The link between the August 15 presidential referendum in Venezuela and the state of the global energy markets is clear.

Once incumbent Hugo Chávez demonstrated his ability to get re-elected, oil markets calmed down, at least temporarily, even though Chávez is unpopular among foreign economists and analysts. Uncertainty about the future of the Chávez regime had been one of several factors pushing world oil prices to record highs in recent months.

Chávez, by surviving a move to expel him from power, will now remain in office at least until December 2006. The referendum had occurred in accordance with the country’s Constitution of 1999, which requires the signatures of at least 20% of the electorate. In the official count, Chávez obtained 58% of the votes compared to the opposition’s 41%. Although opposition leaders and critics charged fraud, international observers, led by former U.S. president Jimmy Carter and Cesar Gaviria, secretary general of the Organization of American States, certified the results as genuine.

According to Wharton management professor Mauro Guillén, the referendum helped settle global energy markets. “Uncertainty kills markets,” he says. “Uncertainty has been removed for awhile, and I am not surprised that oil markets have calmed.”

As the referendum date approached, global energy markets had suffered from widespread fear of riots in Venezuela’s streets and shutdowns in oil production. “Markets worry about disruptions in production,” notes Guillén. “After all, they are setting prices today for oil that will be delivered in three or four months. If there is uncertainty, then prices will be pushed up.” In addition, the referendum conferred some renewed legitimacy on Chávez, Guillén adds. “At least you have a result, and a procedure was followed.”

Michelle Labbé, a petroleum analyst for Econsult, a consulting company in Santiago, Chile, agrees that uncertainty is a key to market behavior. “Uncertainty has been pressuring oil prices the most,” the analyst wrote in a recent report on the subject. “All it takes is an attack in the Middle East to distort the environment.” Adds Olivia S. Mitchell, Wharton professor of insurance and risk management: “From the U.S. point of view, the big question is, ‘What does this mean for oil?’ Markets had been nervous. This gives us a sigh of relief.” Oil revenues comprise about 80% of Venezuela’s state budget and constitute about 75% of its exports.

Franco Parisi, professor of business at the University of Chile, points out that “several factors were involved” in the run-up of oil prices, not just the situation in Venezuela but also “the convulsions in Iraq, the struggle over Yukos Oil in Russia, and the phenomenon of a strong increase in demand in Asia and the United States.”

Labbé emphasizes one significant difference between this oil crisis and previous crises. “Unlike other oil crises, this one is a crisis of demand, not supply. The excessive demand incorporates other important factors such as speculation and/or uncertainty. On the one hand, it is clear that demand has expanded because we have China growing more strongly, along with India. On the other hand, there are very important elements such as potential terrorist attacks, especially those that would affect producing countries such as Saudi Arabia … With this much uncertainty in the environment, demand for maintaining stock is greater. People try to protect themselves by holding on to a physical asset, and this generates higher levels of stock.” Now that there is less uncertainty about Venezuela, oil prices should trend downward, Labbé writes. “These prices are not in balance, long-term. On both the supply and demand side, we should arrive at more reasonable price levels in the medium term.”

How Solid Is Support for Chávez?
Now that the referendum is over, observers have moved on to question the depth of Chávez’s support – and the long-term future of Venezuela if Chávez continues in office. “The country is divided, and there are two visions of Venezuelan society,” says Francisco Rojas, professor of economic development at the Rafael Belloso Chacín University in Venezuela. “On one side, there are those who want to move toward liberal democracy. On the other side, others have a vision of society that is socialistic” and similar to Cuba’s.

Rojas argues that Chávez’s “participatory” approach is much closer to socialism than to Western democracy but that Venezuela has a democratic tradition and is resisting Chávez’s attempts to move toward socialism. “A lot of people don’t understand that a large number of Venezuelans were trained and educated in a democracy and have the values of Western democracy. You cannot suddenly impose on them the notion that democracy doesn’t work.”

Chávez’s core support comes from unionized workers in the oil industry, which is largely state-owned, Guillén says. This sector also includes many private companies that are subcontractors to the state. “They love Chávez because they know he won’t cut their wages and that when there is inflation, he will raise them.” Beyond that core group of supporters, some consumers may be happy with Chávez because he subsidizes prices for basic utilities, such as water and electricity, as well as for bread, flour and milk.

However, Guillén argues that it is simplistic to say that Chávez is universally supported by Venezuela’s working class, especially working families that don’t have stable jobs. Sectors such as metal-working and agriculture suffer whenever the government’s ambitious programs stimulate inflation. Moreover, Venezuela’s more dynamic export-oriented businesses are clearly lined up against Chávez, he says.

Despite the seal of approval on the vote provided by Jimmy Carter and others, Guillén doubts that the referendum was a genuine victory for Chávez, noting that allegations of a rigged election “are probably true. A lot of journalistic reports indicate that fraud was very widespread, although it will be hard to prove.” Rojas shares Guillén’s skepticism. “There are no principles of common sense that can explain how the government got so many votes. Not even the government’s own supporters have accepted” the outcome.

