U.S.-Cuba Deal Shows Venezuelan Oil Giveaways Running Out

While Pope Francis is applauded for helping broker this week’s U.S.-Cuba accord, a key motive for Cuba is Venezuela’s diminishing oil gifts to its biggest ally.

Venezuela sent about 100,000 barrels a day to Cuba last year in exchange for medical personnel as part of a regional subsidy program to promote the government’s socialist message. While there’s no official data for shipments to Cuba this year, anecdotal evidence suggests volumes have already slumped to about 70,000 barrels a day, Moody’s wrote Dec. 16.

The regional aid is set to be scaled back further as oil’s biggest rout in a decade undermines a socialist revolution that transformed Venezuela over the past 15 years under Hugo Chavez and Nicolas Maduro, according to Eurasia Group and EnergyNomics. The commitment by Cuba and the U.S. to normalize relations opens the door for the island nation to buy more oil on the open market and for Venezuela to sell more for cash.

“Venezuela needs all the money it can get right now and will likely shift a lot of the oil that its exports to Cuba and Petrocaribe to the U.S.,” Carlos Rossi, president of Caracas-based EnergyNomics and formerly an economist with the Venezuelan Hydrocarbons Association, said by telephone.

Cuba pays for Venezuelan oil with care provided by about 30,000 medical and sports personnel sent to the country. Venezuelan exports to Cuba and Petrocaribe members from Guyana to Nicaragua are down 20 percent to 25 percent this year, Eurasia Group analyst Risa Grais-Targow said, citing tanker data. Cuba’s domestic market consumes an estimated 40,000 barrels a day and the rest of the oil it receives is sold on the open market, according to Eurasia Group estimates.

Fastest Inflation

U.S. President Barack Obama and Cuban President Raul Castro announced Dec. 17 an accord that would see the opening of a U.S. embassy in Havana and the lifting of some of the restrictions that have limited travel and commerce. The deal was brokered by the Argentina-born pontiff and aided by the generational shift in Florida’s Cuban-American community.

Cuba’s compromise also comes as its longtime patrons, Venezuela and Russia, are squeezed by an almost 50 percent plunge in oil prices this year to the lowest levels since 2009. In the case of Venezuela, the island-nation’s biggest economic and political partner, crude’s nosedive is spurring speculation that Chavez’s economic model is on the brink of collapse amid the world’s fastest inflation and a slumping currency.

Venezuela’s Information Ministry didn’t respond to e-mailed requests for comment. The press department of Petroleos de Venezuela SA didn’t answer phone calls seeking comment.

Soviet Lessons

“Countries want to be less reliant on Venezuela at a time Venezuela has less resources to provide for them,” Avinash Persaud, the Barbados-born chairman of Intelligence Capital and Elara Capital in London, said by telephone. “In the case of Cuba, they don’t want this to be another Soviet Union where their dependency suddenly disappears.”

Support from the Soviet Union helped Cuba endure a U.S. embargo imposed in 1960. The union’s 1991 collapse nearly crippled Cuba’s economy, which was dependent on soviet trade and subsidies.

“To the extent that Cuba now has potential access to multilaterals and increased commerce, it’s a good substitute for what was essentially Venezuelan aid,” Eurasia’s Grais-Targow said by telephone from Washington. “The issue for Cuba is that Venezuela replaced the USSR but they don’t have access to financial markets. So, this is essentially one step in that direction.”

While Maduro would be looking for more cash-generating oil sales, Cuba won’t be the first subsidy arrangement to be cut, according to Jorge Pinon, Interim Director at The University of Texas at Austin Center for International Energy and Environmental Policy.

Cuba Priority

“It would take a change in administration in Caracas to terminate” the Venezuela-Cuba arrangement, Pinon wrote in an e-mailed response. “Venezuela would first cut off supply to Jamaica, the Dominican Republic, Nicaragua and other countries.”

Rather than diverting oil used in regional swap programs to cash-generating exports, Venezuela may be just consuming more locally, Grais-Targow said. Subsidies make Venezuelan pump prices the lowest in the world.

“Whatever happens between Cuba and the U.S., it’s a sign that Venezuela cannot help Cuba anymore,” Rossi said.

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