The three nuisances have found that oil prices can go down, down, down as well as up, up, up
- From: Jack Linthicum <jacklinthicum@xxxxxxxxxxxxx>
- Date: Tue, 21 Oct 2008 03:12:12 -0700 (PDT)
Would you prefer that I rewrite this well-research New York Times
article or take it as it stands?
October 21, 2008
3 Oil-Rich Countries Face a Reckoning
By SIMON ROMERO, MICHAEL SLACKMAN and CLIFFORD J. LEVY
CARACAS, Venezuela — As the price of oil roared to ever higher levels
in recent years, the leaders of Venezuela, Iran and Russia muscled
their way onto the world stage, using checkbook diplomacy and, on
occasion, intimidation.
Now, plummeting oil prices are raising questions about whether the
countries can sustain their spending — and their bids to challenge
United States hegemony.
For all three nations, oil money was a means to an ideological end.
President Hugo Chávez of Venezuela used it to jump-start a socialist-
inspired revolution in his country and to back a cadre of like-minded
leaders in Latin America who were intent on eroding once-dominant
American influence.
Iran extended its influence across the Middle East, promoted itself as
the leader of the Islamic world and used its petrodollars to help defy
the West’s efforts to block its nuclear program.
Russia, which suffered a humiliating economic collapse in the 1990s
after the fall of communism, recaptured some of its former standing in
the world. It began rebuilding its military, wrested control of oil
and gas pipelines and pushed back against Western encroachment in the
former Soviet empire.
But such ambitions are harder to finance when oil is at $74.25 a
barrel, its closing price Monday in New York, than when it is at $147,
its price as recently as three months ago.
That is not to say that any of the countries is facing immediate
economic disaster or will abandon long-held political goals. And the
price of oil, still double what was considered high just a few years
ago, could always shoot back up.
Still, Russia, Iran and Venezuela have all based their spending on oil
prices they thought were conservative but are now close to the market
level. Significant further drops could tip the three countries into
deficit spending or at least force them to choose among priorities. A
worldwide recession, which many economists say is likely, would worsen
matters, dampening energy demand and holding down prices.
It is not clear whether the new pressures could create opportunities
for the United States to ease tensions, or whether the three
countries’ leaders will rely more on angry words even if they cannot
afford provocative actions. Mr. Chávez has continued his overtures to
Russia. He, Prime Minister Vladimir V. Putin of Russia and President
Mahmoud Ahmadinejad of Iran may now see the United States, hobbled by
financial crisis, as even more vulnerable.
Daniel Yergin, chairman of Cambridge Energy Research Associates, a
consulting firm in Cambridge, Mass., said oil states were facing
something of a reckoning. Originally, he said, they saw the economic
crisis as a problem mainly for the United States — but then oil prices
went into free fall.
“Now, the producers are experiencing a reverse oil shock,” Mr. Yergin
said. “As revenue went up, government spending went up and
expectations of a continuing windfall led to greater and greater
ambitions. Now they are finding how integrated they are into this
globalized world.”
Venezuela
Mr. Chávez was emphatic last month when he announced that Venezuela
would engage in naval exercises with the Russian Navy in the
Caribbean. “Go ahead and squeal, Yanquis,” he said. “Russia’s naval
fleet is welcome here.”
The moment, made possible in part by a flood of petrodollars used to
buy Russian weaponry, must have been sweet for a man who has spent his
presidency wagging his finger at the United States and railing against
its capitalist model. Cozying up to Russia, whose leaders have been
increasingly at odds with the United States, evoked cold war rivalries
in the hemisphere.
Mr. Chávez has also used his oil money — in direct payments and
through subsidized oil shipments — to win friends in the hemisphere
and elsewhere, including President Evo Morales of Bolivia, who
expelled the United States ambassador in La Paz last month, saying the
envoy was involved in plotting a coup.
Domestic spending in Venezuela has also surged, through the creation
of a wide array of social welfare programs that furthered Mr. Chávez’s
goal of building a socialist-inspired state — and suppressed
opposition. The 2009 budget, based on $60-a-barrel oil, includes a 23
percent increase in government spending, to $78.9 billion.
At $140 a barrel for oil, that was conservative. With prices now
uncomfortably close to $60 a barrel, economists in Venezuela are
expressing alarm over the government’s ability to pay its bills,
including those for arms purchases.
Venezuelans are already struggling with an inflation rate of 36
percent, one of the highest in the world.
Mr. Chávez said on Saturday that the country could endure any oil
price decline, citing its $40 billion in foreign currency reserves,
though he then qualified his remarks by saying that oil prices at $80
to $90 a barrel would be sufficient for his plans.
Still, fears of an impending economic crisis in Venezuela are
increasing because of a lack of transparency in public finances and
because the economy has grown far more dependent on oil in the decade
Mr. Chávez has been in power, with seizures of rural estates weakening
agricultural output and nationalizations scaring away foreign
investors.
“This country will be paralyzed because it is so dependent on
petroleum,” said Oscar García Mendoza, president of Banco Venezolano
de Credito, a private bank.
Anxiety over the economy already helped lead to a sell-off of
Venezuelan government bonds, sharply limiting the country’s borrowing
options.
