OPEC's decision last month not to shore up oil prices by cutting production has begun to hurt at least one of its members: Venezuela's government will cut government spending by one-fifth and is even considering a tactic that could devalue the country's currency, the bolivar.
The worldwide price of oil has been falling since mid-June and was expected to be addressed at OPEC's Nov. 27 meeting in Vienna. Throughout the autumn Venezuela, an OPEC member, was most outspoken in urging the cartel to cut its daily production of 30 million barrels, by at least 1 million barrels a day.
OPEC ignored those pleas, however, leaving Venezuela in the lurch, even as the price of its oil kept falling. The drop was 7 percent between Nov. 28 and Dec. 2, down to $63.40. This is a sharp blow to Caracas' revenues because selling oil accounts for 96 percent of the country's income in dollars.
Related: Falling Oil Prices Could Push Venezuela Over The Edge
As a result, President Nicolas Maduro evidently had no choice but to announce a 20 percent cut in government spending. But he stressed that the reductions wouldn't be across the board. Only "discretionary and luxury" programs would be affected, not the social spending that began under his hugely popular predecessor, Hugo Chavez.
Maduro also said he planned to change the country's currency-exchange system, allowing Venezuelans to exchange bolivars for dollars at a better rate by cutting the transaction's red tape. He said that would raise the value of the bolivar, "delivering a blow to the parallel dollar."
The president didn't elaborate, but the website Venezuelanalysis.com says analysts are split in their evaluations of the move: Some say it could reverse inflation and others say it could lead to further devaluation of the currency.
Meanwhile, Maduro said, he will visit both Russia and Iran in search of financial aid, and that his finance minister, Rodolfo Marcos Torres, already was in China on a similar errand.
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No matter how much aid Venezuela gets from abroad or how much it cuts spending, the price of oil alone will define its financial future. The country's deficit now hovers around an unsustainable level of 17 percent of annual gross domestic product.
The spending cuts and currency tweaking also present political risks for Maduro. A survey released on Dec. 2 by the local polling organization Datanalisis said his popularity had fallen 5.7 percentage points between September and November to 24.5 percent, its lowest ever. And the poll found that nearly 86 percent of the 1,293 homes surveyed said the country was moving in the wrong direction.
Beyond Maduro personally, the outlook for his country isn't much better. Its economy is expected to contract by 3 percent this year, with inflation over 60 percent. And a shortage of dollars is matched by a shortage of imported goods, including foods. If the price of oil keeps falling, Venezuela's economic status can only get worse.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com More