Chavez Not Fooling Around With Oil

Hugo Chavez, Venezuela’s president, is treated in the American media as the political equivalent of Ronald McDonald.

If he’s mentioned, and he rarely is, it’s as a clownish boor. He attracted attention in 2006 when he called Bush a “devil” before the UN General Assembly.  Or in 2007 when Spanish King Juan Carlos told him to “shut up.”

But oil prices have tumbled and Chavez is no fool, as the Wall Street Journal shrewdly notes today on its back pages.

In the “Heard on the Street” column, John Lyons points out that fears that Chavez will nationalize Venezuela’s banks are overblown and Venezeula’s dollar-denominated bonds may rate a “buy.”

In fact, President Chavez has recently been loosening some terms for the international oil majors operating in the country in an apparent sign of the government’s need to keep attracting foreign capital.

(In my paper edition, the headline is “Venezuela’s Bank Nationalization Fears Are Overblown.”  The headline in the online edition is a more subdued “Banking on Venezuela.”)

Venezuela cannot afford to see the flow of dollars dry up. Oil accounts for 80 percent of Venezuela’s export revenue and there are signs that production is dropping.

The country’s need for foreign capital “perversely” might provide reassurance for international investors, the Journal notes.

Barclays Capital likes the 2027 bonds of the state-owned oil company, PDVSA, trading at 41.77 cents on the dollar and yielding 14.73 percent. The 2027 bonds are one of the emerging market’s most-traded bonds, Reuters reports; Credit Suisse likes the 2017 bonds, which are among the emerging market’s most traded debt securities.

The United States also relies on Venezuela. Mr. Chavez’s government supplies 11 percent of our imported oil and PDVSA owns five U.S. refineries.

If that oil suddenly stopped flowing, prices would shoot up. In the time it took to rebalance global supplies, the U.S. GDP would shrink by about $23 billion, according to a 2006 GAO study.

Chavez may say he doesn’t like the free market, but it’s U.S. petro-dollars that are keeping his “revolution” alive.

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