$50 oil and the Axis of Evil

The financial markets have dealt oil a pretty serious blow - moving this morning to around $50. At the end of 2006 the spot price for light sweet crude was well over $70 per barrel. Today it is flirting with a price below $50, or a drop of more than 28%. As I have watched that change I have wondered how that drop will affect the ability of Venezuela's Hugo Chavez and Iran's leadership to wage their ideological wars. The chart shows the long term trend in oil prices.

Hugo Chavez of Venezuela has done all sorts of things using oil - including offering to sell oil to poor people in the US at a discounted rate. For the country oil amounts to about a third of the GDP and about 80% of their export volume. Oil influences about half of the governmental revenue. So a 28% drop has some deep effects.

Iran is about 15% of the middle east's exports in oil (the Saudis have just under half). What is most interesting is that from published data, even before the price drop, Iran was spending beyond its means in pretty substantial proportions. For example,in the last quarter of the year Iranian President Mahmoud Ahmadinejad had to ask his parliament to augment his budget because they so chronically overspend their resources. That was before this most recent market decline.

Neither country's oil industry is robust. So the ability to react positively to this market decline is quite limited. Light sweet crude dropped 4% today (about $2 per barrel) but one wonders whether even this economic reality check will influence either Ahmadinejad or Chavez to rethink their agendas.