How this weekend’s Venezuelan elections could hit the oil price
By
Matthew Partridge Oct 03, 2012
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Forget the US election. The contest that you should really be paying attention to takes place this Sunday – in Venezuela.
It might not seem that important. But in fact, the outcome of this election won't just affect the lives of people in this Latin American country.
The result could impact on the entire global economy – via the oil price.
Why Hugo Chavez could be on the way out
So who are the candidates in the Venezuelan election?
In one corner, you have the current incumbent, ‘Caudillo’ Hugo Chavez. Facing him, and breathing down his neck in the polls, is Henrique Capriles, who is backed by over 30 opposition parties.
They have radically different visions of how the country should be run. Chavez wants to continue the move towards a command economy, while Capriles wants to institute market-based reforms.
Most of Latin America has spent the last two decades opening up to trade and loosening barriers to the private sector. However, under Chavez, Venezuela has gone in the opposite direction.
After taking power in 1999, Chavez started to move private firms into state control. He also went on a spending spree that was designed to shore up his political standing.
To fund this, he used the national oil company as a piggy bank, putting up taxes on the oil sector. As we noted earlier this year, this has been a disaster.
Starved of investment, production has fallen greatly, even against a backdrop of higher crude prices. That has helped to keep the global oil price high – Venezuela is a key oil-producing nation.
Chavez’s role in keeping the price of oil higher than it probably should be extends to the international stage. At the moment Opec – the oil producers’ cartel – is divided into two groups.
One group thinks the priority should be to moderate prices. This isn’t because they are charitably-minded – it’s because they worry that other energy sources will take over if crude gets too dear. It’s a calculated view taken in the interests of long-term self-preservation.
But Chavez needs money now. He is firmly in the camp, alongside Iran, that reckons oil output should be cut in order to raise prices – and revenues – as quickly as possible.
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However, the election, which takes place in less than a week, might change all of this. While the campaign started with Chavez in front, Capriles has been gaining momentum. Most analysts now agree that the contest is very close. Indeed, one survey of public opinion shows that the gap between the two is as small as 2%. And Capriles’ rallies have been drawing more crowds than those of Chavez, despite government-led disruption.
Of course, Chavez could try to rig the election anyway. There are long-standing concerns that the electoral roll, which has shot up in recent years, contains a large number of dead people, for example. The president has also put his supporters on the council in charge of counting the votes. There are even fears that he may use armed gangs to suppress any protests.
However, Capriles is an experienced politician, who has faced similar pressures when he successfully ran for positions in local and regional government. He has assembled a huge army of volunteers to monitor polling stations. While this will not cut out fraud entirely, it should make it much harder for the government to rig the vote.
So, what happens if Chavez loses?
Capriles has kept his cards close to his chest about his policies. However, he has made two major promises regarding the oil industry.
Firstly, he has emphasised that he will encourage foreign companies to invest in oil exploration and development. While he will not move the state oil company into the private sector immediately, he will reform it so that it is run along business lines.
In the medium term, these policies should boost output, and increase the amount of oil on the world market. More market-friendly policies would help Venezuela to exploit its oil reserves more effectively. Given that these are the second-largest in the world, behind Saudi Arabia, that could have a huge impact.
Of course, while markets are forward-looking, these reforms will still take time to affect global supply. However, Capriles’ stance on foreign policy may have more of an impact in the short-term.
He has pledged to phase out barter deals with countries such as Cuba. This will increase the amount of oil that goes directly onto world markets. And if he drops Venezuela’s support for Iran, this will reduce support on Opec for oil production cuts, paving the way for higher production – and therefore lower prices.
In short, a Chavez victory would have little impact on the oil price – it’s expected after all. But a Capriles victory could put a dent in a market that is already jittery about slowing economic growth, and being propped up largely by fears over Iran’s nuclear ambitions.
If you like the idea of speculating on a falling oil price, but would prefer not to spread bet, you can use an exchange-traded fund (ETF), such as ETF Securities Short WTI Crude Oil (LSE: SOIL) which rises in value as the oil price falls. Just remember that this type of ETF is only suitable for relatively short-term trades, and you should monitor its performance closely.
If you'd rather take a longer-term view, one share that should also benefit is EasyJet (LSE: EZJ). Clearly airlines are hugely cyclical, so this isn't a 'buy and hold forever' investment. But with fuel making up a large proportion of EasyJet's costs, a fall in the price of crude should increase its profit margins. And on a price/earnings ratio of ten, it looks reasonable value.
• This article is taken from the free investment email Money Morning.
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