Cuba, Venezuela, Oil and Not

                 Cuba, Venezuela, Oil and Not

Cuba is promoting itself as a respite from The Virus, offering holidays with high quality medical backup.

The wonderfully vicious Mary Anastasia O'Grady has some comments in a recent WSJ article made available by Don. Here's some of it:

In a country where soap and water are luxuries, ramping up traffic from Europe was a precarious strategy. But desperate times spawn crackpot measures, and the Cuban economy is skating dangerously close to the edge. The regime needs dollars to maintain the police state that has kept it in power for six decades. Its problem today, in a word, is oil.

Cuba hasn’t done well on its own since Fidel Castro took power in 1959. It was a dependent of the Soviet Union until 1991. Havana was then forced to legalize the dollar and microenterprises and let foreign investors take minority stakes in regime companies. But the ruling elite didn’t like it.

The Castros found a new sugar daddy in Venezuela’s Hugo Chávez, who came to power in 1999. A symbiotic relationship blossomed: Cuba would exchange its comparative advantage in repression for Venezuelan petroleum products. At the deal’s peak, from 2010-12, Havana received some $4 billion annually in oil subsidies from Venezuela.

Venezuela was pumping 3.4 million barrels a day before chavismo. Output is now around 750,000 barrels a day—and falling—thanks to poor well management, a scarcity of skilled labor and a collapse of investment.

Caracas has been eating big discounts because it’s difficult for buyers to get around U.S. sanctions. Russia’s Rosneft, formerly Venezuela’s key customer, is said to be put off by all that effort. Other former buyers can get heavy crude more easily from Saudi Arabia. With the international oil-price swoon, tar-heavy Venezuelan crude has plummeted to between $10 and $15 a barrel.

Venezuelan storage capacity on land and at sea is full up, so it is sending the excess to Cuba. This has boosted daily shipments back to 100,000 barrels a day from lows of around 20,000 before fall 2019. The Castro regime has been filling its storage tanks and selling what it can on the black market.

Yet more than crude, Havana needs gasoline, diesel and gas oil for electricity production, which Venezuela used to provide but no longer has the infrastructure to produce. Venezuela resorts to swaps when it can, but the terms are terrible. So despite the uptick in crude supplies, Cuba is still limping badly.

Meanwhile the effects of the coronavirus shutdown “are likely to be catastrophic for Venezuela,” Francisco Monaldi, an energy economist at Rice University, told me in a telephone interview last week. Running water and soap aren’t readily available in hospitals or even in many homes. Gasoline shortages make getting imported food to cities outside the capital difficult. Venezuela is heavily dependent on some $3 billion in annual remittances from citizens who fled, mostly to other South American countries, in recent years. If their jobs dry up in a deep regional recession, so will the flow of money. This will put more pressure on Venezuelan leadership to end subsidies to Cuba.

What’s more, it may be necessary to cap wells, and that’s unlikely to be temporary. Experts say it won’t be easy to restart them when human and financial capital is in short supply.