The Petrocaribe Trap

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The bit they don't show the tourists

A guest post by Alexis Caraballo, who makes her living as a Caribbean regional analyst.

The bit they don't show the tourists
The bit they don’t show the tourists

A failing economy, where everything for sale in the shops is imported, with dwindling foreign reserves and on the brink devaluation.

Sound familiar? It does to folks in Jamaica, a country that breaks records not just in the 100-meter dash (9.58 seconds) but also in debt-to-GDP ratio (139%) – and whose beaches, stunning though they may be, just can’t bring in enough money to keep the island’s economy afloat.

Venezuelans tend to have some vague notion that the government has basically bought up these struggling Caribbean island states through oil subsidies, but seldom do we really stop to understand just how dependent places like Jamaica are on our petro-largesse.

So let’s go there.

Jamaica is currently in austerity-land as it fights to achieve IMF targets. To IMF reform package means the usual mix of higher taxes and lower public spending, in return for USD $345.8MM loan. That’s peanuts compared to its outstanding debt with Petrocaribe, which the Government of Jamaica estimated at USD $2.5B at the end of January.

True, for a bigger country US $2.5 billion is a mere rounding error. But for Jamaica, US $2.5 billion is 2.4 times the country’s international reserves. In fact, international reserves have only surpassed the billion dollar mark in three of the last 12 months.

Jamaica’s total exports are also peanuts next to what it owes to Petrocaribe. The nation’s exports were just $1.4 billion between January and November of last year. And they’re falling fast, with a 7% year-on-year drop during these eleven months.

The country’s access to international credit markets remains extremely precarious: its credit rating was taken out of default category by S&P only 12 months ago, after a successful NDX debt swap that had an impact on domestic bonds worth no less than 64% of GDP.

Into this extremely fragile macro environment comes Moneybags Uncle Ramírez offering to finance up to 95% of their fuel tab for periods of up to 25 years, at a bargain basement 1% interest with a manguangua-del-siglo two-year grace period.

Of course, as the debt under the Petrocaribe mechanism grows, so do the stakes for Jamaica. Never forget, the second-to-last article of the Petrocaribe Agreement explicitly states the deal be changed or terminated by the Bolivarian Republic of Venezuela unilaterally, with just 30 days’ notice after notification through standard diplomatic channels.

In effect, the Venezuelan government has a fiscal gun pointed at Jamaica’s head at all times, with a 30-day trigger.

What happens if that trigger gets pulled? It’s simple, really: if Petrocaribe stops, the lights go out. Literally. Because – did I mention? – Diesel-powered powerplants make up almost 95% of the country’s installed power generation capacity.

This is a country whose political economy just doesn’t work without Petrocaribe. Already the fiscal accounts barely work with the Venezuelan subsidy. Without it, it’d be just fiscal carnage.

Now you start to see why, when Roy Chaderton says “jump” to Jamaica’s ambassador at OAS, the guy barks back “how high”?

Though Nicolás Maduro makes the friendly promise to his Caribbean neighbors that Petrocaribe is here to stay, he was not smiling on March 8 when he said that “any country that intervenes in Venezuelan affairs will go dry, sink, and pay a high price.” It’s…not exactly subtle.

Under the Petrocaribe ‘goods for oil’ arrangement, Jamaica has agreed to supply Venezuela with 100,000 tons of clinker – a key input for cement-making – over the five months to May. With the deal valued at only USD $8.5MM, it will barely make a dent in the USD $2.5B debt. In fact, the cement company involved in the deal, Caribbean Cement Company Limited, could decide to repatriate profits to Trinidad & Tobago anyhow.

Termination of the Petrocaribe agreement or an increase in the interest rate would mean more pressure on the currency, more inflation, and more strain on the private sector. In fact, the Petrocaribe countries are already feeling the pinch, as 2013 shipments were down by 4.6% and Rafael Ramirez stated in December that only 84% of Petrocaribe quotas had been fulfilled last year.

