South American Energy Politics Deals Double Blow to U.S. Economy

Extremely interesting article from an oil industry trade publication..

Venezuela Buys Oil to Meet Contracts

Is Venezuela's oil production rapidly waning? One source reports that the world's fifth largest oil producer is showing signs of a rapid decrease in production, one of the key tenets of the peak oil theory.

Venezuela is buying oil from Russia in order to avoid defaulting on deliveries to clients. The situation raises serious questions about the country's oil production and the future of PDVSA as a major oil producer, and increases the risk to the U.S. oil supply should the country's oil production suddenly plummet.

According to the Financial Times: "Venezuela, the world's fifth-largest oil exporter, has struck a $2bn deal to buy about 100,000 barrels a day of crude oil from Russia until the end of the year. Venezuela has been forced to turn to an outside source to avoid defaulting on contracts with "clients" and "third parties" as it faces a shortfall in production, according to a person familiar with the deal. Venezuela could incur penalties if it fails to meet its supply contracts."

The news has so far been very much inside baseball, as it has not made the mainstream, due to competition from more sensational stories such as the illegal alien marches, and the media's obsession with oil company profits.

But, as these things go, we may be on the verge of a major developing story.

I would suspect that the reasons behind this are more geopolitical and economic than they are driven by production capacity.  Venezuelan leader Hugo Chavez wants to exacerbate the global oil supply crunch to make it impossible for the US to attack Iran.  With oil prices hovering near $70/bbl any move against Iran would cause prices to spike to a level that would have catastrophic effects on the global economy.  However, the Venezuelan national oil company PDVSA cannot afford to renege on its prior contractual obligations to supply oil to its customers.  The solution: buy it elsewhere and resell it while cutting domestic production.  Reducing domestic production even by just 10% has a significant impact on the global supply/demand balance in this tight market.

The purchase of Russian oil also would likely have been made with dollar assets that would otherwise have been invested in U.S. Treasuries or in other dollar denominated securities.  Pulling those funds out of the the United States accordingly would deal another, smaller blow to the U.S. economy.

At the same time, newly elected Bolivian leader Evo Morales has nationalized the important energy sector of that country, with the support of Chavez.

Chavez has openly supported Iran in its dispute with the United States.  If the U.S. launches an attack against Iran, Chavez could well take additional action, possibly including a cessation of oil exports to the U.S.  This would cause a bona fide state of emergency in the U.S. and quite likely lead to attempted military intervention.  With the U.S. military already being stretched thin throughout the world, a situation such as that could take some time to resolve, perhaps more time than the Strategic Petroleum Reserve could provide.

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