My mom out in California is elated -- gasoline prices in her neighborhood are below $4 a gallon for the first time in four months. Less so are the world's petro-rulers, who are watching the price of oil -- their life blood -- plunge at a rate they have not experienced since the dreaded year 2008. Industry analysts are using phrases such as "devastation" and "severe strain" to describe what is next for the petro-states should prices plummet as low as some fear. No one is as yet forecasting a fresh round of Arab Spring-like regime implosions. But that's the nightmare scenario if you happen to run a petrocracy.
To understand why your average oil king is right to be worried at the moment, grab your calculator. The price of U.S.-traded oil fell to $83.27 a barrel on Monday, and global benchmark Brent crude to $96.05 a barrel; now juxtapose that against the state budgets of Iran, Russia, and Venezuela, which require more than $110-a-barrel Brent prices to break even, according to generally accepted estimates, and you'll see the problem.
Given this already-existing revenue gap, one might fairly wonder what would happen if, as Citigroup's Edward Morse says is possible, prices drop another $20 a barrel for an extended length of time. Oil economist Philip Verleger's forecast is even gloomier -- a plunge to $40 a barrel by November. Or finally, what Venezuelan Oil Minister Rafael Ramirez fears -- $35-a-barrel prices, near the lows last seen in 2008. In Russia, for instance, "$35 or $40, or even $60 a barrel, would be devastating fiscally," says Andrew Kuchins of the Center for Strategic and International Studies. That could damage the standing of President Vladimir Putin, since his "popularity and authority are closely correlated with economic growth," Kuchins told me in an email exchange.
With few exceptions, the same goes for the rest of the world's petro-rulers, whose oil revenue supports vast social spending aimed at least in part at subduing possible dissatisfaction by their populace. Saudi Arabia can balance its budget as long as prices stay above $80 a barrel, according to the International Monetary Fund, although projected future social spending obligations will drive its break-even price to $98 a barrel in 2016.
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Oil king Venezuela? Is Saudi Arabia's mere possession of much oil the central reason it is the most pivotal energy player on the planet? Observed through the prism of Venezuela, the answer is no. BP's 2012 Statistical Review of World Energy, the bible of the energy industry, was released this week, and makes official something that OPEC asserted months ago -- Venezuela has surpassed Saudi, and become the world's largest reserve of oil. With 296 billion barrels, Venezuela has 18 percent of the oil on the planet; Saudi Arabia, with 265 billion barrels, has 16 percent (Canada's 175 billion barrels make it third, with 11 percent of the global total). Yet, oil is one sphere where possession is not nine-tenths of the law. Saudi Arabia remains king because of what it does and, more important, can do with its oil. For starters, the Saudis are the world's biggest oil exporters (10.1 million barrels a day in April); Venezuela exported 2.1 million barrels of oil a day, the seventh in rank, according to OPEC. But the more salient factor is Saudi's residual capability -- it is the sole country able to add meaningful daily volumes to global production in a pinch; Venezuela's spare production capacity is effectively zero. And that factor -- spare capacity -- is pivotal in the stability, or lack of, in global energy. When the world knows that there is oil to be had regardless of what calamity ensues, it can go and worry about other matters. Conversely, when spare oil production capacity becomes razor-thin, the world fixates on petroleum; prices go through the roof. Conclusion: Little sleep was lost this week in the kingly palaces of Saudi Arabia.
Go to the Jump for the rest of the Wrap.
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In a profession that prizes the illusion of reality, Hugo Chavez is one of politics' best -- a consummate actor whose connection with the Venezuelan masses has kept opponents off balance for 13 years. We never know if the Venezuelan president is putting us on.
So is he now?
For the last several months, Venezuelans have witnessed the drama of a cancer-stricken Chavez shuttling back and forth to Cuba for treatment, all the while taunting opponents seeking his ouster in October presidential elections. Last week, they were treated to scenes of the usually feisty Chavez in church, tears rolling down his cheeks, hands clasped in his parents', and beseeching Christ, "Don't take me yet." Meanwhile, a rumor went around that he was giving up on Cuba, and heading imminently for superior treatment in Brazil. Only to turn up yesterday in Havana, where he was met by Raul Castro.
"He is pulling all the stops for sympathy and will likely get it from his support base," a skeptical Stephen Johnson, director of the Latin America program at the Center for Strategic and International Studies in Washington, told me in an email exchange. He said:
Yet what all this theater means is very hard to determine, since few verifiable facts are available on what may be wrong with him. Offers of treatment in Brazil have been spurned before, either because he is not really ill, or because he really believes the best medicine is in Cuba.
We are watching the flow of events in Venezuela in large part because of the potential impact in the greater region, given Chavez's penchant for projecting influence through the use of the country's oil proceeds.
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When Patrick Duddy, the former U.S. ambassador to Venezuela, thinks about the ailing Venezuelan president, Hugo Chavez, he is reminded of the 1961 epic El Cid. In the climatic finish, a dead hero's men, fearing they cannot defeat North African invaders without him, secure his corpse upon his horse, and send it onto the battlefield in order to intimidate their enemies. Sure enough, the dead El Cid's Castillian army goes on to final victory.
