Caracas Weighs Using Petrodollars to Retire Debt, Improve Social Programs : Venezuela: The gulf crisis brings a windfall to nation beset by austerity measures and unemployment.

As the world struggles to resolve the gulf crisis, Venezuela’s big new problem is what to do with a windfall of petrodollars.

And Venezuelans are debating what to do with the money--whether to pay off their debt or invest in social programs to ease the heavy burden of the country’s austerity measures.

Venezuela has the largest proven oil reserves in the Western world. Within three weeks of Iraq’s invasion of Kuwait, oil platforms in Lake Maracaibo were pumping 350,000 more barrels a day. By year’s end, output will rise to 500,000 barrels a day above the country’s previous quota of 1.9 million barrels a day, as set by the Organization of Petroleum Exporting Countries.

“We will gain an extra $1.2 billion to $2.4 billion in oil revenues this year,” said Celestino Armas, Venezuela’s oil minister. Venezuela stands to gain $1 billion a year for every $1 a barrel rise in wholesale prices, say officials of Petroleos de Venezuela (PDVSA), the state-run oil company.

This privileged situation has raised the expectations of the average Venezuelan, whose pocketbook has been hit by government austerity measures and unemployment. Last year, Venezuela’s economy shrank 8%, overall unemployment reached 10%, and inflation was cut to 30% from 85% a year ago, the Ministry of Finance said. Union leaders say 500,000 people have lost jobs.

“For us, the standoff in the gulf is a blessing,” said Pedro Ibarra, a Caracas shoe store owner. “The question we are all asking ourselves is: What is the government going to do with the oil bonus?”

The government is “debating what to do with the extra funds,” said Marcos Morales, who leads an economic policy team. “We don’t want to count our eggs before they hatch. We remain cautious. You never know what the price of oil will be tomorrow.” Morales, however, thinks the windfall will wipe out the $1 billion 1990 budget deficit.

In street markets, government offices and newspapers, three options are talked about: paying off debt to stabilize the economy; reinvesting in the state-run oil company to expand oil production; or investing in social programs to ease the burden of austerity. Advocates of paying off Venezuela’s foreign debt include businessmen and politicians.

“The debt is the heaviest burden we have ever suffered in our history,” said Sen. Pedro Paris Montesinos. In mid-August, private banks cut Venezuela’s foreign debt by 20% to $18 billion, and debt payments were cut by 50%. In return, the government will continue austerity rules that help it pay. Still, Venezuela faces annual payments of up to $3.5 billion.

“The gulf crisis is a bonanza,” said businessman Jose Marquez. “But in the long haul, paying off the debt will guarantee that, no matter what happens to the price of the barrel, our economy will be at last stabilized.”

Others believe improving the state-run oil company is as important as fixing the economy. “We have a very ambitious plan,” said PDVSA’s Paul Reimpell. “We are going to operate at full capacity in the coming year and beyond.”

From the wellhead to the gas pump, improvement efforts are under way, oil company officials say. But money is needed to reactivate 13,000 idle wells to meet demand. About 80% of company earnings goes to the government, with 20% reinvested, Reimpell said. Venezuelan President Carlos Andres Perez has said some oil bonus money may be used to expand production, some of it for a rainy-day fund.

Critics, however, say Perez wants to overexpand production to satisfy Third World countries and boost his image as a spokesman for the developing world--a role he played as president in the 1970s. Under a 10-year deal between Venezuela, Mexico and others, Venezuela has been selling oil at $17 a barrel.

But some at home wonder why Perez does not solve their many problems. “We demand water, electricity, a better health system, and an end to the rise in prices,” said Marcos Fiel Loaiza, a social activist.

A year ago, Perez’s new austerity measures sparked riots that killed 300 and injured 1,000. The Perez free-market plan abolished price controls, reduced government subsidies, freed exchange rates and moved to privatize state-run companies.

Scattered street protests have erupted over plans to raise gas prices from 26 to 28 cents a gallon. In slums in the city, water shortages have led to demonstrations. Simmering discontent was evident in a recent poll. Sixty-five percent of 1,500 respondents thought the economy would worsen, and 53% disapproved of Perez’s leadership.

“It’s the same old story,” said Fiel Loaiza. “We live in a country rich in oil and natural resources and somehow the benefits of our national wealth never trickled down to the people.”