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.