And so it has come across the news that South America's latest Caudillo, Hugo Chavez, is not pleased with the Venezuelan constitution which he himself wrote and is putting up for vote revisions. All this to push along his so called 21st century socialism, which of course is no different from the socialisms of the 19th and 20th centuries that succeeded - as the Wizard personally knows - in keeping billions of people throughout the world in dire poverty. Some people just never learn.
Today's epistle is about a specific aspect of the latest Chavez bombasts and threats - threatening to kneecap America by cutting off oil shipments in the event that America tries to intervene. In short order, such a threat will not work and the Wizard will tell his gentle readers exactly why.
As Daniel Yergin explains in his master work on the world oil and gas industry, The Prize, in the 1980's petroleum started being traded on world oil markets. Not all oil is created equal, as some petroleum from some places has lots of gunk in it like sulfur, metals, and other content in it which makes it more difficult to refine into useable products than other petroleum. The petroleum from Venezuela tends to be of the less desireable kind.
But the fact that Venezuelan crude is less desireable than petrol from other places doesn't mean it is not desireable at all. Indeed that's the whole point. Say for just a moment that Chavez make good with his promise to cut off oil exports to the United States. He needs to remember that in order to carry out his 19th and 20th century 21st century socialism, he needs oil revenues. As such, the country's fields need to continue to produce. There are supply schedules to follow and those schedules need buyers.
Now then, Chavez could try to command that the country's oil be sold to China or India, presuming that there would be enough buyers to use it. However, what would buyers do once their hands are on it? That is the problem is Chavez's threat. Petroleum is fungible and there is nothing preventing others from turning around and simply selling it to the United States at prices which are set by world oil markets. Indeed that is what happened to a large degree in the aftermath of the 1973 Arab oil embargo. Petroleum exports still eventually reached the U.S. through other countries, once the world's oil and gas industry figured out how to reconfigure the supply lines and shipping routes.
The real problem for America in 1973 was self created - namely that the Nixom Administration imposed price ceilings (price controls), which as every first year economics student learns, results in shortages in supply. Because prices were not allowed to rise, rationing had to occur somehow and that rationing came in the form of waiting in line for gasoline, with the entire country wasting time, money, and gasoline trying to get more gas.
And so gentle readers, Chavez's threat is little or nothing to worry about. If Chavez does not want to sell us oil, then some other corrupt government in some other heavily politicized (hence making it a disordered and disastrously run country) will.
Wizard
Posted by The Mighty Wizard at December 2, 2007 05:47 PM