How then did the government manage to win the referendum? Rojas suggests that the administration sent its supporters to various locations where it allowed access only to those who had ties with the government. “In Venezuela, we changed our president every five years because we realized that things weren’t going well. In this case, there is a general view that the president has not done a good job, and even the previous election polls showed that the government was in a tough spot.” Although there is not enough proof to invalidate the referendum, Rojas says that the official result is “practically impossible to explain.”

Venezuela’s Future
What does the future hold for Venezuela? Rojas is highly critical of the Chávez government’s economic strategy. “The Venezuelan economy is extremely dependent on oil. It should have diversified a long time ago. Instead, what the current government has done is depend on oil even more than ever before. In the past, when oil prices were high, the country enjoyed a bonanza, but nowadays unemployment is around 17%. It’s alarming to see how apprehensive Venezuelans are.”

This apprehension has continued despite the fact that Chávez has taken measures to resolve the crisis in education and has brought in Cuban doctors to help the national health care system, Rojas says, adding that although oil prices are at record-high levels, companies are closing down and jobs are disappearing forever. Rather than find permanent solutions, the Chávez regime is merely “applying band-aids” to the situation, Rojas states.

According to Guillén, although Chávez has been in power for years, the percentage of poor people in Venezuela has not declined. Moreover, rather than attract badly needed new investment to Venezuela, the regime is taking a confrontational approach that only alienates multinationals. Rojas describes this as part of the “the anti-globalist vision” of Chávez, and his strategy of “permanent confrontation with the United States.”

For the foreseeable future, Venezuela’s fate will be tied, of course, to the future of oil prices. Parisi says that OPEC could find a balance of between $28 and $32 a barrel over a three-year period. Nevertheless, there will be a strong and constant volatility until interest rates in the United States return to levels around 5.5%.

Venezuela “has opted to reduce production in order to have higher prices,” says Rojas. “Petroleum revenues depend on volume and prices; we have high prices but we have lower production, which theoretically is not enough for an economy like ours, which is so dependent on petroleum.”

Some sources in Venezuela believe that the government’s real production levels are less than the levels it announces. The government says it is producing 3.2 million barrels a day at $35 a barrel. If so, according to Rojas, its international reserves should be much higher than they are. He cautions that Venezuela will suffer an even greater crisis if oil prices collapse to the $20/barrel level – unless drastic measures are taken. “Venezuela is not investing in major exploration and maintenance, and that leads to the exhaustion of wells and deposits,” says Rojas. “They are doing nothing to improve the system of production.”

The Venezuelan oil industry, he adds, “is going to have to go abroad to be able to obtain financing for investment.” This, in turn, will make the country “much more vulnerable” because Venezuela might not get the financing it needs at an affordable price. This would lead to delays in exploration and maintenance, and we could wind up in a difficult situation.” A similar scenario unfolded in Libya, Rojas notes, another “anti-democratic” country that cut its petroleum production “in order to satisfy the needs of the group in power.”

Rojas worries that the situation in Venezuela could lead to something even worse – “the loss of the institutional value of voting. If people stop believing in their votes, we are one step away from a dictatorship.”

How Long Will Chávez Remain in Power?
How long will Chávez remain president of Venezuela? Guillén predicts that Chávez will run for re-election in 2006. “We can expect the same populist measures [as now]. Chávez will continue throwing money at the people who support him.” His power rests in his control of the state’s treasury, not in any ideology, says Guillén.

Furthermore, given that oil prices are high, Chávez “is going to be particularly difficult to dislodge from power,” Guillen adds. “He will have plenty of money, and he will have plenty of room to maneuver.” If the price of oil were at, say, $16 to $18 a barrel, as it was two years ago, he would have far less [space]. With oil prices at near-record levels, he has been raising pensions and promising infrastructure improvements in such areas as water and sewage systems “where he thinks he can get support.”

While politicians all over the world rely on such patronage, the problem in Venezuela, says Guillén, is that the usual checks and balances do not exist. “Parliament is a puppet and the President has a lot of power, as long as the price of oil is high. All the tools are at his disposal, not just legal tools.”

If oil prices fall far from current levels, it may not take long for Chávez to feel the sting, experts agree. “Already, petroleum isn’t providing for enough of the needs of Venezuelan society,” notes Rojas. “Imagine, for a moment, how much worse the situation would be in Venezuela if oil prices were to drop to $20 a barrel. At the moment, what we have in Venezuela is much more of a political crisis than an economic problem. On the margins of the national budget, the government has been giving away money to its supporters to maintain itself in power, but it has been excluding most Venezuelans.”

Rojas cautions that “the Venezuelan economy is going to grow, but only because the growth we had in recent years left us practically in the basement … Growth is almost nothing compared with the levels we had four or five years ago.”

Unless Chávez makes a fundamental change in his approach, uncertainty about Venezuela will continue to be a problem for the country and for global energy markets, Rojas says. “It is time for the President to stop being exclusive. The President has an obligation to play by the rules of democracy, which are much more inclusive.” Chávez must “eliminate political violence. Venezuelans are tired of a situation of permanent violence, both physical and verbal. There is a terrible insecurity in this country.”