Friday, 08 February 2013 17:56

Chavez’s Absence in Venezuela Featured

What if Chavez’s Absence in Venezuela Degenerates to a Political Crisis?

Venezuela, Home to the world’s largest known oil reserves, is now in a political limbo as the fate of its fiery President continues to hang in the balance. President Hugo Chavez has remained in a critical condition since early-December 2012 when he was hospitalized in Cuba to undergo surgery on cancer-related complications.

The Venezuelan President has always casted a larger-than-life shadow in the country’s socio-economic and political landscape of the oil-producing socialist country. However, his failure to attend his own swearing in ceremony in January 10, 2013 for his third consecutive six-year term as President is now casting shadows over his political invincibility.

Chavez’s health has been taking a turn for the worst in the last two years. This raises the question as to whether his sudden exit from the helm of the country’s politics spark political and economic crises. If so, what would be the impact of such crises to the global crude oil prices considering that Venezuela boasts the world’s largest proven oil reserves totaling about 296.5 billion barrels?

Case Scenarios

There are various case scenarios that would define such an eventuality. The impact of the news of Chavez’s departure from presidency by way of retirement or otherwise would definitely trigger some oil price shocks in the Latin American region or even across the globe. However, the extent of the impact of such news to global crude oil prices would dependent upon the prevailing the influence of Venezuela’s crude oil supplies to the overall global demand and supply of crude oil. This perspective becomes clearer when you look at it from the paradigms of demand and supply on the one hand, and Venezuela’s influence in the global crude oil markets, on the other.

Crude Oil Prices versus Market Supply and Demand Dynamics

Barrel prices usually spin along the demand and supply axis of crude oil. In the same measure, crude oil prices form the bedrock against which the global demand and supply of crude oil thrives. As such, the global demand and supply of crude oil and barrel prices are intricately intertwined, that a slight change in one is enough to trigger a fundamentally significant change in the other. High demand and low supply triggers high crude prices and vice versa. As such, any news or events that can potentially destabilize the demand and supply fulcrum of crude oil could either push oil prices upwards or downwards. This nexus is easily visible through the lens of leading stock exchange markets such as the London Stock Exchange, New York Stock Exchange and American Stock Exchange. Fluctuations in crude oil prices usually cause fluctuations in the stock prices of the oil companies listed in the stock exchange markets. This relationship is so sensitive that news of major oil price shocks could send stock prices of listed oil companies crushing within hours.

The Influence of Venezuela in the Global Crude Oil Markets

Global changes in crude oil prices sometimes serve as indicators of changes in one or more fundamental global economic parameters such as economic growth rates, inflation, currency exchange rate movements, interest rates and political trends. The rates of these changes will always vary with the circumstances at hand.

However, these changes could sometimes be fast, furious and catastrophic when they involve negative economic or political news, especially if such sentiments involve any of the leading global oil suppliers and consumers such as the U.S., the European Union, China, Japan, Russia, Saudi Arabia, Venezuela, UAE and many others. Negative political and economic prospects portend adverse, and sometimes devastating, impact of oil prices. Sudden surges or falls in global crude oil prices do not augur well with the overall global economy because they stifle production across man y sectors.

Therefore, any type of crisis in Venezuela, including political instability would cause jitters in the global crude oil prices. The fact the country is ranked as the world’s eighth-largest net exporter of oil in addition to being home to the largest proven oil reserves tell it all. The United States and China are some of the leading importers of the Venezuelan oil. Moreover, the country supplies its South American neighbors with crude oil at subsidized prices. As such, if any political crisis involving Chavez spills over to Venezuela’s oil production sector, then the global economy would have to brace for higher barrel prices.