With seven months to go until October presidential elections, Chavez returned to Caracas over the weekend after a second cancer operation in Havana. Chavez's health has thrown the election into disarray, raising questions about what will happen not only in Venezuela should he be incapacitated, but in the country's projection of influence around the region. Until 2008, Chavez, fueled by the income of some 2.5 million barrels of oil exports a day, provided hundreds of millions of dollars of support for Colombia's hyper-violent rebel opposition FARC movement. Venezuela also was a key to cocaine smuggling. Meanwhile, Chavez has had a tense relationship with foreign oil companies during his 13 years of power, sometimes nationalizing their fields, or unilaterally changing contractual terms. ExxonMobil and ConocoPhillips left the country.
On arriving home, Chavez sang and danced with his daughter on a balcony (pictured above), a demonstration of rigor intended to dispel talk that, despite chemotherapy he is to undergo, he is not up to the challenge of a tough campaign. "The beating we're going to give the Venezuelan right will be memorable ... not just in the history of Venezuela but in almost all the world," Reuters quoted Chavez as telling the crowd.
Duddy is sure of only one thing -- that, whether or not Chavez is healthy, he will in fact appear as the ruling candidate for president on Oct. 7. There simply is no serious alternative in the Chavista camp to face the popular opposition candidate, Henrique Capriles Radonski. And there is too much at stake in the way of power and wealth to leave victory to chance.
"I think they're going to try to stick with Chavez to the very end," Duddy told me. "And they think [they will triumph] through a combination of aggressive spending on the social program, incessant election publicity. They dominate the [broadcast media]. They have immense resources. They're going to put those resources to use in the serve of the president's campaign for re-election."
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Venezuela President Hugo Chavez's disclosure that his cancer has recurred raises hard questions about his ability to campaign for re-election in October. If he lacks the stamina or is incapacitated, what happens next -- will fair elections proceed, or will his ruling circle frustrate any potential transfer of power?
In short, if there is new leadership, can one imagine a shift in which Venezuela stops using its oil wealth to support a violent Colombian guerrilla movement? And will Venezuela lift constraints on oil production, and become a tipping point in the fast-changing geopolitics of oil?
The evidence to date is that Chavez, who has led Venezuela for 13 years, has prepared a tough strategy "to defend the revolution," says Stephen Johnson, director of the America's Program at the Center for Strategic and International Studies. The most recent datapoint came Monday, when a congressman's son was injured in a shooting by red-shirted Chavez supporters at a rally for opposition candidate Henrique Capriles Radonski.
The 39-year-old Radonski (pictured above), who is governor of Miranda state, appears to represent a serious popular threat to Chavez. He was elected as the united opposition candidate by a resounding majority last month. Among his platforms is a new day for the Venezuelan economy, fueled by a modern export oil industry pumping out far more crude.
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If Venezuelan President Hugo Chavez is forced to drop his bid for re-election for health reasons, will the primary repercussion for the West be the exit of a voluble thorn in the side? Perhaps, but it will also mean the prospect of yet more newly available oil reserves -- on top of the widely projected U.S. shale oil bonanza. The takeaway: If the shale oil projections are accurate, and Chavez leaves politics under whatever scenario, we have the prospect of a geopolitical shakeup analogous to what has accompanied the rise of shale gas.
Venezuela has the largest proven oil reserves on the planet -- 296 billion barrels, according to OPEC figures. The number is slightly misleading: Saudi Arabia's 264 billion barrels are higher quality and cheaper to produce than the extremely heavy crude of Venezuela's Orinoco Basin; yet Venezuela's reserves are so massive that such details almost don't matter.
The trouble has been that, since Chavez took power 13 years ago, Venezuela's oil production has fallen to 3 million barrels a day, 16 percent less than the 3.5 million barrels a day it produced in the 1990s. This has resulted from Chavez forcing out key members of the skilled labor force and management of the state oil company, known as PDVSA, and his marginalizing of the other source of oil patch expertise -- foreign oil companies such as Chevron and Shell.
Yesterday however, Chavez said his cancer may have recurred, reports the Associated Press -- he must go to Cuba for further treatment and scale back his frenetic pace. That bodes ominous for his attempt to hold back a groundswell of apparent support for Henrique Capriles (pictured above), his 39-year-old opponent in October elections. What distinguishes Venezuela from some other petro-states -- Russia, Kazakhstan, Azerbaijan and Iran among them -- is that power can actually change hands through the ballot box. So even though polls show Chavez with sustained popularity, he still must win. Capriles already was a serious challenger, and now he is more so.
Capriles has already said that, if elected, he will boost oil production. He also has suggested that foreign expertise will be permitted back into the country.
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The geopolitics around us -- mainly Iran and Nigeria -- are keeping oil prices aloft. But should traders lose the fear of Tehran closing the Strait of Hormuz, and Nigeria's Goodluck Jonathan not managing to make peace with his striking countrymen, look for the air to go out of prices that, despite the continuing European economic crisis, exceed $100 a barrel. And if they drop far enough -- into the low-$80s-a-barrel range -- some key petro-states are going to be in serious trouble, according to a couple of analysts from the Eurasia Group.