As the OAS Ambassadors sat around a table on March 21 to decide on a motion to have the meeting held behind closed doors (since Venezuela’s opposition would speak from Panama’s seat), it was hard to hear when Jamaica’s representative muttered his vote. In fact, he didn’t even look up to say “closed”.

Personally, I don’t think the Ambassador was avoiding the camera. As his country’s economy hangs in a delicate balance and Nicolás Maduro threatened to sink deserters, it seems to me that he may have been looking around trying to find his own #Salida.

1 COMMENT

  1. “What happens if that trigger gets pulled? It’s simple, really: if Petrocaribe stops, the lights go out. Literally. Diesel-powered powerplants make up almost 95% of the country’s installed power generation capacity.”

    Gosh, I had not idea Jamaica lived in darkness before Petrocaribe? Don’t you think this comment is a little over the top?

    As far as the new found debt, buyer beware – it’s pay me now or pay me later. That was a conscientious decision by the Petrocaribe neighbors. Remember not all Caribbean countries bought into this con.

    • Petrojam is alive and well, thanks for your interest; they have handed over 40% of the ownership to PDVSA through Petrocaribe. It is a tiny 35,000 barrel hydroskimming refinery that imports all the crude from Mexico (like 20%) and Venezuela (80%). A FEED package was finished in 2009 or 2010 to upgrade the refinery to 50,000 BPD and handle the difficult Venezuela crude. PDVSA did not approve the 1.3 billion cost for it then, but “last year (2013), in a filing to the US Securities and Exchange Commission (SEC), the Venezuelan government said that PDVSA has brought forward the start date of the Jamaica project to 2014, a year earlier than previously expected.:.”.

      The issue for PetroJam is not the refinery, it is Jamaica perse; to import 35,000 bpd, it will take (35,000*365*110) 1.4 billion dollars in the open market; Jamaica has a total reserve of 1.4 billion dollars. As such, without PDVSA, PetroJam is dead in the water. We will be back in business in 2014, I hope of fixing the refinery .

      • It is not clear why it is fiction. The REFIDOMSA is half owned by PDVSA. The issue is if and what they are paying for the crude. Half of the crude price is supposed to be paid in in dollars; the remaining is 1% low interest loan spread over 25 years . Variously, DR has supplied blackbeans, milk powder etc in return.

        In any case, the following has to happen:

        1. Break the refinery holdings out of the PDVSA and group them into a stand alone company.
        2. IF Ven. wants to subsidize the gasoline and crude, they would need to pay PDVSA for that, and the refinery holding appropriately.
        3. Why is Cuba consuming 150 kbpd with 92 k supplied by Ven? Almost all PetroCaribe countries have been unable to pay anything for the crude supply.

    • please enlighten me, how legalizing cannabis in Jamaica will help. It’s already abundand and nobody goes to prison for it. They cannot export their outdoors weed to the U.S. because it’s illegal and Americans grow better weed at home.

  2. very well written and informative. In greater to lesser degrees the same situation applies to most or all the other PetroCaribe members. What a miserable fate, to be ordered around by Roy Chaderton!

    • Rob : Thats an important point which often gets overlooked , a moderate population growth rate can work to improve standards of living if a country manages to get economic growth going , because then there is more of the good stuff to go arround , specially in countries were people breed like rabits but then dont concern themselves overmuch about raising their children in a responsible manner .!!

    • Things are a wee bit more complicated than that.
      Jamaica’s population grew until now to 195% of what it was in 1950.
      Chile’s population grew 282% in the same amount of time.
      Venezuela’s population grew to 549% of the 1950 levels.

        • and remember something: even though Venezuela is much larger, few people will be willing to live in Los Llanos no matter what or in the Amazon region.
          The coastal and Andean states are getting pretty high density rates already. I don’t say we shouldn’t be thinking about reducing birth rates in Venezuela – I am all for that -.
          Still: the issue is much more complex than many think.

          • It would be interesting to compare Venezuelan population growth to rich Middle Eastern countries. I would bet my liver that Venezuela’s population growth was much smaller.