Last week, Venezuela’s embassy in Nicaragua said the Caracas
government would postpone construction of a $4 billion oil refinery
there. And the national oil company announced that it would tighten
the terms for subsidizing oil exports to some Caribbean countries.
“We’re in the same situation of people who have lost a limb but can
still feel it,” said Ricardo Hausmann, a Venezuelan economist who
teaches at Harvard. “I don’t know how long it will take for Chávez to
realize he’s lost a limb.”
Iran
When President Ahmadinejad presented his budget to Parliament in 2007,
the United Nations Security Council had already imposed economic
sanctions on Iran because of its nuclear program. The president said
it did not matter.
“Even if they issue 10 more such resolutions,” he said, “it will not
affect Iran’s economy and politics.”
He was partly right. It hardly affected Iran’s politics. There was
another resolution two months later, and another a year later — and
still, Iran augmented its nuclear program, even as its economy was
squeezed.
One of the main reasons it was able to endure the economic punishment
was the price of oil. Iran has the second largest known oil reserves
in the world, and it has used them in the past four years as a
political and economic weapon to defy and undermine the West while
promoting its own agenda.
Oil money helped Iran spread its influence in Iraq. Oil money helped
it challenge Arab political dominance in the Middle East. Oil money
helped spread its influence in Lebanon, through Hezbollah, and in the
Israeli-Palestinian conflict, through Hamas.
At home, oil money allowed Iran’s ideological hard-liners to preserve
their monopoly on power, to buy political allegiances and to offset
the fiscal damage of their economic policies. All that may now have to
be recalibrated.
“The drop in oil prices will make the Iranian regime re-examine its
calculations because its political immunity is less,” said Mustafa El-
Labbad, director of the East Center for Regional and Strategic
Studies, an independent research center in Cairo. “Their regional
presence and role will shrink.”
Even before the global economic crisis undercut the price of oil, Iran
was gripped by an economic crisis. Now, inflation is running at 30
percent, according to the Central Bank. And this month, bazaar
merchants, who wield significant political power, went on strike after
the government imposed a value-added tax.
Mr. Ahmadinejad’s way of dealing with the general economic distress
has been to increase government spending, primarily through imports.
But the International Monetary Fund said in August that Iran would
face unsustainable deficits should prices for its oil fall to $75 a
barrel.
It is not expected that economics will force Iran to change its
underlying ideology or long-term goals. Still, if prices stay
depressed for long, it could mean a greater willingness in Tehran to
find a compromise on the nuclear issue and, perhaps, a political shift
that left Mr. Ahmadinejad vulnerable in June’s presidential election,
analysts said.
“The government has distributed money and has encouraged spending,”
said Saeed Leylaz, an economist and political analyst in Tehran. “It
has given high salaries to its own supporters. They have increased
their expectations, and there is no way they can give them less now
without making them unhappy. If the government fails to respond to
their expectations, it might lead to a crisis.”
Russia
On a winter day in 2006, Russia suddenly cut off the supply of natural
gas to Ukraine, where a pro-Western government had come to power. The
Kremlin cited a dispute over prices. But some Western officials said
Vladimir V. Putin, Russia’s president at the time and still its
paramount leader, was sending a message: Russia was willing to use its
vast energy reserves to try to reassert the dominance it lost with the
Soviet Union’s collapse.
Two months ago, the muted reaction of some European nations to
Russia’s invasion of Georgia seemed to indicate that Mr. Putin’s
policy was working, some foreign policy analysts said. Europe had
become dependent on Russia’s gas and could not afford to mount a
strong challenge, they said.
Now, however, with gas prices tumbling, this strategy has been thrown
into question. Europeans may no longer be as intimidated, knowing that
Russia is less able to pressure its customers.
“The more other countries are nervous about their energy security, the
better Russia is geopolitically,” said Peter Halloran, chief executive
of Pharos Financial Group, an investment fund based in Moscow.
Still, at least in terms of its domestic economy, Mr. Halloran and
other experts said Russia was better positioned to weather lower
prices than were many other oil and gas producers, because it had
adopted conservative fiscal practices in recent years.
The country deposited a significant portion of its oil revenues into
two stabilization funds, which totaled $190 billion at the beginning
of this month. The Russian budget is pegged to an oil price of roughly
$70 a barrel — most revenues exceeding that have gone to these so-
called rainy-day funds.
The Kremlin also succeeded in recent years in establishing control
over many of the pipelines that transport oil and gas in the region —
an achievement that will endure despite the lower prices.
The Kremlin has started tapping into its stabilization funds to prop
up the banking industry and the stock market, which has been hard hit
by the international financial crisis, dropping by more than two-
thirds since May. The government may also rescue many of Russia’s
oligarchs, the industrial magnates who were thriving with the high
price of natural resources but have now been suffering steep losses.
These bailouts, combined with declining oil and gas revenues, could
make it difficult for the Kremlin to carry out plans to modernize the
country’s aging infrastructure, from highways to schools, and still
promote Russian ambitions abroad.
Even so, opposition politicians in Russia said they did not perceive
sagging prices as undermining Mr. Putin’s power.
“I think that it’s too early,” said Grigory A. Yavlinsky, an
opposition leader. “The crisis at the moment is not related to the
population enough. The banks are still open, and unemployment is not
yet going higher. It’s a threat, but it’s only a potential threat.”
.
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