Got a Chevy Volt? Better buy one...Chavez on a roll.

Chavez Contagion: The Growing Risk To Latin American Oil

Another election, another win for Hugo Chavez. Despite considerable speculation that President Chavez might finally loose his grip on power last weekend, the ‘Bolivar revolution’ clinched 54.4% of the vote (currently counted), equating to a 1.3m vote lead.

Chavez is going nowhere, but unfortunately for him, neither is the Venezuelan oil sector. This is going to be the same old disorderly management of hydrocarbon decline, but the problem is that the ailment might start spreading further afield across Latin American producers. ‘Chavez contagion?’ Don’t bet against it, even in Brazil.

Disorderly Decline
It’s no surprise that the market failed to react this morning to another six year Chavez term. If anything, El Presidente was a better bet for short term oil market stability than his opponent, Henrique Capriles, who’d been threatening to tear up some of Venezuela’s more ridiculous supply contracts amassed by Mr. Chavez. That obviously won’t now happen; the donkeys will keep nodding, tankers will keep being loaded.

But Chavez knows he’s on borrowed time (politically as well as physically) given that a core part of his electoral strategy was spending Venezuelan oil wealth to win electoral support. State spending increased by 30% this year, subsidising food, housing, fuel and healthcare, all while oil production dropped to 2.5mb/d. High prices helped to paper over the cracks given growth is rattling along at 5.4%, but when you consider PDVSA wasn’t paid in cash for almost half the crude it pumped last year, and that oil markets are set for a significant downside correction into 2013, it’s little wonder that analysts are already taking about a fire-sale on Venezuelan dollar denominated debt.

Given the underlying commodity at stake is ‘oil, oil, oil’, it’s pretty clear that Chavez needs to allow for far greater international investment to get the Orinoco belt going, a region that could increase Venezuelan production by up to 2mb/d according to some excited geologists. But the form book doesn’t bode well, especially if PDVSA retains 60% ownership of operations. It lacks technical expertise; lacks policy consistency from Caracas; and certainly lacks credible finances to do any heavy oil lifting as the statist cash cow of choice for Mr. Chavez.

President Chavez has actually overseen a 22% reduction in Venezuelan oil output since 1999. It would be surprising if Caracas manages to keep production above 2mb/d by 2018, especially when investors all know that Chavez opts for drastic (expropriation) measures when things get too tight for comfort.

Regional Ramifications
Venezuela’s plight will come as welcomed news to Middle East producers, and indeed those of a more moderate disposition in OPEC ranks, but there is a broader problem from a ‘Chavez win’ across the Americas: Rather than learning the lessons of how not to do effective resource management, they’ll go the other way, and start imitating many of his moves to tighten their grips over the resource sector. That’s not necessarily because they think that’s good for production, but because it makes for successful politics. Resource nationalism wins votes; showering the electorate with petrodollars works; being an international nuisance translates into domestic support.