The Oil Politics of Venezuela

Now that the effort in Venezuela to recall Dictator President Hugo Chavez seems to have failed in a referendum vote, hopefully we can get some stability in world oil prices. In recent weeks the price of a barrel of oil has threatened to top $50. On Friday it peaked out at $46.91, capping a 30% rise in the past year. That is an unsustainable level.

As a major contributing member of OPEC, Venezuela has much to gain from high prices in the short term (though in the long term all OPEC countries have a stake in seeing prices return to somewhere under $30 in order to retain demand). Venezuela, the world's fifth largest producer, pumps nearly 2.6 million barrels a day. With Iraq's supply constantly in doubt and Russia's YUKOS on the verge of being broken up by the Russian government, the large demand from the U.S. and China has been a strain on the market - a strain that has little room for error.

Chavez used this world crisis to his political advantage. While the authenticity of the referendum results is still a bit questionable, it appears that Chavez has survived. Ironically, the high oil prices may have helped the corrupt autocrat retain power:

Of course there is now a fairly substantial Catch-22 situation. Part of the reason why Chavez was able to win was that in recent months he's been throwing around money like water on social programs. He was able to do this because oil was up above $40 a barrel, generating vast profits for the state oil company. A lot of the reason why oil prices were so high was that ... there was significant uncertainty about supply from Venezuela because of the impending referendum. Now that some of the uncertainty has been resolved, oil futures have already started tumbling, meaning that it's going to be that little bit more difficult to deliver on these promises; if I were a Venezuelan, I wouldn’t be assuming that we were out of the woods yet.

And this, in a nutshell, is why political economy is so interesting. Chavez created the high prices due to his own failings, which in turn helped him paper-over his corruption and authoritarian means of governing through the age-old practice of throwing money around. Priceless.

**UPDATE**

This is choice. Apparently the Bush administration's devotion to human rights and democracy is no more than skin deep:

The Bush administration too may be wishing for little change in Venezuela. Over the past few days, Bush officials have been biting their tongues not to publicly antagonize Chavez. For officials who less than three months ago were issuing ultimatums and talking of a "consolidation of a dictatorship" under Chavez, this sudden silence is remarkable.

It may be a sign that they don't want to give Chavez anything he can use to his advantage, but it could also be a calculated response to avoid further instability in the United States' fourth-largest source of oil less than three months before the U.S. presidential election.

Lovely. Oil trumps democracy.