The link between the August 15 presidential referendum in Venezuela and the state of the global energy markets is clear.
Once incumbent Hugo Chávez demonstrated his ability to get re-elected, oil markets calmed down, at least temporarily, even though Chávez is unpopular among foreign economists and analysts. Uncertainty about the future of the Chávez regime had been one of several factors pushing world oil prices to record highs in recent months.
Chávez, by surviving a move to expel him from power, will now remain in office at least until December 2006. The referendum had occurred in accordance with the country's Constitution of 1999, which requires the signatures of at least 20 percent of the electorate. In the official count, Chávez obtained 58 percent of the votes compared to the opposition's 41 percent. Although opposition leaders and critics charged fraud, international observers, led by former U.S. president Jimmy Carter and Cesar Gaviria, secretary general of the Organization of American States, certified the results as genuine.
According to Wharton management professor Mauro Guillén, the referendum helped settle global energy markets. "Uncertainty kills markets," he says. "Uncertainty has been removed for awhile, and I am not surprised that oil markets have calmed."
As the referendum date approached, global energy markets had suffered from widespread fear of riots in Venezuela's streets and shutdowns in oil production. "Markets worry about disruptions in production," notes Guillén. "After all, they are setting prices today for oil that will be delivered in three or four months. If there is uncertainty, then prices will be pushed up." In addition, the referendum conferred some renewed legitimacy on Chávez, Guillén adds. "At least you have a result, and a procedure was followed."
Michelle Labbé, a petroleum analyst for Econsult, a consulting company in Santiago, Chile, agrees that uncertainty is a key to market behavior. "Uncertainty has been pressuring oil prices the most," the analyst wrote in a recent report on the subject. "All it takes is an attack in the Middle East to distort the environment." Adds Olivia S. Mitchell, Wharton professor of insurance and risk management: "From the U.S. point of view, the big question is, 'What does this mean for oil?' Markets had been nervous. This gives us a sigh of relief." Oil revenues comprise about 80 percent of Venezuela's state budget and constitute about 75 percent of its exports.
Franco Parisi, professor of business at the University of Chile, points out that "several factors were involved" in the run-up of oil prices, not just the situation in Venezuela but also "the convulsions in Iraq, the struggle over Yukos Oil in Russia, and the phenomenon of a strong increase in demand in Asia and the United States."
Labbé emphasizes one significant difference between this oil crisis and previous crises. "Unlike other oil crises, this one is a crisis of demand, not supply. The excessive demand incorporates other important factors such as speculation and/or uncertainty. On the one hand, it is clear that demand has expanded because we have China growing more strongly, along with India. On the other hand, there are very important elements such as potential terrorist attacks, especially those that would affect producing countries such as Saudi Arabia … With this much uncertainty in the environment, demand for maintaining stock is greater. People try to protect themselves by holding on to a physical asset, and this generates higher levels of stock." Now that there is less uncertainty about Venezuela, oil prices should trend downward, Labbé writes. "These prices are not in balance, long-term. On both the supply and demand side, we should arrive at more reasonable price levels in the medium term."
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