Stagnant economic growth, flagging demand for crude oil, and an increase in alternative supply sources such as US shale gas have led to a growing mismatch between supply and demand in global energy markets. These factors have been accentuated by both geopolitical instability and OPEC’s decision not to cut output, resulting in a free-fall in the price of oil. Prices this week hit a 6-year low and WTI crude closed at USD 45.56 at time of writing (January 27, 2015). Though cheap oil has the potential to fuel greater economic growth in some corners of the world, it could have profoundly destabilizing effects in others. In this five part series, Geopoliticalmonitor.com examines how cheap oil is a threat to certain regimes and economies, even the global order itself. Part one focuses on Venezuela and Cuba.

Background

Oil accounts for up to 95% of Venezuela’s export earnings. In total, oil and gas make up 25% of Venezuela’s total gross domestic product (GDP). The country, which is a member of OPEC, is the world’s 10th-largest oil exporter. Its economy is performing very poorly of late: it shrank 2.8 percent in 2014; it has the highest inflation rate in the Americas (63.6 percent in November 2014); and it officially slipped into recession in 2014. The current black market exchange rate is 30 times the official one, and shortages of essential goods and medicines have become the norm.

The governments of both President Nicolas Maduro and the late Hugo Chavez have used oil as a political weapon. Both governments have long subsidized the price of gas in the domestic market. Venezuela famously enjoys the cheapest gas in the world, at around USD 5 cents a gallon. This subsidy program costs the current government roughly USD 15 billion a year, and it has been a cornerstone of the regime’s support. Many Venezuelans now see cheap gas as a right and experts have long speculated that if the government were to raise prices, it could lead to massive civil unrest. Raising gas prices would undermine the regime’s support base and could act as a potential tipping point. However, given the country’s dire fiscal situation, the government may no longer be able to afford this program as soon as 2015.