Friday, December 19, 2008

Dec 19/08 | What Goes Up Must Come Down: Oil Betrays Those it Empowered

Crude Oil Prices: Not quite a perfect Christmas tree

PMBComment: Oil has gone back to it's old boring pattern. Oil now trades, as it used to do, based on fundamental supply-demand drivers. Yesterday OPEC cut 2.2 million barrels of production and the market reached a 4-year low. Since there is no visible floor for demand in the mist of a global meltdown, there is little that can be done to arrest a price dive to the $30-$35 level, or below. The run from $50 to $147, which actually defied production increases, was supercharged by Hedge Funds with ample cash and easy access to credit. The ease of leverage in the oil futures markets acted as propellant to a wicked boom that made Petrostates feel all too powerful and act all too cocky. They essentially believed that oil at $200 was their right and something they were destined for even at the expense of the economies of their consuming clients. The stupidity and shortsightedness of this type of thinking matches nicely with the regulatory lapses of the capitalist world some of them claim to despise. While trumpeting the demise of the West, Iran, Venezuela, and, to some extent, Russia, are fast digging their own deep and frigid graves. No countries will be more hurt by their failure to understand the contradiction of their circumstances than these three increasingly inscrutable oil-dependent autocracies. 

It is safe to say that financial speculators (those who are still among us) are now out of the oil market and it will be physical barrel players - real oil companies, traditional commodity traders and refiners - who will call the shots with little room, or leverage, to over speculate. Trying to ascertain a floor for oil prices will be impossible in the coming months and the best OPEC can hope for is to buttress current "low" prices through some degree of - hard to achieve - collective discipline. In the medium term, and barring any terror bred disruption, prices above $50 are nonsensical. Solving massive fiscal shortfalls by wishing a return to lofty prices is not only wishful thinking but also irresponsible.

Now the key question is: What will nefarious and on-the-brink oil states like Venezuela and Iran do to reverse their awful predicament? There is no easy answer to this obvious quandary as dictators and charlatans are prone to error when hurting or cornered. But rest assured that far-fetched schemes must be cluttering their desks. 

In the case of Venezuela, it is going to be interesting to see how a "revolution" fueled and sustained solely by increasing oil revenue deals with this new disastrous reality. Hugo Chavez is once again trying to distract attention with yet another referendum that is proof of his undemocratic self ("Why should a good President ever have to leave office" he asks). Even if he were to "pull off" a triumph in his effort to change "just 11 words" in the Constitution, he will still have to manage to stay in power until the 2012 election to opt for another 6 year term. Having the right to another re-election does not in itself ensure it, unless the opposition is unable to present a soon-to-be-destitute nation with a clear picture of the culprit or a better option to him and his band of incompetent ruffians.

By not cutting his losses in time, Hugo Chavez will have no one to blame for the impending implosion of both a political "model" and hoodwinked nation. After 10 year in power he cannot unload on the past anymore - he is now effectively "the past" - and with Bush out of power, he can no longer shadow box with an unpopular US President who all but ignored him for years. So what will Hugo do in the days to come? Facing the prospect of ending like Noriega, Milosevic or Ceausescu - none a pretty ending - he is bound to make a number of very big mistakes, and then, a final fatal one. My bet is that he is at his most dangerous right now. Chavez might have been a tolerable fellow to some on the upswing, but he will be detestable for most in the fast occurring bust. 

The biggest risk for the future of Venezuela, and beyond, is that Hugo's foreign "friends", and his local accomplices, conclude that Chavez-the-revolutionary-martyr is a much better legacy than Chavez-the-exposed-incompetent-despot. If that calculation leads them to dispose of him before he is revealed as the coupster who wore no clothes - as the fraud he has always been, then we will all have to put up with Saint Hugo, the XXI century martyr of "the excluded". It is incumbent upon all that Lt. Colonel Chavez, and his self-proclaimed revolution, undergo the severe dressing down they sorely deserve. This man, and his corrupt revolution, should enter history in its darkest pages, those purposefully reserved for the wicked, the corrupt and the insolent. PMB