      • Actually Kepler , I wasnt thinking specifically of Jamaica when I mentioned the rate of population of growth ; I was thinking more of Venezuela and the effect which large population growth has in the capacity of the economy and of govt services and functions to handle the consequences of that growth and improve the general welfare of the population . If we had grown at the Chilean rate how would our per capita indexes be like today ?? would we a better of country ?? specially since my guess is that Venezuelas population growth has concentrated in the worse off sectors deepening the consequences of an already terrible poverty.

        • Bill Bass, the inflation and scarcity would be the same. Look at Cuba. Low fertility rate among the poor might help, but it can’t produce miracles alone.

          • Marc, as I understand it the formula for an undeveloped country to become a developed one implies a steady high economic growth rate coupled with a discreet or moderate population growth rate , so that over the years accummulatted economic growth allows a increasing bigger slice of the economic pie to benefit the whole population and thus a rising standard of living .

            If your population growth rate is too high then reaching the goal becomes more difficult.!! I actually witnessed a group of economist make this calculation for Venezuela years ago , they got their numbers but then decided they had to correct it because they figured that people on top would always skim off the top of economic growth leaving the worse off with less to receive , so you needed more economic growth for a longer time to achieve a developed status that benefitted everyone . !!

            Cuba of course has no economic growth worthy of the name so even if their population is stagnant they remain trapped in their mandatory poverty.

    • Don’t know if it is worth it to use data to reply to a snark , but here goes.
      Fertility rate 2011
      Jamaica 2.31
      Latin America & Caribbean 2.20
      Venezuela 2.44

      Conclusion: Jamaica’s fertility rate is not bad.

      Regarding a way out for Jamaica, I offer no solutions, but note that in the last 40 years, it has had governments with a wide variety of economic plans, from left to right.
      [courtesy of World Development Indicators Databank (World Bank).]

  3. Now that’s what I call “regional integration.” Just hold the flow of energy of another country hostage so you can influence their behavior on the international stage in organizations like the OAS.

  4. Old moral precept , generosity begings at home , by all means lets help people from poorer lands but lets measure our generosity to them so that we take care of our own ‘inner jamaicas’ first ( of which there are many) .!!

    • Nothing. PetroJam has been unable to even maintain 34 k BPD with Ven. crude (heavy and sour). Yield of the hydroskimming refinery has been less than 10k diesel and kero 10 K petrol per day. That is not even sufficient to supply Jamaica.

  5. Un elector un voto!

    Similar fallacies can be found in the OAS forums and in liberal democracies where voter franchise has been progressively opened to more groups.

    Populisms trumps and even in the context of theoretical fair elections, the results are biased by the natural numbers of CDE vs. AB voters…

    PetroCaribe is a clear working strategy of the Cuban led occupation, Use our money to buy Island states votes to protect the diplomatic front for them to keep pillaging Venezuela. A master plan.

    There is nothing the resistance can do about this until they grab power and have authority to rescind legal frameworks and or, use this 30 day trigger as stated…There will be time to revise our foreign energy policy and generosity, but first need to GRAB power….

    This is the crux, this is the objective. everything else is fluff. Intellectual fluff for internet warriors.
    Realpolitik trumps every time.

    How to get these caribean parasitos out!!!!

      • Sieg Heil !!! , One man one vote is out of style !! In progressive Cuba you only need to consult the votes of two Ubermensch to replicate the workings of a perfect Democracy !! We are a backward land and still hold to old fashioned ideas , but slowly were catching up!!

      • Why is this fascist? Petrocaribe supplies are 92 K to Cuba, 103 K Total to Caribbean countries (34 K to DR, 34 K to Jamaica, and utotalled estimate of 35 K to Belize, Haiti,Antigua and Barbuda, Bahamas, Belize, Dominica, Grenada, Guatemala, Guyana, Honduras, Nicaragua, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Saint Lucia and Suriname). 200 K bpd at 110 $ per barrel is 7.83 billion dollars. I estimate Ven gets back know more than 2 billion in USD, some in sugar, beans, etc.

        Petrocaribe is a waste of money for Venezuela. Not only the Petrcaribe, all the refineries must be sold.

