Among the questions arising after the death of Venezuelan leader Hugo Chavez is what will become of the PetroCaribe program he started in 2005 and upon which many Caribbean economies have become dependent. Since it began, PetroCaribe has become a much-needed lifeline to countries in the region that are overly reliant on fossil fuel imports to supply their energy and transportation sectors. However, it has also increased the unsustainable debt levels of these countries. What comes next is uncertain as Venezuela prepares to elect Chavez’ successor as president of Venezuela next month.
Chavez started PetroCaribe with the aim of helping neighboring countries bear the burden of oil dependence at a time when oil prices began to rise sharply. Touted on its Web site as a “shield against misery,” the program allows participating Caribbean countries to purchase Venezuelan oil under preferential conditions. At the outset, 50 percent of the payment was due within 90 days with the remainder being financed over an extended period, sometimes up to as long as 25 years. The interest charged on the balance was at 2 percent but fell to 1 percent once oil surpassed US$40 per barrel.
In some instances, countries have been allowed to exchange goods for oil. For example, the Dominican Republic pays for a share of its Venezuelan imports with a yearly supply of 10,000 tons of locally grown black beans. And although it was not officially part of PetroCaribe, Cuba has a bilateral arrangement with Venezuela where the latter supplied the former with oil in exchange for things like medical services.
PetroCaribe has meant relief for small-island and other developing economies in the region that were (and still are) overly dependent on pricey fossil fuel imports and it has been said that if it were not for PetroCaribe, the Caribbean region would be in economic freefall. It has allowed countries to keep energy slightly lower than they would have otherwise been, a fact that was especially beneficial when oil prices topped $140 a barrel in 2007. And after the 7.0 earthquake that struck Haiti in 2010, Chavez forgave that country’s US$295 million PetroCaribe debt.
The program is not without its critics, however. Some argue that it has been nothing more than “oil diplomacy” and Chavez’s attempt to make the region reliant on Venezuela and to sign up to its anti-U.S. rhetoric. Others have noted how the agreement has further saddled countries with high levels of external debt. For example, the Dominican Republic, already beset with financial troubles in the energy sector, owes Venezuela US$3.3 billion for its PetroCaribe deals alone.
Jamaica’s agreement with PetroCaribe calls for 60 percent of the import value to be paid up front, with the remaining 40 percent being converted to a long-term loan with 1 percent interest. Instead of paying down the debt, the proceeds go into the country’s PetroCaribe Development Fund. Although the fund has supported various infrastructure projects in Jamaica, including the expansion of the island’s utility-scale Wigton Wind Farm, it has also left the island with a roughly US$1.9 billion debt to Venezuela, a 4 percent rise from 2011.
With Chavez no longer at the helm, uncertainty over PetroCaribe’s future has some indebted countries worried. Existing long-term deals will likely be honored but if the program is modified to demand larger upfront payments and less-generous financing (or if it is scrapped altogether), some of PetroCaribe’s participants will not be able to afford the oil they need at current world prices. It seems unlikely that Nicolas Maduro, Chavez’s hand-picked successor and current acting president, will make any radical changes before the upcoming April 14 election. Venezuela’s next president, however, will face an economy that has suffered greatly during the profligate spending of the Chavez years and is sporting a worrisome fiscal debt, a factor that may contribute to the end of the program as Venezuela seeks to shore up its finances.
Assuming that PetroCaribe remains in place for the time being, participating countries would do well to heed this latest wake-up call and more aggressively pursue sustainable domestic energy solutions. Although PetroCaribe has been beneficial in some ways (Jamaica’s current dealings with the International Monetary Fund would have been much more agonizing had the country been purchasing oil without preferential financing costs all these years), the arrangement may have dulled regional urgency to address fossil fuel reliance.
Given the abundant renewable energy resources of Caribbean islands – including wind, solar and geothermal – and the enormous potential of energy efficiency, ambitious pursuit of sustainable energy solutions would severely reduce fossil fuel dependence and could have avoided the need for the PetroCaribe short-term fix that never really addressed the long-term problem of energy import dependence. Going forward, participating countries should examine closely the factors that hinder domestic sustainable energy development and work diligently to resolve them.
In some cases, a country’s fiscal situation is one of its biggest barriers to such development. Carrying a large amount of debt is often seen as too risky for investment, a problem that is only exacerbated by continued reliance on an expensive commodity whose price will most likely rise in the long run. Other times, ineffective or antiquated legislation and special interests that profit from the status quo present a very large barrier to renewable energy development. As usual in these cases, political will, strong leadership, and an effective country strategy rooted in the socio-economic and security interests of its people are necessary to forge a new way forward.
For more than three years now, the Worldwatch Institute has studied the potential of sustainable energy options for individual countries, including the Dominican Republic, Haiti, and Jamaica. Recently, the Institute expanded that work to include a region-wide study for the Caribbean Sustainable Energy Roadmap and Strategy (C-SERMS) being conducted by the Caribbean Community Secretariat (CARICOM). With this work, Worldwatch is helping to set bold but achievable targets for sustainable energy growth in the region by 2030.
At a recent meeting of CARICOM’s Council for Trade and Economic Development, energy ministers from member countries agreed to adopt a regional energy policy and provisional targets for renewable energy over the long-term, both region-wide and in their respective countries. These targets were prepared with input from the Worldwatch Institute and it was an encouraging sign that Caribbean leaders are taking their energy challenges seriously and see the advantages of adopting sustainable energy solutions. Continuing down this path could go a long way toward reducing reliance on petroleum imports, increasing the health of their people and environment, shoring up domestic finances, and becoming the model of what other countries need to do in the fight against global climate change and fossil fuel dependence.
Mark Konold is the Caribbean Program Manager for Worldwatch’s Climate & Energy Program.