In a blog post at the Financial Times, Eurasia's Chris Garman and Robert Johnston scrutinize Russia, Nigeria, Venezuela and Saudi Arabia. Garman and Johnston's presumption is that oil demand remains soft in the U.S. and Europe, and erodes the impact of an expected rise in Asian oil consumption. As a result, Saudi Arabia attempts to retain a floor under prices by reducing production, but that just creates a vicious circle: Lower actual Saudi production necessarily means higher idle production capacity, also known as spare capacity. As far as petro-states are concerned, that is a deadly brew.
Oil prices are determined at precisely that inflection point -- spare capacity. Oil traders in London and New York compare global oil demand and the capacity of petro-states to meet it, and if the gap between the two numbers is exceptionally narrow -- if there is barely enough production capacity to satisfy demand -- then traders will bid up the price. When they do so, they are betting on the blowup risk of an event like anti-Iranian sanctions or Nigeria's street protests, and the loss of existing oil exports. This risk is based on the following question: Do or do not states such as Saudi Arabia possess sufficient spare capacity to make up for those lost exports?
Similarly, if the gap between the numbers is super-wide -- such as would occur this year in the Eurasia scenario -- traders will bid down the price, since it almost wouldn't matter what geopolitical event occurred: There is still plenty of spare capacity to compensate for almost any loss of production.
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A new middle class - the other commodities story: Share prices have surged in recent years for agriculture, metals and energy companies, and traders betting long on the commodities sold by these companies have been rewarded richly as well. Now the Wall Street Journal finds a far more dramatic impact across borders -- Eric Bellman reports that the boom in palm oil (seeds pictured above), cocoa, rubber, coal and more has created a new or larger middle class in countries like Brazil, Indonesia, Malaysia and Thailand. In Indonesia, writes Bellman, "rubber tappers, cocoa pickers, coal miners and other rural laborers have in some cases seen their incomes more than triple in the last three years, making the workers' wealthier than some city residents and putting them on the radar of such multinational consumer-goods makers as Honda Motor Co. and Unilever." Of course, if you are not engaged in palm-oil farming or other commodities businesses, you are probably hurting with high prices. The palm oil boom has also caused deforestation in Indonesia. But Bellman quotes figures from the Asian Development Bank that from 1999 to 2009, Indonesia's middle class doubled to 93 million people, or 40 percent of the population of 229 million people.
The trouble in Greenland: Shell has gotten provisional approval to drill for oil offshore from Alaska's North Slope in the Arctic Ocean. After five years and $4 billion in spending, Shell is pretty thrilled. Oil booms can be exciting, but there is something other-worldly about the hoopla surrounding the Arctic, which every large oil company on the planet, not to mention the leaders of a few states such as Russia, appears unabashedly eager to develop as the next big frontier. The ice-melting impact of global warming is opening up the Arctic Circle, the location of 25 percent of the world's remaining oil and gas reserves, according to the U.S. Geological Survey. But earlier this week, we got a reminder that the arrival of a sloshy ice pack doesn't make this forbidding region easy to work in. Cairn Energy, which had already faced creatively angry activists from Greenpeace, says it is abandoning a dry hole it has drilled on Greenland's west coast, one of four wells costing $600 million that the British company plans in the country. The company says it's going ahead with the other wells. ExxonMobil, Chevron and Encana Corp. also hold drilling licenses there. As for Shell and Alaska, this is just the first major hurdle.
Read on for more of the Wrap
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The Arab Spring has added the appearance of fragility to almost all petro-states regardless of their location. In Venezuela, President Hugo Chavez, back in Cuba for follow-up cancer treatment (pictured above on arrival in Havana with his daughter Rosa and Raul Castro), has triggered speculation on what will happen should he become incapacitated or die. Among the questions -- would Chavez's successor revive an oil industry whose reserves have officially surpassed Saudi Arabia's but whose production is just a third of the kingdom's? Similar questions are being asked anew about oil-rich Kazakhstan, prompted by the 11-day disappearance of leader Nursultan Nazarbayev, who it turns out was undergoing secret prostate surgery in Hamburg, reports Germany's saucy newspaper Bilt.
The root of all this inquiry is the Saud family of Saudi Arabia -- a few months ago, oil prices went through the roof over the issue of what would happen to the global economy if the guardians of the entrepot of global oil went south. That shudder didn't last long because the premise was thin, and became thinner when King Abdullah laid some $130 billion in largesse on his population, and sent troops to shore up the neighboring monarchy in Bahrain, home to the U.S. 5th naval fleet.
Till today, though no full-fledged petro-state has been caught up in the Arab Spring, we remain jittery because of the possibility for more economic havoc should the turbulence strike a big oil producer. Yet Venezuela tells us that the range of possible outcomes includes not only the recurrence of a Yemen or Libya scenario; it is also changes to the market status quo in a simple change of leadership.
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Steve LeVine is the author of The Oil and the Glory and a longtime foreign correspondent.