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Toronto-based Financial Correspondent Al Emid writes: If an important person can be conspicuous by his or her absence, an important political event can be conspicuous by its absence in international media coverage … a sad fact proven again by the relatively low amount of international attention paid to the recall referendum in Venezuela.

Understandably, world media coverage and therefore world attention currently focuses far more heavily on the body count in the latest skirmish in Iraq and the appeals to the political converted by incumbent US President George W. Bush and the man who wants his job … John Kerry, as they head for the American election in November.

Venezuela’s status as the world’s 5th largest oil exporter … responsible for producing roughly 10% of the United States oil supplies … likely accounts for much of the limited attention paid to this coming Sunday’s recall referendum.

World oil prices and Venezuela’s status mean that settling the future of the government of President Hugo Chavez Frias has become important abroad as well as at home.

Venezuela and its North American partners will read from the same page of the economic hymn book if Chavez wins the referendum … a solid, decisive win for Chavez would imply that he will finish his term, meaning relative stability at last for the time being. That could lead to more deals like ChevronTexaco’s US$6 billion project proposed last week for the upgrading of extra heavy oil from the Orinoco Faja region into lighter product, eventually producing between 200,000 and 400,000 barrels per day. Orinoco oil is too heavy for normal processing and has to be upgraded into synthetic crude or blender with lighter crude product before processing.

As would likely be the case with future deals, Venezuela and ChevronTexaco both stand to gain here. Venezuela would benefit since it gets most of its foreign currency through oil exports and since authorities here want to reach 5 million bpd by 2009. ChevronTexaco is clearly on a deal-making binge, since it also has discussions underway in Libya and elsewhere along with established ventures in Norway etc. The company‚s record quarterly net income of $US4.1 billion or $3.88 per share compared with net income of $1.6 billion, or $1.50 per share in the same period last year, means that it has the bank account stamina to finance whatever deals have a bottom line appeal.

Rising oil prices worldwide make these investments attractive and notwithstanding Venezuela’s current volatility, new foreign investments here would likely appear safer to the denizens of oil company boardrooms than in the Middle East and Nigeria. The comfort factor becomes even more important in light of the financial tumult at the Yukos Oil Company, a Russian oil major responsible for approximately 2% of the world‚s oil supply. These factors could assume greater or lesser importance pending decisions at the next meeting of the Organization of the Petroleum Exporting Countries (OPEC) scheduled for September 14 in Vienna (Austria).

A decisive win for Chavez could therefore telegraph stability to decision-makers but a Chavez loss would mean a question mark hanging over the President‚s Office while the Vice President makes preparations for another election. Political stability therefore starts developing either next Sunday or remains questionable until after the next election.

The good news has to be tempered with a look at recent history, since the net impact of increased oil prices does not necessarily mean a correspondingly high increase in revenues overall, according to Gavin Graham, Vice-President and Director of Investments at the Guardian Group of Funds, which analyzes and invests in South America through its Emerging Markets Fund and Global Growth Fund.

Graham points out that oil production has not returned yet to the pre-2002 strike level, meaning that higher oil prices do not provide a bonanza in net dollars after factoring in the drop in output. “All one has to do is look at the output numbers it was down to 2 million (barrels per day) then it went back up but it‚s still down by half a million barrels a day from where it was pre-stoppage.”

Moreover, higher oil prices mean higher costs in other areas, such as subsidies to lower income families for food and fuel, he pointed out. “The higher oil price is a double edged sword in that the cost of subsidizing of oil prices continues to get higher so what you are taking on the one hand you are spending on the other,” he argues. “It’s probably a wash (break-even) in that higher prices make up for the lower production unless you have some likelihood of increasing that production again.”

That being the case, the real payoff only comes with substantially increased output.

Still, resolving who occupies the President’s Office and for how long will also mean making the country more attractive to outside investment than in recent years. “It’s been such a volatile and unattractive market for outside investment over the last five years compared to Chile or Brazil,” he says adding that Colombia and Peru have remained fairly attractive in spite of their own problems.

Political stability would mean that Venezuela could set about taking serious advantage of its geographic location, says Milos Alcalay, former Venezuelan Ambassador to the United Nations. “Venezuela is situated geographically in such an important geopolitical (location) that it is a sustainable provider of oil not only for developing nations but for developed countries.”

In at least one financial area, the results of the referendum have little projected impact — largely because the country has already took the hit earlier. In January, Moody's Investors Service … a blue-chip New York-based ratings service … said that its Caa1 rating reflected, amongst other factors, the country’s ability to continue paying foreign debts ‘may falter under the stress of future negative shocks’.

Moody’s also cited the country’s debt burden, including a near-doubling of domestic debt from 10,532 billion bolivares in December 2001 to Bs.20,632 billion eighteen months later (in June 2003).

The Caa1 rating has not changed since January says Luis Ernesto Martinez-Alas, a Moody's analyst in New York, characterizing the Caa1 rating as “ … a very low rating which means very high risk of default.” Martinez-Alas says that Moody's does not expect any impact on these ratings as a result of the referendum. “The outcome itself of the referendum will not change the nature of the problems.”

mailto:financialnews@alemid.com Journalist, broadcaster and college lecturer Al Emid has worked in US-Canadian financial news since studying at Ryerson University in Toronto. 

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