Tuesday, February 12, 2008

Venezuela Leader Hugo Chavez Threatens To Cut U.S. Oil Supply

Exxon is in the midst of a fierce battle with Venezuela in response to the expropriation of Exxon assets by the Venezuelan government. The value of the expropriated Exxon assets was approximately $12 billion. According to Business Week, Exxon recently won an international court order that prohibits PetrĂ³leos de Venezuela (PDVSA), Venezuela’s national oil company, from selling any of its overseas assets pending a court ruling. Naturally, this infuriated Hugo Chavez who is not known for his calm demeanor and friendliness towards the U.S. to begin with.

Chavez has since threatened that he would cut off the Venezuelan supply of oil into the U.S.,but it is unlikely that he will follow through with his threats. According to Money Week Venezuela exports around 75 percent of its oil to the U.S., while the U.S. gets only about 13 percent of its oil from Venezuela. In addition the U.S. is just about the only country which has refineries capable of working with Venezuelan crude. If Chavez were to act on his threats it would cost his country much more than it would cost the U.S. Considering that he is already losing favor in his country (see prior post “Chavez Defeat A Victory For Democracy”), a move such as this could prove disastrous for him.

The announcement did cause a slight rise in the price of oil, even though most feel that these threats are idle. Predicting the price of oil is never easy and even the slightest rumblings from oil-producing countries can have a dramatic impact. Any price movement caused by these threats should likely be corrected over the coming days as threats prove empty. If out of pure spite Chavez decides to follow through and cut off Venezuelan oil exports to the U.S., investors can expect the price of oil to jump significantly. However, it is questionable whether it would reach the $200 level Chavez says it would. I personally doubt it, but with the volatile nature of the market you never know.

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