Iran, Chavez, and the Oil Markets

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More observations on the oil market. One, there is an element of geopolitical volatility in oil prices—a premium if you will—that can add $10 back on to spot price in a hurry.

Today’s Jerusalem Post reports that, “A senior Iranian officer warned that if the West continues to threaten Iran’s economy over its nuclear program, Teheran will discontinue the flow of oil via the Strait of Hormuz.” Couple that with the fact the new man set to be in charge of U.S. forces in Iraq is a Navy man, and you can see that both the U.S. and Iran anticipate that the oil trading lanes of the Straight of Hormuz will be contested in any future confrontation between the two powers (putting aside that there is a current confrontation in Iraq between the U.S. and Iran, which everyone politely calls a civil war.)

–The second point is that there is good news and bad news to falling oil prices. The good news it that falling oil prices mean falling revenues for regimes made rich and powerful by high oil prices. We’re thinking here of that bombastic, idiotic, wealth-destroying socialist in Venezuela, Hugo Chavez. Chavez announced today his intention to nationalize Venezuela’s electrical and telecommunication’s assets.

–With the flare of the author of the book of Genesis, Chavez took to the airwaves and said, ”All of those sectors that in an area so important and strategic for all of us as is electricity — all of that which was privatized, let it be nationalized…C.A. Nacional Telefonos de Venezuela (CANTV), let it be nationalized…The nation should recover its property of strategic sectors.’”

–Predictably, the stock of CANTV fell in New York trading, destroying wealth immediately before incompetent Chavistas have even had a chance to loot the company for personal gain. Perhaps Chavez isn’t as stupid as we thought, however. Falling oil prices mean falling revenues with which to fund his socialist schemes. Thus, his newest efforts at state-sponsored theft and mismanagement. Of course that’s what happens when you treat capital-intensive assets as if they were cash cows. You stop investing in them, they stop producing.  And you’re forced to go looking elsewhere for cash flow.

–When oil prices fell in the mid-1980s (some say by design, as Ronald Regan encouraged the Saudis to increase production to lower prices) the oil glut dried up the Soviet Union’s source of hard currency reserves. Two years later, the Soviet Empire collapsed. This is a lesson for the Ahmadinejad in Iran, Chavez in Venezuela, and perhaps even the Royal family in Saudi Arabia. Regimes reliant on oil wealth for power are vulnerable to a loss of power when oil prices fall.
–The band news about falling oil prices is that these regimes will fight for higher oil prices to fund their respective power bases. And in the event of falling oil prices which make them more vulnerable, they are also likely to become more belligerent geopolitically, the way a cornered mammal lashes out.

–This itself could lead to increased volatility and higher prices. And it also leads to the somewhat surprising strategic conclusion that the best way to deal with noisy, wealthy oil regimes is to ignore them and find alternative sources of energy. This strategy eventually starves the regime of money with which to buy weapons. And provided you aren’t goaded into a shooting war, internal forces replace one regime with another.

–There’s no guarantee that the next regime in oil-producing states will be any friendlier than the last. But that is a whole other looking glass through which we don’t have time to pass today.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. With all due respect to the author I don’t buy into your rhetoric on Chavez. I’m sort of shocked at your speaking the Bush regime’s propaganda.

    You seem to have caught the (what I like to call) the “Bush Demonization” disease. You also paint America as the “controller” of world events. You have totally discounted the rapidly rising power of both Russia and China who both could give a hoot about what America has to say about the price of oil.

    Chavez “hates” the Bush Administration, but he admittedly does not hate the Americans. (See Barbara Walter’s March interview; also interviews with Chavez on http://www.democracynow.org for more insights into Chavez and the United States).

    In any case, Chavez is no dummy, IMO, and he can literally kiss the Bush Administration “good-bye” at basically any time he wants. Russia, China, India; all would be just happy pink to buy up all his oil.

    I think people in the United States aren’t getting the picture of what’s happening outside their borders. There’s a HUGE market for goods and services outside the US. China just became Japan’s #1 trading partner, replacing former #1 the U.S. The whole of Asia is literally hungering for “cell phones, DVD players, wide-screen TV’s, luxury cars and goods, etc.” and China can at anytime turn its attention to its own backyard and pour its power and resources right here in its own neighborhood. Who needs the US anymore? Tell me that?

    Anyway, I wouldn’t discount a good investment into CANTV if I were you. I noticed that after the announced news of Chavez’s nationalization plan that, although the stock took a near 30% hit, it has recovered a good portion of that (actually within a rather short time) and still seems healthy. It pays a 20% dividend. Compare that to Microsoft’s 1.5%.

    Anyway, I could be totally off on the safety of being invested in Venezuela, it is a “hot” spot, to say the least, but Chavez has built a pretty good relationship with Russia (I don’t know about his Chinese ties) but I personally don’t think he’s a total fool and would let these industries he’s nationalizing disintegrate into nothing. However, to be honest with you I don’t know the first thing about CANTV, who the owners are particularly. I would suppose if they are Americans who share your ideology concerning Venezuela then they may have something to be concerned about, whereas on the other hand if they are level-headed folks who will engage in an open dialog with the President of Venezuela then there could perhaps be some investment opportunity here.

    On another point; I notice that you refer to the Chavez administration as the “Chavez regime”. It seems to me that the word “regime” carries a sort of dark or sinister label with it. I mean, how often do you hear the Bush administration referred to as the Bush regime? We seem to use this word on governments that we wish to impose a negative mindset upon. It seems that you are doing your best to paint Chavez as a pretty crazy guy. Well, you might be correct but then again you might just be behind the curve here.

    Anyway, just my humble thoughts.

    Reply

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