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Charles Kennedy

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Venezuela Delaying The Inevitable With $5 Billion From China

Venezuela, a country in economic crisis because of the dramatic fall in oil prices, is seeking additional financial help from China this week.

Venezuela is overwhelmingly dependent on oil for its economy, and the country’s budget has a breakeven price of well over $100 per barrel. In other words, the government had fiscal pressures even before the collapse of oil prices. With oil down around $46 per barrel, it is facing a veritable economic and financial crisis. Related: West Texas Fracker Uses Toilet Water To Cut Cost

In the past, the government has been able to paper over its budget problems by loans from China. In exchange for tens of billions of dollars in loans, Venezuela sends around 700,000 barrels per day of oil to China. Since 2005, China has loaned the South American OPEC member more than $50 billion.

But Venezuelan President Nicolas Maduro traveled to China this week with hat in hand, looking for more assistance. China has agreed to loan an additional $5 billion, with the intention of having the money dedicated to boosting Venezuela’s struggling oil sector. Few details were offered on how this money would help Venezuela increase production. Related: Financial Sector To Cut Credit Supply Lines For Oil And Gas Industry

Meanwhile, Venezuela’s President sought a meeting with Russian President Vladimir Putin on September 3 to discuss ways to address low oil prices. “We can talk about what we can do to stabilize oil market and stabilize prices, what would allow us to overcome the current conditions,” Maduro reportedly told Putin, according to Reuters. “We have some not bad ideas on this issue,” he added.

Unfortunately for Maduro, there is little prospect of Russia cutting its oil production in order to prop up prices. Russia is facing its own economic crisis, as its GDP shrinks, its currency continues to lose value, and its budget has suffered under the weight of sinking oil prices. Russia needs to pump every barrel that it can in order to offset the decline in prices. Related: The Mirage Of An Iranian Oil Bonanza

As a result, Maduro may not gain much beyond the $5 billion loan from China. To be sure, that is a much needed lifeline, but it may just postpone the day of reckoning for Venezuela, whom many are predicting could default on its debt as early as next year. Venezuela’s bonds are considered some of the riskiest in the world right now.

By Charles Kennedy of Oilprice.com

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