“PetroCaribe is not without flaws and logistical hang-ups, yet it remains the most concrete proposal on the table to alleviate the region’s suffering. Chavez’s intention is patently not self interest or glorification, as he is not exactly aiding a region with significant global diplomatic or economic clout. Furthermore, objections to the proposal – specifically by Trinidad and Tobago – are not based on well – reasoned arguments, but rather on stubborn selfishness and shameless servility to Washington. Kaia Lai, Council on Hemispheric Affairs (COHA) Research Associate January 2006. What are features of the PetroCaribe arrangements and what are the economic implications for participating countries? PetroCaribe is an energy union between Venezuela and eighteen (18) Caribbean countries thus far. These countries include Antigua and Barbuda, the Bahamas, Belize, Cuba, Dominica, the Dominican Republic, Grenada, Guyana, Jamaica, Nicaragua, Suriname, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Haiti, Honduras and Guatemala.
The agreement was first signed at Puerta La Cruz, Venezuela on 29th June 2005, and is based on the political principles of unity, solidarity, cooperation, complementarity, energy security, socio economic development, sovereignty with regard to the use of energy resources, conservationist vision and looking towards the south. The features of the agreement include an institutional platform, ALBA Caribe Fund for social and economic development, operating aspects, financing mechanisms and compensations, and energy efficiency.
Under the institutional platform, a Ministerial Council formed by the Ministers of Energy or their equivalents will be formed to help PetroCaribe achieve its objectives. The Council will be responsible for five main functions. They will have to coordinate relevant policies, strategies and plans. They will also have to delegate functions and responsibilities to the agencies created for the fulfillment of specific tasks, whenever necessary.
Thirdly, the will have to agree on and approve issues of absolute priority to the organization, as well as studies, workshops and work sessions, with a view to providing the necessary technical and legal support for these issues. Another function of the Council includes, exercising its fullest authority with regard to the performance of the Executive Secretariat and agreeing on the admission or withdrawal of members whenever required. The Council of Ministers also has a President and a Deputy who calls and chair meetings. Regular meetings are held once per year as well as special meetings which are held as often as necessary.
The Executive Secretariat ascribed to the Ministry of Energy and Petroleum of the Bolivarian Republic of Venezuela is also responsible for five main functions. These include, preparing agendas of the meetings of the Council of Ministers, directly managing and administering PetroCaribe – related affairs, ensuring the implementation and follow-up of the decisions adopted by the Council of Ministers and submitting the relevant reports and recommendations, also, proposing the allocation of resources for the performance of all necessary studies.
To help foster the social and economic development of the countries of the Caribbean, PetroCaribe has at its disposal the ALBA Caribe Fund. This Fund is earmarked for the financing of social and economic programs and consisting of contributions from financial and non financial instruments. Such contributions may, upon agreement, be drawn from the financed portion of oil invoicing and the savings from direct trade. Venezuela activated the Fund with an initial contribution of US$ 50 million.
The Operating Aspects deals with the creation of PDV Caribe, a special – purpose affiliate of Petroleos de Venezuela (PDVSA). This affiliate has to possess sufficient cargo capacity for covering its supply-related obligations. Freight expenses arising from these operations shall be charged at cost price, which represents additional savings for the signatories of this Agreement. PDV CARIBE shall guarantee a direct trade relationship without intermediaries in the supply process. This arrangement shall help generate additional savings for the consumer countries.
To this end, PDV Caribe shall also be responsible for organizing a logistics network of ships, storage facilities and terminals. This will include, whenever possible, refining and distribution facilities for fuels and products. Priority shall be given to countries in greatest need. This affiliate is also responsible for adopting training programs designed to strengthen professional capacities and to promote a non-contaminating, more energy-efficient and more rational use of conventional energy and of renewable energy.
The fourth feature of the Agreement is the Financing Mechanisms and Compensations. Apart from the benefits set forth in the San Jose Agreement and in the Caracas Energy Cooperation Agreement, Venezuela shall extend credit facilities to the countries of the Caribbean exhibiting less relative development on the basis of bilaterally fixed quotas. This fourth feature is comprised of long-term financing and short-term financing, and deferred payments.
The portion to be paid in the short-term is extended from thirty to ninety days. In the long-term, the same bases of the Caracas Energy Cooperation Agreement shall apply for 17 years (including the 2-year grace year period mentioned), provided that the price per barrel remains below 40 dollars. Should the price per barrel exceed 40 dollars, the payment period shall extend to 25 years, including the 2-year grace period specified at 1% interest.
With regard to deferred payments, Venezuela shall be able to determine the portion that shall be paid with goods and services for which it shall offer preferential rates. The products that Venezuela may purchase at preferential rates may include certain items such as sugar, bananas or other goods or services to be determined that are believed to be affected by the trade policies of rich countries. One essential and also the fifth feature of the objective of PetroCaribe shall be to add energy saving programs to supply-related agreements.
In this regard, PetroCaribe may arrange credits and exchange technologies to enable beneficiary countries to develop highly functional energy-efficient programs and systems, as well as other measures making it possible for them to reduce their oil consumption and to provide a wider range of services. What makes this arrangement unique is the fact that contracting countries are required to pay a percentage of the market price, with the remaining cost converted into long term, low interest loans.
