Tags: Oil, Russia, Venezuela

Putin Wins Chavez Loses: A Net Win for Oil Investors

By , Money Morning •

By Martin Hutchinson
Contributing Editor

Russian president Vladmir Putin's United Russia party won 64% of the vote in Sunday's elections, while Venezuelan president Hugo Chavez lost his constitutional referendum in by a slim 2% margin the same day.

That's a split result for the wannabe dictators, but it looks like a net win for investors.

That may seem a strange view. After all, Russia is generally considered one of the most politically influential countries in the world, while Venezuela is a modestly important South American oil producer that carries little international clout. Even economically, Russia's Gross Domestic Product in 2006 was $733 billion whereas Venezuela's was only $186 billion.

However, the position becomes very different when you examine both countries' principal export - oil.

On current production, Russia still dominates, with 10 million barrels per day in 2007, compared with about 2.5 million from Venezuela. But if you look at proven and probable oil reserves, the picture is very different. Not including places like the North Pole, which Putin is currently attempting to seize, Russia currently has about 74 billion barrels of reserves, or about 20 years of production at current rates.

Venezuela on the other hand has the Orinoco tar sands, which are believed to contain about 1.8 trillion barrels of oil, 24 times Russia's reserves.

Orinoco, being tar sands, is relatively expensive to extract - though even at about $20 a barrel, it's a bargain compared with today's oil prices. Production from Orinoco currently is only about 600,000 barrels per day, one quarter of Venezuela's total. U.S. companies have recently invested $15 billion in the region, but Chavez seized control of their projects in May, leaving them with only a minority position.

That's where the good news comes in. If Chavez had won his referendum, he would have cemented his power, as well as getting control of Venezuela's foreign exchange reserves at the Banco Central de Venezuela.

His loss in the referendum vote suggests that his popularity is slipping - after all, he won with 63% only a year ago. That's not surprising - inflation in Venezuela has been running at almost 20% for a year now - and that "official figure" is artificially low because there are price controls on energy and basic foodstuffs.

The Venezuelan state budget is a mess, too. In 2007, budget expenditure was $53 billion, but actual expenditure came in at $64.7 billion. The new budget for 2008, which passed last week, estimates expenditure at $64 billion, but it is likely that the 2008 budget will also overshoot.

That doesn't matter too much currently, with oil prices up 50% in the last year. However, at some point prices will come back down. When that happens, Chavez will quickly run out of money; both his social programs and his foreign policy are frighteningly expensive, involving as they do bribes to either the impoverished Venezuelan voters or the dozier and more anti-American Latin American satraps.

When oil revenues drop, Chavez will face a financial crisis and the awful reality of facing an election he might not actually win. The army will not back him; this referendum loss has dented his electoral magic and the last thing any army wants is to take responsibility for an economy going into a major recession.

Instead, Chavez will be allowed to lose an election and some opposition figure will replace him. That opposition figure may still try to do business with China in preference to the United States, but unless he's really stupid, he will realize that Venezuela's primary needs will be foreign capital and expertise to develop Orinoco. Regardless of who gets the oil out, the supply will enter a world market that will rapidly become much less tight as Orinoco production expands.

It would make Vladimir Putin really mad to learn that what he does in Russia doesn't really matter to the world economy. However, in terms of oil reserves, Venezuela is 24 times as important as Russia, and the good guys won one in Venezuela on Sunday. At least one of the major risks facing the world economy, a real oil shortage, has become substantially less important.

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