        • Not a waste of Money VJ. Its an investment in democratic charade protection on the OAS front.

          Expensive? maybe. but who are we to say…
          Venezuelans do not demand any accountability from their government and/ or state. If we were used to ask: “y donde estan los reales” questions, perhaps it would be less attractive for people to go into politics and work their asses off.

          For comparison purposes, Alberta’s standing Premier had to step down after mounting pressure fro failing to report a $40k plane ticket to come back from Nelson Mandela funerals last year. (forty thousand dollars!!!)

          I have not heard any oppo parties fighting for the proverbial empty bottle, challenging the status quo of budget secrecy and mismanagement. They are only waiting for Chavismo’s cycle to fade to get on with the coroto. Or am I missing something?

    • Caribbean parasites was meant for the cubans (Ejercito Cubano de Ocupacion), but it may have been missed in the context of other Caribbean parasites. My apologies.

      I will keep on point and continue to call the cubans the Piratas del Caribe, a more precise term.

      Petrocaribe beneficiaries are parasites nevertheless.

      • I am just not sure why someone was called fascist, just because he refused to pay money to Caribbean people. Is Venezuela and Caribbean really close? I was last in Ven, in 1995, and at that time I could have bet that very few Venezuelana could name two Caribbean countries, simply because Venezuelans were not really, “maritime” . Even the Spanish spoken in venezuela and Caribbean countries has differences in slang and accent. The cuba-Venezuelaa love is more recent, and I am not at all aware of the love for other caribbean countries.

  6. So, in Venezuela, the lights are going out (figuratively and literally), in part in order to protect the lights in the nations of our PetroCaribe “brothers”….

  7. Most small islands in the caribbean dont have ‘refineries´which are capable of being economically run , they are small scale coffe kettles which feed on (costly/difficult to find) light or medium crude mixed with refinery products to maximize output . Venezuela is running low on light crudes ( much of which are needed to be mixed with extra heavy crudes to be able to produce and sell the later) so logistically and economically the best thing to do would be to close these ineficient refineries, stop crude supplies and instead supply these tiny island markets with refined products refined in Curacaos large efficient well located Refinery . Keeping these tiny inneficient refineries open is costly difficult and uneconomic despite the prestige for these countires of having a refinery .

    Dominican Republic might justify having a refinery ( DR might have the market size to keep one open) but one would have to monitor the economics to see whether keeping one is justified if products can be obtained cheaper from other sources . What probably needs investment and some rational effort is the building and operation of an efficient electrical generation system for the island which optimally minimizes the amount of fuel needed to run it .

    Maintaining Petrocaribe is very expensive for Venezuela and absent the geopolitical advantages for the regme probably irrational , caribbean countries are in Venezuelas backyard and are going to continue buying from Venezuela whatever the conditions of payment , Helping them out with their oil invoice is probably a good thing but Venezuela cannot continue being as generous as in the past with all the problems that the regimes mismanagement has created for Venezuelas economy . it will become impossible to maintain the original terms , they will have to be substantially scaled back and if the US or Mexico or Brazil want to take up the slack they should be thanked for it.

    • This is unfortunately true; although, old, small refineries can be maintained competitive with new, large refineries. However, that is not possible with all Venezuela crudes which are very sour. The DR refinery is the same size as Jamaica refinery. In any event, the needs of all Caribean states can be met with just one (Curacao size) refinery.

  8. OT: I’ve just seen on TV about the brand new lunatic law that Maduro has enacted.

    Landlords who have been renting their property for more than 20 years will be FORCED to sell them to their tenants. They won’t be able to decide the prices, and if they refuse to sell, they will have to pay a fine of $40k to Maduro. I think that’s a very important development and CC should write about it.

    Ps: I don’t know if the channel (GloboNews) was making an April 1st joke or if such lunatic law is for real.

  9. I think Jamaica should take the IMF loan and than just default on the PetroCaribe debt. They would be better off just buying their fuel elsewhere and get from under a debt they can’t repay.

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