Wall Street Journal: Softening oil prices over the past few months have spurred hope in Washington that less revenue for oil-rich states could weaken the hand of governments the U.S. considers worrisome — particularly those in Iran, Venezuela and Russia. The Wall Street Journal
By DAVID LUHNOW in Mexico City, BILL SPINDLE in Tehran, Iran, and GUY CHAZAN in Moscow
January 29, 2007; Page A2
Softening oil prices over the past few months have spurred hope in Washington that less revenue for oil-rich states could weaken the hand of governments the U.S. considers worrisome — particularly those in Iran, Venezuela and Russia.
The three nations are potentially vulnerable: Oil-and-gas revenue accounts for between two-thirds and three-quarters of government income in both Venezuela and Iran, and only slightly less in Russia. So, a big drop in oil prices would slow economic growth and hit government finances, forcing them to cut back spending increases that have boosted the popularity of all three governments at home and emboldened them abroad.
But it is far too early to expect the changing economics of oil to have big political effects. For one thing, although the price of oil has fallen 28% since hitting an all-time high of $77.03 in July, it is still high by historical standards. The three nations, having weathered crises before, have all built up substantial currency reserves to cushion against a further fall in prices.
“Fifty-dollar oil doesn’t put any of them in any grave danger,” says Michelle Billig, director of political risk at PIRA Energy Group, a New York-based consultancy. “After all, it was only a few years ago that we were talking about an oil windfall for these places at $30 a barrel.”
March crude-oil futures settled at $55.42 Friday on the New York Mercantile Exchange, up $1.19 on the day.
Equally important, it isn’t clear that any of the trio would radically alter their policies even if squeezed harder economically. Under President Vladimir Putin, a former KGB spy, Russia has put a priority on reasserting its political might and reclaiming the global influence it wielded during the Soviet Union’s heyday. Generations of leaders in Tehran have made the development of nuclear power a stated goal — and asserted the country’s hypothetical right to a nuclear weapon — no matter the price of oil.
Venezuela might have the hardest time pursuing the assertive foreign policy of President Hugo Chávez, a populist and former army officer, if oil prices were to drop much more. Over the past few years, Mr. Chávez has used oil money to try to counter what he sees as harmful U.S. influence in Latin America. Caracas has helped finance some neighbors’ debt, and it has handed out cut-rate oil to dozens of countries, including Fidel Castro’s Cuba — and even some U.S. communities through the state oil company’s Citgo subsidiary.
Unlike Russia, and to a lesser extent Iran, Venezuela has been much more reckless in spending its oil windfall. Last year alone, public spending grew 43%, widening the gap between total government income and outlays to about 1.5% of the total economy, according to estimates by Morgan Stanley.
So far, falling oil prices haven’t dented Mr. Chávez’s spending habits. Just last week, he announced a program to send 100,000 poor Venezuelans each year to vacation in Cuba. He also recently offered the army’s services to build a road in Nicaragua at a projected cost of $350 million.
While economists agree that Mr. Chávez’s free-spending policies may eventually shipwreck the Venezuelan economy, they say that won’t happen — if it happens at all — for at least another year. The main reason: Venezuela has accumulated more than $36 billion of reserves.
But there are signs Mr. Chávez could be headed for trouble, even without a much bigger drop in oil prices. He recently ordered an increase in gasoline prices — which the government has long subsidized — to raise federal revenue. And some economists view his recent nationalization of Venezuela’s biggest telephone and electric companies as a sign his administration is eager to raise more money to keep up its spending.
A further drop in oil prices, then, might leave Mr. Chávez with some tough choices about where to trim the fat. High on the list would be his foreign aid. By far the chief beneficiary of Mr. Chávez’s largesse is Cuba, which receives 103,000 barrels a day of refined petroleum products in exchange for the services of Cuban doctors and other specialists. Analysts believe aid to Cuba totals about $3 billion a year.
Cutting back on such aid would be a relief in Washington, which worries about the spread of Mr. Chávez’s socialist message, and could also be welcome at home, where many Venezuelans resent Mr. Chávez’s largesse toward others when Venezuela has seen little progress on issues such as reducing poverty. Indeed, a recent study by Claudio Loser, a former International Monetary Fund official, showed that Venezuela’s real per-capita income has grown a cumulative 1% since 1998, the year Mr. Chávez took power.
Mr. Chávez also might be forced to cut back on the domestic front. Last year, Venezuela had Latin America’s highest inflation rate, about 17% — and it is expected to climb sharply this year.
“I think it will be a difficult year for the Venezuelan economy,” says Francisco Rodriguez, who teaches Latin American economics at Wesleyan University in Middletown, Conn.
Russia is much less vulnerable to oil prices. Under Mr. Putin, the country has built up $300 billion of foreign-exchange reserves, an $89 billion rainy-day oil fund and runs big yearly budget surpluses. Mr. Putin is loosening the purse strings this year in the run-up to presidential elections in early 2008, with a 26% increase in spending from 2006. But the budget would still break even with oil as low as $38 to $40 per barrel. However, lower oil prices could hurt earnings at energy companies that form the backbone of Russia’s economy.
Iran is more exposed to the vagaries of the oil market. As revenue has soared with oil prices, Iran’s public-sector spending has expanded almost as fast. To pay for massive subsidies for most daily goods — including gasoline, bread and heating fuel — the government has borrowed in each of the past two years from a special rainy-day fund set up to retain some oil revenue for when prices fall again. But that spending has ignited inflation, now running around 15%.
Iranian President Mahmoud Ahmadinejad introduced a budget early last week that included a 20% increase in spending for the Iranian fiscal year that begins in March. He said the government, whose ultimate authority is held by a council of Islamic mullahs, would be able to add to its rainy-day fund if oil prices remain above $33 per barrel, the level the budget assumes for Iranian oil.
But some private economists doubt the budget calculations and predict Tehran would again fall back on those surplus funds to finance spending.
— José de Córdoba in Mexico City contributed to this article.
