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Hugo Feels the Pinch

Venezuelan President Hugo Chavez has delighted in the economic meltdown in the United States, mocking the Bush administration for its bailout plan and predicting the end of American economic dominance. "The U.S. model of capitalism is collapsing," Chavez, a self-avowed socialist, told reporters recently.

The price of a barrel of oil has fallen from $147 in July to less than $70, and analysts say the drop is a blow to Chavez's free-spending administration, which depends on oil for 50 percent of government revenue and 95 percent of its export earnings.

But Venezuela's oil-fueled economy is deeply intertwined with the United States and is poised to face major challenges as the crisis pushes down the price of crude, economic analysts and oil experts say. The price of a barrel of oil has fallen from $147 in July to less than $70, and analysts say the drop is a blow to Chavez's free-spending administration, which depends on oil for 50 percent of government revenue and 95 percent of its export earnings. Other oil-producing countries, which like Venezuela ramped up spending as the price of oil rose to historic highs in recent years, also face serious economic problems, analysts say.

Robert Bottome, editor of Veneconomia, a Caracas business newsletter, said that if the price continues to fall, Chavez's populist government will face economic turmoil. "The common perception is that the Venezuelan government goes bankrupt," he said, "that they cannot meet their obligations."

Chavez has said that such prognostications are wishful thinking generated by his foes and that Venezuela, with $40 billion in Central Bank reserves, will ride out the storm. He is among the leaders in OPEC, the Organization of the Petroleum Exporting Countries, who will attend an emergency meeting Friday that could lead to a production cut to boost prices. "Many want the oil price to continue to drop to see us fail, but Venezuela is not going to go under," said Chavez, who has built what he calls his Bolivarian revolution by exporting oil to the United States.

But perhaps more than any oil-exporting country, Venezuela could be particularly exposed if the worldwide financial meltdown continues. That would slow economic growth, reduce the need for petroleum products and further drive down oil prices. Venezuela exports about 1.4 million barrels daily to the United States, about 10 percent of U.S. oil imports.

The dire predictions come as the inflation rate in Venezuela has surpassed 36 percent and the black market rate for dollars has shot well beyond the fixed government rate. JP Morgan, in a research note this month, predicted that economic growth in Venezuela would reach 5 percent this year and 2.5 percent next year. Last year, the economy grew by 8.4 percent. "Venezuela is the one that's in the most difficult position, relative to the other OPEC countries," said RoseAnne Franco, lead analyst on Latin America for PFC Energy, a consulting firm in Washington.

PFC Energy said in a report that oil must be at least $94 a barrel to ensure Venezuela's macroeconomic stability this year and generate enough money to pay for imports. Although Chavez frequently touts his country's independence from Washington, Venezuela is more reliant than ever on the food, auto parts, medicine, construction materials and other products it imports from the United States and Colombia, a close U.S. ally.
Posted by: Fred 2008-10-20

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