With oil prices dropping dramatically over the last six months, Venezuela said it would cut costs at its state-run energy company, Petroleos de Venezuela SA, by 40 percent.

PDVSA President Rafael Ramirez said the company would reduce costs by cutting back on contracts to service companies whose "high prices" are no longer affordable with oil costing less than two-thirds of its all-time high in July 2008, when the per-barrel price in Venezuela reached $147.

With prices now at $35 to $40 a barrel, PDVSA is faced with mounting debts to thousands of outside contractors, some of whom have not been paid for months, according to Venezuelan news reports and analysts.

PDVSA officials, as well as Venezuelan President Hugo Chavez, were hopeful that the recent production cuts across the board by the Organization of Petroleum Exporting Countries would drive global oil prices higher to help meet costs both at the state oil company and in the Venezuelan budget, which depends heavily on the industry to fund Chavez's wide-ranging social programs.

Last month Venezuela made good on its promise to reduce oil exports, canceling several shipments to the United States, in order to comply with reduced OPEC production requirements and bolster its own fortunes by helping raise the price of oil worldwide.

And as part of its own efforts to stem losses caused by falling oil prices, PDVSA in January announced it was discontinuing shipments to two southern U.S. refineries, Sweeney and Chalmette.

Downplaying the drop-off of exports to the United States, Chavez maintains that the reduced exports to the United States are part and parcel of his plan to continue reducing exports to the United States while increasing those to oil-hungry countries like China.

Meanwhile, the steep reduction in the price of oil has already forced significant cost-cutting measures by the leftist Venezuelan leadership and the programs favored by Chavez.

Venezuela's budget for 2009 was created with a $60-per-barrel price tag in mind. But with prices hovering in the $30 to $40 range, the Chavez administration has admitted that its social efforts, both at home and abroad, would surely suffer.

Despite the downturn caused by falling oil prices and a worldwide economic slowdown, Chavez recently expressed confidence in both PDVSA and the Venezuelan economy's ability to weather difficult challenges ahead.

"The revolution will not fall into pieces because of the economic problems that may arise from the global crisis," Chavez said during his latest national address earlier this week. "But it does not mean that we are unlikely to face serious hardships."

While Chavez has expressed optimism amid Venezuela's economic woes, there has been some talk in Caracas of devaluing the national currency -- which was set at 2.15 bolivars to the U.S. dollar at the beginning of last year and had been pegged at 2,150 bolivars to the dollar since 2005 -- to offset capital shortages at home.

However, the Chavez administration has expressed confidence that global oil prices would make a rally in the second half of next year and allow for a reversal of some PDVSA budget cuts.

"We interpret signals from the Hugo Chavez government to mean that it's betting on a sharp oil-price recovery in the second half of 2009 and therefore will not devalue the bolivar by adjusting its official exchange rate," a recent analysis by the New York-based firm Latin Source said.