PetroCaribe: The way to hell is paved with good intentions

Introduction: Lifeline or noose

I shall outline the key details of the Venezuela PetroCaribe initiative in the next section of this column but upfront I wish to categorically assert that Guyana along with other members of this initiative have benefited greatly from it since its establishment in 2005 and for sure right up to the middle of 2014. As we shall observe the initiative provides benefits to its oil importing members that are directly correlated with the level of prevailing crude oil prices. Thus in practice as the world price of crude oil rises the benefits increase and vice versa when the price of crude oil falls. In this way PetroCaribe has been a vital lifeline for the region’s net oil importers.

As indicated in the two columns preceding this week’s crude oil prices have, unanticipated, fallen quite sharply over the past nine months thereby leading to a substantial decline in PetroCaribe benefits. This occurrence has unleashed a torrent of regional and wider criticism, mostly revisionist, questioning whether the initiative is still a lifeline Venezuela provides to the region or is it now a noose strangling its crisis-ridden and weakly recovering economy.

Features of PetroCaribe

In this section I shall indicate the key features of the PetroCaribe initiative from the perspective of its role in Guyana’s regime of oil importation. First, the initiative embraces 18 countries including Venezuela, twelve of which are Caricom members (the prominent exclusions are Barbados and Trinidad and Tobago). Second, contrary to general public expectations the initiative is not predicated on Venezuela offering lower crude oil prices than the prevailing global crude oil price to members of PetroCaribe. Instead its benefits flow from providing low cost soft loans (credit) to net oil importing countries for payment of oil on an agreed sliding scale, in which the soft loan portion rises as the oil price increases. Thus for example at a world crude oil price of US$30 per barrel a 25 per cent credit line is offered; at US$40 per barrel a 30 per cent credit line is offered; at US$50, 40 per cent is offered, and at US$100, a 50 per cent credit line is provided.

While the above briefly indicates the general framework of PetroCaribe, the initiative requires each beneficiary to bilaterally negotiate a separate accord with Venezuela in order to take into account its specific needs. Each negotiated accord can be cancelled or modified with 30 days’ notice, if desired. It should also be borne in mind that the accords do not provide for Venezuela to be the sole or monopoly provider of oil to members of the initiative. Members are free to source their oil needs as their separate circumstances dictate.

When Guyana joined PetroCaribe in 2005 it had to ensure that its accord with Venezuela met the international conditionalities laid down under the Heavily Indebted Poor Countries (HIPC) programme, which Guyana was participating in at that time.

The crucial HIPC conditionality was that credit provided by Venezuela for its oil must have a 35 per cent grant element. From what I have been able to glean Venezuela would however typically offer a financing charge of one per cent; a repayment grace period of 1-2 years; and, a maturity of 17-25 years. This in effect provides a grant element of about 42 per cent. This is well in excess of the HIPC mandated 35 per cent grant element. As a recent Stabroek News feature noted, JP Morgan has termed this arrangement to be “almost free money” (Business News November 28, 2014).

For readers’ full appreciation of PetroCaribe, two institutional features should be noted. First, the initiative has superseded the Caricom Energy Accord, which Guyana had joined back in 2001, after initially being refused membership. Second, in 2013 PetroCaribe was formally linked to the Bolivarian Alliance for the Peoples of our America (Alba) founded by Cuba and Venezuela in 2004. Its grand vision is to promote the fullest political, social and economic integration of Latin America and the Caribbean. At present six Caricom members have joined Alba.

Well-intentioned but …

From experience I have come to realize that one of the most important sayings or aphorisms I have used to guide me in forming political economy judgments is that “the way to hell is often paved with good intentions.” By this I understand that 1) no matter how well-intentioned, failure to achieve expected goals and objectives can suffer immensely through inaction and lack of drive, and 2) well-intentioned goals and objectives can also suffer from unintended and unforeseen circumstances as one proceeds along a well-intentioned path. Next week I shall explore this notion more fully in regard to PetroCaribe, but I believe this represents a classic example of what social scientists label “pathological idealism.”

Despite recent unfair and revisionist assessments of PetroCaribe it still remains in my view one of the most generous intergovernmental efforts to promote regional integration among the poor countries, especially small ones. Caribbean members of the initiative benefited so much between 2005 and mid-2014 that I believe they ought to have cautioned Venezuela to be more prudent in dispensing largesse to them at a time of high oil prices and for them to have behaved more in a spirit of regional solidarity than approaching Venezuela as an ATM available to mendicants.

As I shall posit next week, perhaps the greatest weakness of the initiative is its lack of transparency, particularly in its management operations and provision of timely public financial information and records for all of its transactions in all of its participating member states. Enough has however been available for me to indicate its main financial and economic contours.