Still recovering from last year’s Hurricane Sandy and the 2008 financial crisis, many Caribbean countries now face another threat: the possible curtailment of Petrocaribe, a Venezuelan program that has kept their economies afloat with deals on discounted oil.
Consider the case of , which this month had to go to the International Monetary Fund for a $932 million loan after rescheduling $9 billion worth of domestic debt. With exports of bauxite and sugar down, fewer tourist arrivals and Sandy’s lingering costs, its economy has been shrinking. Unemployment hovers at 14 percent. Last year, public-sector debt was up to 140 percent of gross domestic product.
That included the $2.4 billion that Jamaica owes Venezuela for oil deliveries, at an interest rate of only 1 percent. If Venezuela were to cancel the program, Jamaica -- which relies on oil for more than 90 percent of its energy needs -- would need to find $600 million a year to replace the supply. According to the Inter-American Development Bank, in 2012 the oil trade imbalance for Caribbean countries was equivalent to -8.7 percent of GDP.
The good news is that Jamaica and its neighbors can reduce their dependence on Venezuelan heavy crude. More affordable technology can unlock the energy contained in the sun, wind and sea -- resources that Caribbean countries possess in abundance.
True, many of Petrocaribe’s 13 Caribbean members would have suffered without the cheap oil that began flowing to them in 2005 -- especially after the 2008 crisis body-slammed the most tourism-dependent economies. These countries have benefited not just from the 1 percent interest rate but also from two- to three-year grace periods, 17- to 25-year repayment plans and flexible agreements that have let them channel money to development.
This sweet deal, however, also enabled governments to postpone tough fiscal choices in favor of racking up debt. The Dominican Republic, which owes Venezuela $3 billion for oil, saw its debt-to-GDP ratio rise to last year, up 10 points from 2008. Debt in the Bahamas has jumped to 50 percent, from 32 percent in 2008 -- still low by U.S. standards, but high for an island nation vulnerable to external shocks. After its devastating 2010 earthquake, Haiti had $395 million in oil debt forgiven by Venezuela; it has since amassed almost $1 billion more. Some suggest that, by 2015, 35 percent of the Caribbean’s external debt will be owed to Venezuela.
Now Venezuela and Petroleos de Venezuela SA, its state oil company, face economic pressures of their own. President Nicolas Maduro this month that the Petrocaribe program will continue. But production of oil, which provides 95 percent of Venezuela’s foreign exchange and about half its government revenue, has dropped over the last few decades. Moreover, agreements with Cuba and the other Petrocaribe countries and China mean that PDVSA now receives cash for less than half its exports. During this spring’s election, opposition candidate Henriques Capriles Radonski pledged to stop “giving away” Venezuela’s oil, and there are many in Maduro’s camp who think the same.
To blunt the impact of such a shock, Caribbean countries should take advantage of their “unique opportunities for renewable energy technology implementation,” to quote a report by the Energy and Climate Partnership of the Americas, an initiative started in 2009 by President Barack Obama. In their part of the world, the sunshine picks up during the seasons when the winds die down, and vice versa. Plus, the Lesser Antilles chain is a “geothermal powerhouse.” And the region’s electricity rates -- among the world’s highest -- make it an ideal marketplace for renewable energy, especially as the price of generating solar and wind power has fallen.
Two of Petrocaribe’s biggest customers, Jamaica and the Dominican Republic, are among the best candidates for widespread solar generation, according to a recent report by Bloomberg New Energy Finance. Both have created clean energy policy frameworks and standards, an example that other Caribbean nations should follow, and they have growing clean energy investments that need regulatory reform to thrive. In Jamaica, the monopoly utility will need to make it easier for outside developers to plug into the grid. And the Dominican Republic will need to make its grid more efficient and secure; as it is now, as much as 40 percent of its electricity is stolen or otherwise lost.
Although the U.S. has long recognized its interest in promoting growth and stability on its “third border” -- to use President George W. Bush’s phrase -- its promotion of clean energy there has been mostly hortatory. It has funded projects through multilateral institutions such as the IADB, and through the U.S. Export-Import Bank. The State Department’s still-new Bureau of Energy Resources has also jawboned on behalf of connecting grids and establishing regulatory frameworks. Yet set against declining U.S. assistance and Venezuela’s billions for oil, that doesn’t add up to much. A high-profile demonstration project would be a wise investment. So would speeding up Department of Energy approval for exports of relatively clean liquefied natural gas to the region. If Petrocaribe goes down, it shouldn’t take a good chunk of the Caribbean with it.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.