When market prices rise above US$ 50 per gallon, as they are now, participating countries will receive a 40% “discount” that will accrue as a 25-year, 1% interest loan. If prices rise above US$ 100, this “discount” will rise to 50%. Member countries debt may be partially amortized by means of paying in goods and services. Under the agreement, Venezuela will cover shipping costs, aid in the development of distribution infrastructure and storage sites, contribute to the formation of state-controlled facilities, and provide fuel-efficient systems in member countries.
However, PetroCaribe will only deal with a state-controlled entity, thereby eliminating all intermediaries and middlemen cost. So this will mean direct deliveries of products. In effect, participating CARICOM countries will be edged in the direction of de-privatizing their oil industry infrastructure in favor of setting up state-guided facilities. In light of this arrangement, the signatories of this agreement will view PetroCaribe as a bonanza from heaven given the energy crisis situation.
Volatile oil prices in an environment where consumption demand outstrips available supply. Jamaica especially will benefit because Venezuela has created a $60 million fund for social programs on the island. Prime Minister Keith Marshall of Grenada notes that his country will be able to accrue a total savings of between $10-15 million annually as a result of the Venezuelan deal. Antigua and Barbuda has received close to EC$ 200 million in benefits as a result of their participation in the PetroCaribe initiative.
In response to the severe blow to that country’s economy caused by the global financial crisis, the CLICO/British American collapse and the Stanford debacle, President Hugo Chavez graciously and without pre-condition advanced the sum of US$ 50 million to the Government and People of Antigua and Barbuda. This sum was utilized to improve quality of life. This was money they would have had to do without, borrow or get from taxpayers. The country’s Gross Domestic Product in 2000 (before PetroCaribe) was US$ 664 million, in 2005 (year of PetroCaribe), it was US$ 868 million and in 2008 (after PetroCaribe) it was US$ 1217 million.
The Gross Domestic Product is an economic indicator and also a measure of standard of living when compared to GDP figures for previous years. Therefore it can be said that standard of living did improve. Or at least the economy grew. However, the country’s balance of payments deficit grew from US$ 188 million in 2005 to US$ 384 million in 2008. This will undoubtedly affect the country’s competitive advantage. There are obvious benefits accruing to the country from the initiative, but how the country and its co members use the injections of grants, aids and cheques to put itself on a sustainable developmental path remains to be seen.
Former Venezuelan Energy Minister Rafael Tamirez reported that the achievements associated with projects in the fields of refining, electric power generation and infrastructure amount to an investment of US$ 24. 56 billion and the generation of 59,647 direct and indirect jobs through the incorporation of eleven joint venture companies in which Venezuela and eight member nations participate. Therefore the increase in employment is an important economic implication for participating countries.
Increases in employment will ultimately mean increases in income and an improvement in standards of living conditions. Another implication is the accumulation of debt. The price tag for Barbados if it had signed the PetroCaribe oil deal would have been $136 million in debt per year, according to Energy Minister Anthony Wood. What Venezuela offers is easy credit not discounted oil, however countries will still be in debt. The Dominican Republic owes Venezuela more than $123 billion – almost three times the amount it owed Caracas five years ago.
Analysts said the PetroCaribe members’ debt to Venezuela was mounting and total more than one-third of the Caribbean’s total external debt. As mentioned before, the agreement calls for a state-owned energy agency in each member country to be jointly owned by the Venezuelan government. PetroCaribe will be coordinated by a representative council of ministers, but will be managed by Venezuela and a Venezuelan secretary-general. The Venezuelan government is not only cutting out the middle men but the private sector as well. The economic implication is the close resemblance of the formation of a socialist block.
Let’s not forget Hugo Chavez is a disciple of Cuba’s ageing revolutionary, Fidel Castro. There are valid policy concerns about Venezuela’s effort to link the region to an anti-American political and trade pack. With all these countries except Cuba, relying heavily on imported goods from the United States, signing on with PetroCaribe is a huge geopolitical risk. It is ironic that Trinidad and Tobago agreed to remove the common external tariff (CET) on petroleum products in order to facilitate the PetroCaribe agreement in 2006.
Without the agreement of all parties to the suspension of CET, the PetroCaribe agreement would be in violation of the Treaty of Chaguaramas. Under existing arrangements, imports of petroleum products from Venezuela purchased at current market prices would be subject to the tariff, making them more expensive than those from T&T. The long and short of it is that the PetroCaribe arrangement offers easy payment plan and supply of oil to participating countries in the Caribbean.
However the major economic implication is the fact that these countries are incurring long- term debt. This worsens terms of trade and in the long run these countries will lose global competitiveness. As regards to what Ms Lai thinks about Trinidad and Tobago’s position on PetroCaribe, she must remember that Venezuela is not giving the countries free oil, there is a cost. Every day they are consuming hundreds of thousands of barrels which they will eventually have to pay for. Venezuela is not relieving any debt in my opinion.
