How To End Petrodictatorships

The supreme art of war is to subdue the enemy without fighting.” – Sun Tzu

It’s fitting that here on U.S. Memorial Day (for those outside the U.S. – a holiday commemorating the military service of current and past soldiers) to write about ending authoritarianism tied to petroleum without the loss of our military men and women. It’s hard to deny that our current military adventures in Iraq are at least in part due to the country’s vast energy reserves.  But it need not be that our young men and women come home in caskets draped in the American flag. It need not be that we send hundreds of billions of dollars of wealth overseas each day for energy. There’s a better way to loosen the authoritarian grip of petrodictators. We don’t have to fire a single shot to ruin them.

We simply bankrupt them.

We’ve done it before.. to the Soviet Union specifically. Actually, the British did. The Soviets collapse had little to do with President Ronald Regan’s impassioned “tear down the wall speech” nor did it have to do with the Soviet military adventures in Afghanistan (although the latter was certainly a contributing factor). Instead, the Soviets adopted a model whereby oil revenues were used to subsidize the consumption of is poorest citizens. The policy worked for a while until Prime Minister Margaret Thatcher came into power in the U.K. in 1979. The impact of her decisions to privatize the petroleum rich North Sea lead to a flurry of activity, which turned Britain into a major energy exporter. When the western democracies began to buy from Britain, and not from the Soviet Union, the Soviet revenue machine collapsed, and with it the social policies which kept social stability. What happened next was too predictable: the Soviet currency plummeted in value, the country pulled out of Afghanistan because of functional bankruptcy, and the media began to report on Soviets hauling barrels of rubbles to the local baker to buy a loaf of bread.

Hugo’s Folley

If this sounds all too familiar to anyone in Venezuela, that’s because President Hugo Chavez has implemented the exact same policies. The Chavista policies are likely to hold ground in an inflationary market for petroleum products, but would similarly collapse social security payments to the country’s poorest. You won’t hear that on Aló Presidente.

There’s already substantial evidence that his plan to buy his way to social stability with petrodollars is unwinding quickly. Until recently, the Venezuelan government was encouraging private investment in oil services. then on May 8th, Hugo Chavez changed the law to make the entire industry the ward of the state. The National Guard promptly began to occupy dozens of drilling rigs, docks and boats operated by private contractors, both local and foreign, hired by PDVSA, the state oil company. PDVSA next issues a press release on queue citing that the oil-services firms did not cut their prices when the oil price plummeted last year.

The real reason behind the nationalization is evident one you begin to scour PDVSA’s accounting ledger. Despite years of record oil revenues, PDVSA accumulated liabilities of almost $70 billion by last September, up from less than $30 billion in 2006, according to the company’s financial reports. The company is itself owed more than $24 billion, mostly by Cuba and other neighbours to whom Mr Chávez supplies oil on easy terms. Included in the $70 billion in liabilities are $14 billion in short term liabilities owed to contractors, according to a report to the National Assembly. The same contractors who were just nationalized.

In other words: Venezuela ran out of cash, so Chavez decided to nationalize his creditors in a fit of panic.

Ay Chihuahua.

By the Numbers

Of course to bankrupt petrodictatorships, we would first need to employ enough renewable energy resources to drop the demand for petroleum products below the break even point at which petrodictatorships. Fortunately, the IMF has already done the math based on OPEC meeting minutes. What follows here is a listing of the Dollars per barrel prices needed in 2008 to float the petroleum country’s spending. An oil price over that amount means the country is runnign a surplus relative to social spending. An oil price under means the country is running a deficit which, left uncorrected, will lead to “restructuring”, possibly of the Soviet kind. Here’s how it breaks down:

Bahrain $84
Kuwait $34
Oman $78
Qatar $24
Saudi Arabia $54
United Arab Emirates $24
Algeria $60
Azerbaijan $35
Iran $90
Iraq $94
Venezuela $95
Russia $70
Kazakhstan $67
Libya $53

As of the date of this posting, the price of a barrel of crude is hovering at $61 a barrel. It’s pretty obvious why Venezuela’s National guard is sitting on expropriated assets right now. Highlighted for emphasis is Saudi Arabia, who would need to feel the pinch substantially to make any dent, Iraq, who is just plain high, and the UAE, who has the lowest breakeven point.

Ideally, Our goal should be to invest in renewable energy to easily hold the Iraq price, push down below the Saudi price, and eventually hit the UAE price. Maybe I’m naive here, but I figure such a change will force these countries leaders to invest in people to grow GDP rather than drilling equipment. It’ll also make the planet more comfortable for us to live in as we use more solar, wind, and geothermal. And it will ensure more military veterans will be around to commemorate memorial days to come.

More info:

http://seekingalpha.com/article/116369-behind-the-numbers-problems-loom-for-opec

http://www.cnbc.com/id/27355967

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This entry was published on May 25, 2009 at 12:17 PM. It’s filed under Uncategorized and tagged , , . Bookmark the permalink. Follow any comments here with the RSS feed for this post.

One thought on “How To End Petrodictatorships

  1. You’re not being naive. We’re at the mercy of some shady market forces, including the whims of the petrodictatorships, when it comes to oil. Market speculators are also benefiting at taxpayer exense from a lack of a coherent energy policy. The recent 45% run up of oil prices is not explained by changes in demand. I’m tired of hearing about the “likely demand” and “future demand of developing countries” as a justification for high barrel prices. Please keep up the good work!

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