Oil, Chávez, War and Terror

A half century ago, Juan Pablo Perez Alfonso, the Venezuelan who started OPEC, said, "Ten years from now, twenty years from now, you will see: oil will bring us ruin . . . Oil is the Devil's excrement." Hugo Chávez, who was an infant when those words were spoken, is now learning their truth.

When Chávez took over Venezuela in 1999, the oil price was under $10 a barrel, which he was able to help spike to $147 by July, 2008, a rise coincident with his oil hegemony in Latin America and political alliances with Iran and Russia to oppose "the evil empire" of America and its "Devil" President George W. Bush.

But by the first days of 2009, the Devil's excrement has hit the fan, so to speak, as oil dipped to $30 a barrel in Caracas, where it must be $90 to balance the budget. Consequently, the power of Chávez has been visibly shaken but it would be a huge miscalculation to count him out.

Often underestimated as a foolish showboat, Chávez has monopolized Venezuela's oil, money, and power for ten years running. His oil price strategy was effective until only a few months ago and it might work again in 2009 -- to short the market of oil supplies, while spurring prices with theatrical threats of war or oil cut-offs.

Since 1999, Chávez has personally shorted the market by over 2 million barrels per day. Instead of increasing Venezuelan production from 3.6mbd in 1998 to the planned 5mbd for today, he reduced production to 2.4mbd, which reduced world oil supply just as China and India were coming on line with new demand.

By getting Ali Rodriguez, his co-conspirator in a 1992 coup attempt, appointed president of OPEC, Chávez pushed oil producers into his price-gouging strategy and soon had OPEC also shorting the market (Previous to Chávez, Saudi Arabia had tamped down the price hawks in OPEC).

But his most astounding achievement was spiking the ìpolitical risk premiumî paid for oil through threats of war, which can be found by searching for the words "Chávez + War + U.S." in Google, where no less than 7,300,000 stories pop up for review. When oil approached $70 a barrel in 2006, Saudi Energy Minister Ali al-Naimi opined that the war talk accounted for 40% of the oil price. The price of oil has little to do with supply and demand, as al-Naimi saw it.

Wall Street doubts about al-Naimi's analysis shattered as the oil price soared over $100 in March of 2008 coincident with threats from Iran about developing nuclear weapons, wiping Israel off the map and closing the Gulf of Hormuz (where 15mbd are shipped every day); plus threats from Venezuela about cutting off U.S. deliveries, buying $4 billion of Russian weapons to thwart an imagined U.S. invasion, and threatening war against U.S. anti-drug activities in Colombia or if the U.S. did anything provocative toward Bolivia, Nicaragua, Cuba, Iran or Hamas.

In May, 2008, the oil guru Arjun N. Murti of Goldman Sachs predicted a "super spike" where oil would pierce $200. In July, when oil hit $147, Wall Street thought he was right. But he was not. When a Commodity Futures Trading Commission report showed in September, 2008, that speculative bets by index funds didn't push oil prices up, the power of Chávez's oil price gouging strategy was clear but ignored: Wall Street and Washington had already turned toward a much larger looming crisis with the banks and the worst recession since the 1930s.

The global recession of economic activity cut the legs out of the oil price which sank $100 in 100 days to about $40 a barrel by the turn of the year. This put Chávez in a huge quandary. He's got to get the price up to the $80 level or suffer huge consequences in Venezuela where he employs every other person in the country. If Chávez loses the referendum in March that allows him to run for president for life, things could get dicey for him in Venezuela.

Barack Obama, who has other things on his mind, is all Chávez is thinking about. Obama, Chávez says, is the same as Bush, so the war to destroy capitalism and U.S. power must go on. Chávez, who is more heavily armed than anyone outside the Pentagon on this hemisphere, wants a confrontation with Obama to build his support back home -- the same trick Fidel Castro has worked with ten American presidents in a row.

When Israel began bombing the Gaza strip, Chávez joined his strategic partner, Iran's Ahmadinejad, in defending Hamas and condemning Israel and its supporter, the U.S.  But this time, the threat to cut off oil flowing through the Gulf of Hormuz and oil flowing from Venezuela to the U.S., upped the price by only a few dollars a barrel and only for one day.

The unknown factor is whether the one unused weapon in the arsenal of Ahmadinejad and Chávez will be used before they are ousted. That is the weapon Fidel Castro invited to Cuba in 1962 and which almost caused a nuclear war. Can Obama deal as effectively with Ahmadinejad and Chávez as Kennedy dealt with Khrushchev and Castro in 1962? That, as Joe Biden predicted in the campaign, may be the "test" Obama will face from Chávez.



©2008 Michael Rowan