How a 'Venezuelan Spring' could push down oil prices

A defeat for Hugo Chavez in Venezuela's presidential elections could be a ‘game-changer’ for oil prices, says Matthew Partridge.

Political risk is being blamed for driving up oil prices. The looming threat of Iran, the constant risk of further money-printing by central banks, and concerns over unrest in Saudi Arabia are three that we've covered.

However, it's worth pointing out one political risk that in the longer run - could end up making crude oil cheaper. We're talking about Venezuela.

It turns out that Venezuelan president Hugo Chavez is sicker than previously thought. This could force him to stand down creating a power vacuum. And even if he continues in office, he could lose the election in October.

Chances are, any change in government could result in a major boost for oil production in Venezuela. It might even help to curb the power of both Iran and Saudi Arabia. Here's why.

A tale of two economies

The experience of Brazil shows how developing countries can take advantage of a commodity boom. In the last decade, Brazil has paid down its debts, becoming a net creditor. It has also invested in roads and ports.

This has led to a virtuous circle of increased economic growth, rising living standards and increased foreign investment. Adjusted for prices, Brazil is now the ninth largest economy in the world. Towards the end of last year, credit rating agency Standard & Poor's upgraded its debt.

Venezuela has done exactly the opposite. Since Chavez came to power in 1999, he has wasted oil revenue buying votes and supporting countries such as Syria and Cuba. His decision to take 300 private companies into public ownership - many without compensation - has scared investors away.

The oil industry has been hit hard by Chavez's policies. Not only did he reverse plans to let the private sector have a greater role, he raised production taxes and fired a large number of oil workers for political reasons starving the state oil company of talent.

The 'Chavez effect' on oil production is easy to demonstrate: in 1998, when the price of crude oil hit a low of under $11 a barrel, Venezuela produced 3,167,000 barrels of crude oil a day. Twelve years later, despite record prices, output was only 2,090,000 barrels a day nearly a third lower.

Could Chavez step down?

Despite these economic failures, Chavez was re-elected in 2000 and 2006. He runs what some call a 'soft dictatorship'. Although the law allows free speech and free elections, these rights do not exist in practice.

Those who speak out against the regime may lose their jobs or have their firms taken over by the state. Critical papers and TV stations have been banned. Voters also face intimidation while the opposition has been heavily divided. This has made it hard to effectively challenge Chavez.

However, these things may be about to change. The opposition has finally united behind a single candidate, Henrique Capriles. Despite high levels of official pressure, huge numbers of people turned out to vote in the opposition primary.

More importantly, Chavez may not make it to the election. Last year doctors found that he had cancer. Earlier this month he returned to Cuba for more surgery. However, the follow up radiation treatment will make it hard for him to work full-time.

Ray Walser of the Heritage Institute tips henchmen Diosdado Cabello, Rangel Silva and Adan Chavez Hugo's brother - as possible replacements. But Andrew Cawthone of Reuters believes that "none of the figures around him has his charisma, political and rhetorical skills". Overall, says Walser, "if Chavez dies, I think the chances are good for a reformist.Even if he does not I think we could see the Bolivarian movement self-destruct".

Of course, even if Chavez dies or loses the election there is a chance that his cronies could still cling to power. In 2002, a popular uprising forced him out of office, only to see pro-Chavez forces remove his successor from power. Since then Chavez has put his supporters in key military positions. He has also devolved power to political militias, and worked with Russia, China and even Iran to arm himself to the teeth. A civil war could stop all output increasing the price of crude.

It's all about the long run

Even if Chavez goes in October, there will be little short-term impact on oil prices. When he leaves office, the state firm PDVSA is also likely to be sued over the seizure of assets in 2008 and 2009, delaying any investment. Foreign firms are likely to hold back until the political situation has calmed down.

However, the ability of a free Venezuela to lower oil prices in the long run is huge. The US Energy Information Agency (EIA) thinks that Venezuela has the second largest levels of proven reserves in the world. Oil cartel Opec even claims that it could have more crude oil than Saudi Arabia.

A committed private sector player could even find the huge amount of sea oil that is not currently viable. This would bring the total amount up to 513 billion barrels.

Clearly, this isn't a story that will have an instant impact on investors. But in the long run, Venezuela could be a game-changer' for oil prices. We'll be keeping a close eye on it and watching for potential opportunities.

Recommended

Oil had a terrible 2020. This year will be better
Oil

Oil had a terrible 2020. This year will be better

Oil companies are struggling – both BP and Exxon have reported losses after a year in which the oil price briefly went negative. But hang on to your e…
3 Feb 2021
Oil price comes off the boil as the pandemic lingers
Oil price

Oil price comes off the boil as the pandemic lingers

Brent crude oil had its worst week since October last week, tumbling by 7%, as continued virus restrictions in Europe weigh on demand.
25 Mar 2021
Oil, bonds and tech stocks tumble – what’s going on?
Stockmarkets

Oil, bonds and tech stocks tumble – what’s going on?

The market’s delayed reaction to the Fed’s statement on interest rates led to all manner of assets selling off. John Stepek looks at what’s going on a…
19 Mar 2021
If you’re looking for an “ESG” investment, why not try oil stocks?
ESG investing

If you’re looking for an “ESG” investment, why not try oil stocks?

Investors looking to have their money do good shouldn’t sell out of miners and fossil-fuel companies, says Merryn Somerset Webb. That will just leave …
15 Mar 2021

Most Popular

The bitcoin bubble will burst: here’s how to play it
Bitcoin

The bitcoin bubble will burst: here’s how to play it

The cryptocurrency’s price has soared far beyond its fundamentals, says Matthew Partridge. Here, he looks at how to short bitcoin.
12 Apr 2021
What does the Coinbase listing mean for bitcoin and other cryptocurrencies?
Bitcoin

What does the Coinbase listing mean for bitcoin and other cryptocurrencies?

As the bitcoin price hit new highs, the world's biggest cryptocurrency exchange, Coinbase, listed on the stockmarket. John Stepek looks at what that m…
15 Apr 2021
Lab-grown meat: the new agricultural revolution
Soft commodities

Lab-grown meat: the new agricultural revolution

Vegan alternatives are taking off, but the future of food technology lies in lab-grown meat – cultivating steaks and burgers from animal cells, says A…
16 Apr 2021