Will Chavez's Venezuela be the First Victim of Declining Oil Prices?

As we’ve been forecasting at Anchor Rising, declining oil prices are starting to impact the international landscape. This is from a Reuters report on how declining oil prices are increasing the stresses on the government of Venezuelan strongman Hugo Chavez…

A decline in Venezuela's energy revenue could dog President Hugo Chavez if he is re-elected as expected on Sunday, curbing his self-styled socialist revolution that relies heavily on high oil income…

First, the sector's output is shrinking for the first time in years -- bad news for a government that earns more than half of its revenue from the industry.

Second, while Mr. Chavez has said he needs the average price for Venezuela's basket of generally sludgy crude to be at $50 per barrel, a four-month slide pushed the price below that floor last week despite his promotion of OPEC cuts…

Also alarming is that private oil sector activity contracted by 11 per cent in the third quarter compared with the year-ago quarter.

What the Reuters article is hinting at, but not quite saying, is that Chavez’s heavy-handed rule -- including politically motivated firings at the state run-oil company -- has been alienating Venezuela's professionals and skilled laborers, driving the knowledge base necessary for running a modern oil industry away from the country.

And the effect has been magnified. Many former Venezuelan oil-industry workers have settled in Alberta, where they are using their expertise in refining “generally sludgy crude” to help Canada develop its tremendous heavy-oil potential. This relates very directly to the reason that OPEC is resisting production cuts proposed by Chavez; most of the OPEC nations understand that high oil prices will accelerate the development of oil alternatives, ultimately reducing the demand for conventionally obtained oil. (And somewhere in heaven, Milton Friedman smiles).

According to Reuters, the bottom line is that…

"[Chavez's] heavy levels of social spending eventually start to cut into oil field investment," said Maya Hernandez, an analyst with HSBC in New York. "Chavez's popularity rests so much on oil that any weakening in that area will hit him hard”….

If oil revenue falls in 2007 -- either because of lower production or falling prices -- Mr. Chavez may face either runaway inflation or the need to cut government spending.

Furthermore, on top of the industrial woe, there is scant evidence that Chavez's "social spending" choices are improving the quality of life in Venezuela. Instead, Venezuelans are becomming increasingly victimized by violent crime. This is from an article by Sacha Feinman from yesterday's Slate Magazine…

According to the United Nations, Venezuela recently passed Brazil to claim the dubious honor of having the highest rate of gun-related violence in the world among nations not at war....Lost in the media coverage of Venezuelan oil and Hugo Chávez's colorful antics is the fact that over the last decade, Caracas has become a very dangerous place to live. Colombia might have the history, and Brazil might make splashier headlines, but Venezuela has quietly eclipsed both its neighbors in levels of violent street crime. Unlike Colombia's narco-guerrillas or the heavily armed gangs in the favelas of Rio and São Paulo, crime in Caracas is indiscriminate; it has more to do with anarchy and the failure of infrastructure than it does organized, armed groups challenging the government's monopoly on the use of force.

A runaway murder rate is not a sign that the social agenda being implemented is a healthy one.

Finally, this past weekend, several hundred thousand people, at least, turned out in Caracas to protest the Chavez government and to express support for his opponent in the upcoming Venezuelan Presidential election -- despite the fact the Chavez attemped to close the city off to outsiders. Hundreds of thousands don’t turn out to protest in a country where things are going well for the common folk. The bad news is that Chavez is likely to lash out ever more erratically as the collapse that he is bringing upon his country accelerates.