Coming Down from an Oil High

Topics: Energy and Oil
Countries: Russia, Iran, Venezuela
Venezuelan President Hugo Ch&aacute;vez supported many social programs under "Socialism for the 21st Century" with oil revenue.  Photo: <a href="http://www.flickr.com/photos/my_own_view/1287187469/">Nueva Perspectiva (flickr)</a>
Venezuelan President Hugo Chávez supported many social programs under "Socialism for the 21st Century" with oil revenue. Photo: Nueva Perspectiva (flickr)

Last week oil prices dipped under $70 a barrel for the first time in over a year. While the lower price may have Americans at the gas pump celebrating, it’s bad news for the leaders of oil-rich countries that made long term plans based on the high price of oil.

Venezuela, Iran and Russia went on a spending spree when oil hit $100 per barrel and then planned upcoming government budgets on the peak price.

The high price of oil allowed these countries to thumb their nose at the West with little risk of a response. Venezuela advanced its socialist agenda both at home and in the region. Iran ignored U.S. nuclear related sanctions, and Russia reasserted itself by invading Georgia.

But because they assumed the price of oil would stay high, they might soon be on receiving end of such gestures. The Washington Post reports that:

According to independent estimates, [Iran and Venezuela] need an average oil price of up to $95 a barrel to fund the populist subsidies and social programs they have launched in recent years — not to mention billions of dollars in arms purchases from Russia. Venezuela has been furiously importing food to fill empty shop shelves, while Iran heavily subsidizes domestic fuel.

Venezuelan President Hugo Chávez has gone on the record as unworried about the falling oil prices citing Venezuela's $40 billion in foreign currency reserves. However, Ricardo Hausmann, a Venezuelan economist who teaches at Harvard, doesn't share Chavez's confidence. “We’re in the same situation of people who have lost a limb but can still feel it. I don’t know how long it will take for Chávez to realize he’s lost a limb."

In response Iran and Venezuela pressured OPEC to cut production by 2 million barrels a day. OPEC members initially took a wait-and-see approach, wary of intensifying a global economic crisis or further decreasing global oil demand, before agreeing to cut production by 1.5 million barrels a day in an attempt to drive up prices.

But skeptics question whether significant production cuts won't simply decrease demand for oil — or whether it will influence the price at all. If OPEC can't drive prices back up to their historic highs, Venezuela, Iran and Russia may face a tough reality as they come off their own oil high.

Comments

If they can just hold onto

If they can just hold onto that oil long enough, the price will go back up. Unless of course oil turns out to be a renewable resource.

Heads in the sand

I get a kick out of the reports that the price of oil is dropping because of less demand. Speaking for myself, I am not an idiot. The demand for oil has not dropped.
Check out this video, it pretty much explains everything.

http://video.google.ca/videosearch?client=firefox-a&rls=org.mozilla:en-U...

And what kind of money hungry pigs are we reliant on. They want to hold back production to keep the price of oil from dropping. WHY!....This is ridiculous. Cheap oil is cheap energy. Cheap energy is good for EVERYONE.
If Iran can't manage its budget, that's not our problem. Listen everyone, there is lots of oil! We don't need Iran.
Oil is dropping because prices are set at will. The will now is to bury the only country who decided to sell their oil in Euro's back in Dec. 07 after that, there was a lotta crap about Nuclear stuff. (get it).

Do your home work and stop depending on headlines and CNN people. The truth is there.

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