Transcript provided by NPR, Copyright NPR.

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