Chavez is not oil's friend
By MATHEW INGRAM
Globe and Mail Update - POSTED AT 11:58 AM EDT Monday, Aug 16, 2004 - Crude oil prices dropped on Monday on news that Venezuelan President Hugo Chavez won a recall vote on Sunday, and that in turn helped push the major stock market indexes up. Analysts said that traders were relieved at the vote, because they feared the ouster of Mr. Chavez would lead to instability in Venezuela that could disrupt its oil industry, a key source of global supply. But the market may be a little too sanguine in its view of Mr. Chavez as a friend to the oil industry. His continued presence may keep things stable in the short term, but it also has substantial longer-term risks that shouldn't be ignored.
For oil traders, the calculation involved in Venezuela seems to amount to this: Change is bad. In other words, whatever trouble has been caused by the reign of Mr. Chavez — and it has been considerable — the devil you know is better than the devil you don't. And it's true that if the Venezuelan president had been removed from office there would have been a certain amount of turmoil, which might have increased the oil market's case of nerves. Not only would his successor be a question mark, but Mr. Chavez might have tried to launch a military coup to retain power.
At the same time, however, it's hard to see how the former paratrooper's government could be good for the oil industry over the long haul — or even for Venezuela as a whole, for that matter, since the two are closely linked (oil makes up more than 70 per cent of the country's exports). Although Mr. Chavez has tried to sell himself as the only one who can keep the oil market stable, there's every reason to believe that he has done more to hurt his country's largest industry than he has to help it. And that is something the market should be concerned about, since Venezuela is the fifth-largest oil producer.
Mr. Chavez's popularity in his country seems to be largely a result of his campaign against the "oligarchs" he says used to run Venezuela, a group that the president maintains lined their own pockets with profits from the oil industry, at the expense of Venezuela's poorest citizens. Much like his friend Fidel Castro in Cuba, Mr. Chavez has made himself out to be the champion of the poor and a crusader for justice against the rich. Both the short-lived coup that deposed him in 2002 and the latest recall vote, he says, were attempts by the former ruling elite to get rid of him and take control of the country.
As part of what he calls his "Bolivarian revolution" in Venezuela — a tribute to general Simon Bolivar, who won independence from Spain — Mr. Chavez has been using truckloads of the cash generated by the country's state-owned oil company, Petroleos de Venezuela, to further his social goals. For example, he plans to use $600-million (U.S.) to buy 4,000 pregnant dairy cows to give away to the poor and to resettle thousands of Venezuelans, part of a $2-billion spending program. This may not seem like much for a country that is expected to generate $7-billion on crude sales this year, but some say it raises questions about the long-term health of the Venezuelan oil industry.
Mr. Chavez's country is not only the world's fifth-largest producer — and one of the largest exporters of crude to the United States — but it also has what are estimated to be the second-largest oil reserves after Saudi Arabia. Like any other resource-intensive industry, the oil business requires continued development and investment, and there are concerns that Mr. Chavez has been too busy redistributing Venezuela's profits to pay much attention to that sort of thing. There are also fewer experienced senior executives and managers at the state oil company than there were, because Mr. Chavez fired them all after the oil industry strike last year.
Like the ill-fated coup in 2002, the strike was described by the Venezuelan president as an attempt by the former ruling class to reassert its control, so he fired several senior executives of PDV and replaced thousands of workers in the wake of the strike. Admittedly, not all of those were irreplaceable, but it remains to be seen how well the oil company manages to operate over the long term. And while his crusade against the rich may go over well with the poor, his reaction to the strike didn't do much for Mr. Chavez's reputation with the Venezuelan middle class.
In fact, Mr. Chavez's win may do more to increase destabilization in Venezuela than decrease it, since it will be seen by some as further evidence that the president is clinging to power. The first vote on whether to hold a referendum gathered 3.4 million signatures late last year, but the election council said only 1.8 million were valid. Only after a series of court rulings did the council agree a referendum could proceed. Although the latest vote has been verified by outside observers, the opposition says the result was rigged. Critics also say the Chavez campaign spent heavily in the country's poor areas.
Even if he doesn't plunder the state oil company or cause a groundswell of dissent that destabilizes his country, the market's favourable response to Mr. Chavez's win still seems a little odd. The president has been one of the most vocal critics of OPEC's recent output increases, and has been a persistent lobbyist for higher oil prices, saying the OPEC price target should be between $30 and $35 a barrel — presumably so that he would have even more money to spread around. Is that the kind of thing the markets should be celebrating? Probably not. In fact, on the whole Mr. Chavez's win is something to be mourned rather than celebrated.
E-mail Mathew Ingram at mingram@globeandmail.ca
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