Venezuela Makes a Play for Oil Primacy

The knotty situation with Venezuela is getting knottier. Besides the commencement of arms purchases from Russia, there is the more convoluted issue of oil politics. President Hugo Chavez has announced that he will seek to keep the world price of oil at about $50 per barrel, in contrast to the 1990’s level which was at about $20 per barrel.

According to the BBC, Chavez said “We’re trying to find an equilibrium. The price of oil could remain at the low level of $50. That’s a fair price it’s not a high price.”

A world market price of oil stabilized at about $50 would significantly change the world’s oil politics. The BBC reports that the US Department of Energy (DoE) has concluded that:

Venezuela has vast deposits of extra-heavy oil in the Orinoco. Traditionally these have not been counted because at $20 a barrel they were too expensive to exploit – but at $50 a barrel melting them into liquid petroleum becomes extremely profitable.

The DoE report shows that at today’s prices Venezuela’s oil reserves are bigger than those of the entire Middle East – including Saudi Arabia, the Gulf states, Iran and Iraq…

Venezuela’s deposits alone could extend the oil age for another 100 years.

The DoE estimates that the Venezuelan government controls 1.3 trillion barrels of oil – more than the entire declared oil reserves of the rest of the planet.

So the U.S. is facing an interesting dilemma. There is no love for Hugo Chavez in Washington but, depending on where the world price for oil stabilizes Venezuela could become the biggest player in the world oil market.

And, on top of that, for all we complain about Venezuela, the US has to recognize that Hugo Chavez and Venezuela have become powerful in part because of US policies. As the BBC explains:

Ironically, by invading Iraq, George W Bush has boosted oil prices and effectively transferred billions of dollars from American consumers to the Venezuelan government.

Up to $200m a day – half of it from the US – is flooding into Caracas.

One hundred million dollars a day from the US to Venezuela for Hugo Chavez to use. That is a hard lesson not only in economics, but in the law: the law of unintended consequences.