Vladimir Putin, Hugo Chavez Show How Oil Leads to Geopolitical Power

A bit of a cold snap hit Melbourne this morning. Everyone is in the mood to freeze.

“The incoming Rudd government should escape an interest rate rise when the Reserve Bank meets this week, but could be tested by further hikes early next year,” reports Siobhan Ryan on today’s Australian. The Reserve Bank meets tomorrow and reveals its decision on Wednesday. For now, the cash rate is an ice-cold 6.75%.

What a tough time to be Glenn Stevens. You have a global credit crunch AND rising prices. For example, oil prices closed below US$90 on Friday. Oil’s 9.7% fall on the week was its biggest one-week decline since April of 2005. Are traders taking profits? Is this the market’s way of telling us to expect lower global growth? Or is oil just a week a way from reaching US$100?

“Oil prices could finally breach the US$100 barrier this week, deepening fears for the West’s economic prospects, if the OPEC oil cartel confirms an expected decision at its extraordinary meeting in Abu Dhabi on Wednesday not to raise crude production,” writes Gary Duncan at the UK Times.

OPEC has no plans to increase production this year. However, as we reported last week, Saudi Arabia is planning a new 400,000bpd refinery for heavier crude oil near its existing facility at Ras Tanura. OPEC clearly thinks the market is well-supplied, but would like to increase production capacity a bit more.

Did oil ease off last week because of a smaller geopolitical premium?

In Russia, Vladimir Putin’s United Russia party won big in parliamentary elections. There won’t be a big change in Russia’s oil policy. That is, Russia will continue to use oil a strategic weapon to acquire geopolitical power - and do it better than most.
In Venezuela, voters decided on whether to give Hugo Chavez new constitutional powers. Prior to the polling, Chavez threatened to cut off Venezuelan oil exports to the entire world if anyone tried to meddle in the referendum.

While it’s a nice rhetorical flourish, it’s unlikely. Ninety per cent of Venezuela’s export earnings come from oil. Sixty per cent of its oil exports go to the US, where the heavy Venezuelan sour crude can actually be refined into transportation fuel.

Oil wealth leads to geopolitical power. Chavez and Putin have shown the way. But only so long as you sell the oil to people who can afford to buy it. And only so long as you don’t forget to invest in your oil industry even as you channel most of the profits to your political projects. Cows get sore udders if you over-milk them.

Dan Denning
The Daily Reckoning Australia

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