Shipments of cut-rate oil from Venezuela to Caribbean and Central American countries under the PetroCaribe program were cut by about 20 percent through October compared with the same period last year, ClipperData, a New York data tracker, has reported. And, according to the International Monetary Fund (IMF), last year Venezuela's preferential oil exports to the 13 PetroCaribe countries declined 15 percent from 2012.
Although Venezuela has pledged to continue the program, several participants in the program are preparing for further declines, which would affect domestic spending and potentially tip some economies into recession.
In Grenada, the discounted Venezuelan oil funds 40 percent of social programs, from textbooks and free lunches for children to paying for roads and buses. Haiti named an airport after Venezuela's late President Hugo Chavez , who founded PetroCaribe in 2005, and uses the oil money for food distribution programs and for monthly allowances for the poor. The Dominican Republic has used the program to plug a fiscal hole. In Jamaica, projects funded with Venezuelan oil have provided aid to small farmers and businesses, refurbished a zoo and replaced pit latrines in schools with flushing toilets.
Meanwhile, Honduras and Guatemala are now inactive in the program after Caracas toughened the terms, the Wall Street Journal reported.
The IMF has warned regional governments of looming problems with PetroCaribe.
"The likelihood of disruption is more likely than it was because Venezuela is under greater pressure," said Adrienne Cheasty, deputy director of the IMF's Western Hemisphere unit.
The IMF said PetroCaribe countries will on average face a 1.6 percent hit to economic output if Venezuela terminates the program, with highly dependent countries such as Haiti facing the most difficulty. Brian Wynter, governor of Jamaica's central bank, said his government is adjusting.
"We are being very cautious by using projections of what we will use from Petrocaribe that are much lower than what the facility allows," he said.
The program has cost Venezuela $22.1 billion, with PetroCaribe countries accumulating more than $11 billion in debt through 2013, said Jorge Pinon, director of the Latin America and Caribbean Energy Program at the University of Texas at Austin, basing his calculations on PdVSA data. Participating countries paid a fraction of market price upfront for oil, deferring the full cost through long-term loans with 25-year maturities and interest rates as low as 1percent.
Some regional governments sold the discounted oil at full price or earmarked savings from not having to buy fuel at market prices for social programs and infrastructure.
Venezuela has reportedly been discussing with US investment bank Goldman Sachs a proposal to cash in the debt owed by PetroCaribe countries by securitizing it at about a 60 percent discount.
With the world's largest crude reserves, Venezuela's export earnings are 95 percent dependent on oil and, with the dramatic slump in crude oil prices, an economic crisis appears inevitable.
"A severe economic crisis can be expected if there is no change in economic policy," said Diego Moya-Ocampos, a senior political risk analyst at IHS, an economic and political consultancy in London.
"Every $1 drop in oil is around $770 million of lost revenue," Kevin Daly, money manager at Aberdeen Asset Management, told Bloomberg.
"Every barrel of oil [the state-owned oil company] PdVSA sends to a PetroCaribe country under preferential terms is one less barrel from which Venezuela can immediately derive a higher, market-based price to support the embattled economy," said Cory Gill, an associate with the energy researcher Goldwyn Global Strategies.
Meanwhile, after declining 28 percent in the last three years, the country's reserves have fallen to an 11-year low and are now at about $21.7 billion, prompting the Central Bank of Venezuela to add diamonds, gold and other precious stones and metals to its foreign reserves. The bank said in a statement issued Thursday it intends to use a broader range of assets to increase international reserves. It will also include freely convertible foreign currencies. However, the decision is more of an accounting ploy taken to reallocate billions of dollars in off-budget funds into central bank reserves, Hernan Yellati, analyst at Banctrust & Co told Bloomberg.
"The government wants to seize those off-budget assets and count them as part of the international reserves," he said. "The impact of the measure will be limited as this is just an accounting measure, not fresh money."
Venezuela's economy is expected to contract by 3 percent this year. Consumer prices in the country rose 63.4 percent in August, the fastest in the world, and it is facing deficits and shortages of imported food and consumer goods.
Perhaps the most telling sign of the country's mismanaged economy is the black market exchange rate for the local bolivar currency. Officially, one US dollar buys 6.3 bolivars, according to the strongest of the three official exchange rates. But as a result of controls implemented by former president Hugo Chavez more than a decade ago that have severely restricted the flow of hard currency, one US dollar on the black market buys more than 150 bolivars.
Measured against US dollar, the bolivar has slumped by 30 percent on the black market in the last month alone, as the government failed to provide enough hard currency through official channels.
Edward Morse, head of commodities research at Citigroup Global Markets, estimates that Venezuela needs oil at $161 a barrel to break even this year, after decades of cronyism and mismanagement of its energy sector under the leftist Chavez government.
"Venezuela is a world class example of economic mismanagement," noted Daniel Yergin, vice chairman of IHS.
Oil prices below $80 a barrel "will be devastating," he said.