Hugo Chavez is out, generating ripples in the already stormy energy markets. He is apt at doing so and probably enjoys too. Now being labelled as a hawk within the OPEC, he seems to be spearheading a campaign to entice Moscow so as to ensure fair oil prices. And what is a fair oil price? Chavez has his own explanation to that. And by endeavoring to entice Moscow, the leftist in Chavez is apparently also trying to settle scores with his next door “friend.”
Already a nemesis to Washington establishment, Hugo Chavez has emerged as among the major movers and shakers of the oil markets today. And there are reasons for his rise on the chart. Chavez has been on move again for the last few weeks. He visited Russia, the second largest oil producer after Saudi Arabia and then followed it up immediately with a visit to Qatar. In recent days he has been to Iran and even Vietnam, trying to shore up relations with a nation that at a point stood up to the US.
Venezuela is the world’s fifth-largest oil exporter and a major supplier to the US market, accounting for 11 percent of US imports. He is among the few people who are conspicuous because of the influence they wield today on the global energy map. His left wing policies, his closeness to Fidel Castro and his joining up with Moscow on various issues are only some of the issues that keeps disturbing the world’s largest energy consumer, the United States today. Many also credit Hugo Chavez for the new wave of nationalistic energy politics now in vogue in some countries of South America. In countries such as Bolivia, the new incumbent, elected democratically, copying Chavez have started stressing on nationalizing the energy assets. This was done despite the expressed reservation of the US. In the process, the global majors were asked either to pay up or lose the rights to the energy assets. Rules of the game are undergoing change.
Until the mid 90s, Venezuela was a known quota buster within the OPEC. However, once the leftist Chavez was inducted into power, he strategically worked on fostering closer relationship with fellow oil producers — mainly Saudi Arabia. In 2000, after only a year of coming into power in Caracas, Chavez hosted an OPEC summit, only the second in the cartel’s 40 years plus history, giving a call for much closer economic cooperation between the OPEC member countries. After all nationalistic priorities commanded so!
Major OPEC producers welcomed the change whole heartedly. Insiders say, Minister of Petroleum and Mineral Resources Ali Al-Naimi worked tirelessly toward forging closer relations with this otherwise recalcitrant producer within the OPEC.
Chavez is now drumming up another beat — forging closer ties between the oil producers — interestingly including Russia. Pundits in the energy world are keeping an eye on this move with great interest as it may have great consequences for the energy balance.
While in Moscow, Chavez gave a call to the oil producers to work toward maintaining “fair’’ oil prices. Reportedly he discussed the issue of oil prices with the Russian President Vladimir Putin. “Russia, Venezuela and OPEC — are interested in maintaining oil prices, fair oil prices, and in maintaining production at an appropriate level to assure the supply of oil to the world,’’ Chavez said in comments broadcast by Venezuela’s state TV channel.
Russia is not a member of OPEC but is a major oil producer, second only to Saudi Arabia, according to the US Energy Information Administration. Chavez also indicated that Venezuela, Russia and OPEC “maintain excellent level of coordination’’ regarding oil prices.
What is but a “fair price.” This is a very debatable and divisive question. At the last OPEC meeting in Caracas, the hawk in Chavez suggested that the oil cartel trim production and establish a minimum price of $50 a barrel. And its oil minister Rafael Ramirez went even a step ahead. He says that a $100 plus price could be fair as in real terms prices are lower (in real terms now) than in the 70s and 80s. “The prices we are seeing today are in today’s dollars,” Ramirez said last week. “For us to have the same amount of revenues that we had in mid 70s you’d have to put the oil price close to $100 a barrel.
And according to some analysts the world is already bracing up for that eventuality as many now agree the global economy would still be able to sustain it. Global economy has managed the high oil prices, now flirting at around $75 a barrel, with comparative ease. And if the current level of oil prices have not derailed the global economic growth and have not pushed it into stagflation, even a $100 mark could still be sustainable. Indeed there are reasons for that.
In the 80s, when the world was struck with the “second oil shock” crude was contributing eight percent to the global GDP. Today its contribution to the global GDP is less that two percent, almost one-fourth of the value in the 80s. And thus world has been able to ride this phase of higher oil prices with considerable ease. The fact today is that despite the overall global oil consumption is rising in absolute barrel terms, it has lost its significance considerably as a percentage of GDP over the years. And the current bull ride, and still greater oil usage efficiency, would contribute to the further lessening of the role of oil in the global GDP, one can’t help but concede.