At the recent global energy summit in Jidda, Saudi Arabia, where no one could figure out why an oil barrel is selling for $140 or when its price would peak, the voice of Hugo Chavez was unusually silent. That is because he is the prime mover behind the high price, which he hopes will reach $200 per barrel in 2008, collapsing American economic and political power and thus widening space for regional superpowers such as Iran's Mahmoud Ahmadinejad in the Middle East and himself in Latin America.
Chavez has led the fight to reduce supply and increase global political risk, the two factors that explain oil's skyrocketing price.
Before Chavez took power in 1999, Venezuela planned to increase production from 3.6 million barrels per day (mbd) to 5.5mbd by 2008. Instead, Chavez has reduced Venezuela's output to 2.3mbd and is lying to the world that he is producing more. Even Iraq at war is producing more oil than Venezuela at peace and with reportedly as many reserves as Saudi Arabia.
There's reason to this madness. The 3.2mbd missing from Venezuela, if added to the 85mbd produced and consumed in the world today, would plunge the oil price to a fraction of $140, even in the face of rising demand from China and India that had increased world consumption by 10mbd since 1998. That is the opposite of what Chavez wants.
Chavez started to reduce Venezuela's supply in 1999, when an oil barrel sold for only $10. After the 2002 national strike in Venezuela, he fired 18,000 striking oil workers and replaced them with political loyalists who gutted oil production capacity. In 2003, Chavez stopped reporting oil production information, which became a state secret. Thereafter, production declined but the price went up, easily compensating Chavez for cutting supply.
Chavez also convinced the Organization of Petroleum Exporting Countries to follow suit. In 2000, Venezuela and Iran - oil price hawks -- defeated Saudi Arabia's position that a high oil price causes global recessions and is thus self-defeating for OPEC.
The Saudis were right. Global recessions had followed the Arab oil embargo after the Yom Kippur war in 1973, the Iranian revolution in 1979, and the Persian Gulf War in 1990. But a global recession was precisely what Venezuela and Iran secretly wanted. A weakened American superpower held the promise of Iranian hegemony in the Middle East and Venezuelan hegemony in Latin America.
As supply was squeezed, the oil barrel price rose to $60 by 2007. But what catapulted the price to $140 and could take it to $200 before 2008 closes is political uncertainty in oil producing regions. Markets hate uncertainty and pay dearly to avoid it, which draws speculative investment in a time of capital market decline, which is the situation we face today.
In 2006, the Saudi Minister of Energy, Ali al-Naimi, estimated that the "political risk premium" accounted for 40% of the oil price. At today's $140 a barrel and 85mbd, a 40% political uncertainty premium costs world consumers $4.8 billion a day.
The political uncertainty roiling the markets also comes primarily from Venezuela and Iran, which are in a well-publicized strategic alliance to create it.
Iran supports the insurgency in Iraq via Hezbollah and Venezuela provides training and money-laundering to Hezbollah. Iran wants Israel destroyed and Venezuela is helping Hamas. Iran may be building a nuclear weapon and Venezuela supported Iran's right to do that in its 2006 campaign for a seat on the UN National Security Council, where Chavez got a surprising 77 nations to vote for him.
Venezuela mines uranium and may be shipping it to Iran via Alcasa, its state aluminum enterprise. In Bogota, 30 kilos of non-enriched uranium that could be used in a dirty nuclear bomb were found in a FARC terrorist safe house. Venezuela supports the FARC terrorists in an effort to overthrow the democratic government of Colombia -- Chavez's recent statements to the contrary notwithstanding. Iran and Venezuela facilitate safe havens, arms purchasing, money-laundering and military training for FARC, Hezbollah and other terrorist groups.
Threats of war involving Iran and Venezuela have been in the news almost every day as the price of oil shot from $60 to $140 and the US economy went south. That is not coincidental.
The Bush administration could have prevented today's oil crisis in 2007 but chose not to do so. Sufficient evidence has warranted declaring Venezuela a State Sponsor of Terrorism and cutting off its oil. Bush refused to act fearing the oil price would rise when by not doing so the oil price doubled anyway.
Chavez is extremely vulnerable to a US oil cut-off. One-third of his oil is too sulfuric to be refined anywhere but the US and he has no place to store oil during an embargo. With his oil industry in shambles and his income severely cut, Chavez would face the wrath of his own supporters who have long opposed his anti-American, pro-terrorist, lavish foreign spending, while half of them are unfairly mired in poverty. In fighting terrorism, Bush has underestimated Venezuela just as he did Iraq.
This Independence Day weekend, if you happen to gas up at one of Venezuela's CITGO stations, patriotically festooned with American flags, ask yourself if you want to add to the $37 billion Americans will pay to Chavez this year for his over-priced gas -- money he's spending to trigger a recession and schedule American jobs for extinction. If government won't do anything about the threat, maybe you can.
Michael Rowan and Douglas Schoen are political consultants and writers who have lived or worked in Venezuela since 1993. They are co-authors of "The Threat Closer to Home" which will be published by the Free Press in January, 2009.