Tuesday, January 30, 2007

Could Weak Oil Cost Venezuela, Iran Clout? :: Wall Street Journal

Softening oil prices over the past few months have spurred hope in Washington that less revenue for oil-rich states could weaken the hand of governments the U.S. considers worrisome -- particularly those in Iran, Venezuela and Russia.

The three nations are potentially vulnerable: Oil-and-gas revenue accounts for between two-thirds and three-quarters of government income in both Venezuela and Iran, and only slightly less in Russia. So, a big drop in oil prices would slow economic growth and hit government finances, forcing them to cut back spending increases that have boosted the popularity of all three governments at home and emboldened them abroad.

But it is far too early to expect the changing economics of oil to have big political effects. For one thing, although the price of oil has fallen 28% since hitting an all-time high of $77.03 in July, it is still high by historical standards. The three nations, having weathered crises before, have all built up substantial currency reserves to cushion against a further fall in prices.

"Fifty-dollar oil doesn't put any of them in any grave danger," says Michelle Billig, director of political risk at PIRA Energy Group, a New York-based consultancy. "After all, it was only a few years ago that we were talking about an oil windfall for these places at $30 a barrel."
Unlike Russia, and to a lesser extent Iran, Venezuela has been much more reckless in spending its oil windfall. Last year alone, public spending grew 43%, widening the gap between total government income and outlays to about 1.5% of the total economy, according to estimates by Morgan Stanley.

So far, falling oil prices haven't dented Mr. Chávez's spending habits. Just last week, he announced a program to send 100,000 poor Venezuelans each year to vacation in Cuba. He also recently offered the army's services to build a road in Nicaragua at a projected cost of $350 million.

While economists agree that Mr. Chávez's free-spending policies may eventually shipwreck the Venezuelan economy, they say that won't happen -- if it happens at all -- for at least another year. The main reason: Venezuela has accumulated more than $36 billion of reserves.

But there are signs Mr. Chávez could be headed for trouble, even without a much bigger drop in oil prices. He recently ordered an increase in gasoline prices -- which the government has long subsidized -- to raise federal revenue.
As revenue has soared with oil prices, Iran's public-sector spending has expanded almost as fast. To pay for massive subsidies for most daily goods -- including gasoline, bread and heating fuel -- the government has borrowed in each of the past two years from a special rainy-day fund set up to retain some oil revenue for when prices fall again. But that spending has ignited inflation, now running around 15%.

Iranian President Mahmoud Ahmadinejad introduced a budget early last week that included a 20% increase in spending for the Iranian fiscal year that begins in March. He said the government, whose ultimate authority is held by a council of Islamic mullahs, would be able to add to its rainy-day fund if oil prices remain above $33 per barrel, the level the budget assumes for Iranian oil. But some private economists doubt the budget calculations and predict Tehran would again fall back on those surplus funds to finance spending.

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Blogger nzm said...

Apparently it's being spearheaded by the Saudis who are most likely taking the lead with a little US persuasion upon which this article speculates.

More insight here - the responding comments are interesting.

3:53 PM  
Blogger John B. Chilton said...

At this point, I see an ability by suppliers to prop up prices, but not to hold down prices. Fundamental demand is simply too strong. I could be wrong though.

5:08 PM  
Blogger nzm said...

It depends on what the motive is.

Oversupplying to force the price down is what Saddam did back in the early 2000s and that contributed to his demise.

He also sold for Euros which didn't make the US cartels or govt. very happy!

Forcing the price to drop by increasing supply to give less money to the so-called oil-producing "troublespots" (i.e. Iran and Venezuela) is an attempt to put these countries under financial pressure.

10:41 PM  
Anonymous Anonymous said...

The success of Dubai Holding & Dubai Inc.

10:39 AM  
Blogger bathmate said...

Thank you for your nice posting.
it is really helpful to us.
such a nice topics.


11:46 PM  

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