Rising oil prices triggered by Russia’s invasion of Ukraine could create a big problem for the Biden administration in Latin America: it could create havoc for oil-importing countries in Central America and the Caribbean , and could encourage Venezuela to try to resume its oil diplomacy in the region.
Oil prices approached $100 a barrel on February 22, following Russian leader Vladimir Putin’s decision to recognize the independence of two breakaway regions in eastern Ukraine and send Russian troops there. Economists say oil prices could rise further if Putin carries out a full-scale invasion of Ukraine.
This is already creating a big financial problem for Caribbean and Central American countries, most of which are oil importers. And that is hurting Caribbean countries at a time when they are still reeling from a sharp drop in tourism due to the COVID-19 pandemic.
“It’s a serious problem,” says Juan José Daboub, a former finance minister from El Salvador who served as managing director of the World Bank. “Most Caribbean countries had planned their budgets assuming that oil prices would be around $50 a barrel this year.”
With oil prices nearly doubling, most Caribbean countries and some Central American countries will need to increase their national budgets by at least 20% this year, Daboub estimates. They may have to buy oil with funds they had earmarked for health, education or public works, he added.
To a lesser extent, it would also hurt South American oil importers, such as Chile, Uruguay and Paraguay. Chile imports around 95% of its oil and gasoline, although it will benefit from higher world prices for its copper exports.
Rising oil prices will also have important indirect effects on Latin American oil-importing countries, as it will raise the producer prices of many of their exports. Central American and Caribbean exports of textiles, footwear and metal components will become more expensive.
“It will hit us hard,” Roberto Alvarez, the Dominican Republic’s foreign minister, told me in a phone interview, adding that since his country’s government took office, world oil prices have doubled. “It will be catastrophic for our budget.”
Roger Noriega, former head of the State Department’s Western Hemisphere bureau, and who now advises the Dominican government, says that “Russia, China, Venezuela, Iran and other American rivals could take advantage of scarcity of energy supplies to gain influence in the Americas.”
He added, “American policymakers should anticipate this foreseeable problem today, before it is too late.
Venezuela, which was once a major oil exporter to Caribbean and Central American countries, has seen its oil production drop dramatically in recent years due to mismanagement and corruption.
But, with rising oil prices, Venezuela could divert some of its current oil exports to China to Central America and the Caribbean, oil experts say.
Francisco J. Monaldi, head of the Latin American energy program at Rice University, told me that Venezuela could offer Central American and Caribbean countries a rebate equivalent to its costs of transporting oil to China. In addition, Russia could try to evade US sanctions and export oil to the region through third parties, economists say.
To make matters worse, many oil importers in the Caribbean Basin are not eligible for World Bank or International Monetary Fund emergency loans for poor countries because they are middle-income countries. Among them are the Dominican Republic, Costa Rica and Panama, which recently formed an Alliance for Development in Democracy to promote investment and free market policies in the region.
If the Biden administration is not heeding the looming oil crisis in Central America and the Caribbean, helping countries secure emergency loans from international financial institutions, Venezuelan dictator Nicolás Maduro will try to fill that void. It wouldn’t be the first time that Venezuela has done this – or that the region’s financially crippled oil importers have been pushed over the edge.
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