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The United States is being mocked by Russia's alliance with a tin-pot dictator -- but he holds the oil can.

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Stealth in Venezuela

The United States is being mocked by Russia’s alliance with a tin-pot dictator — but he holds the oil can.

Nearly five decades after the Cuban Missile Crisis, the Russians are once again trying to increase their influence in Latin America. On September 11 (which is fascinating timing), two Russian Tu-160 long-range nuclear-capable bombers arrived in Venezuela, along with a contingent of Russian warships. The jets and 1,000 Russian troops were there to begin training exercises with Venezuelan forces.

Much of Venezuela’s weaponry is Russian-made, a result of a $3 billion arms deal between the two in 2006 that allowed Hugo Ch├?┬ívez to purchase 53 Mi-28N helicopters, 24 Su-30MK2 jet fighters, TOR-M1 anti-aircraft systems, and 100,000 AK-47s. A more recent arms deal calls for Venezuela to buy Russia’s Varshavianka-class (aka Kilo-class) submarines. Ch├?┬ívez, never at a loss for blustery rhetoric, declared after the Russians’ arrival: “Yankee hegemony is finished.”

The reaction of the United States to all this has been rather muted. Because the U.S. is so heavily committed in other parts of the world, including Iraq and Afghanistan, Ch├?┬ívez believes he has free rein in South America. But while the international community has come to expect bluster and aggression from him, it is Russia that has surprised many. First came the invasion of Georgia. Now it appears that Russia is directly challenging the U.S. in Latin America.

Much of Russia’s newfound boldness is driven by oil. Prime Minister (and former President) Vladimir Putin, by hook or by crook (mostly by crook), has re-nationalized the energy industry. He started in 2005 with the destruction of Yukos, and with the run-up in oil prices has used the petrodollar influx for personal and national empowerment. What Russia was unable to achieve with nuclear weapons during the 40-plus years of the Cold War is now now possible through its energy sources. By the end of 2008, Russia could become the world’s sixth-largest economy.
    
Russia and Venezuela share their attitude toward the United States. The reasons for their antipathy differ, but their animosity unites them as in the old adage, “The enemy of my enemy is my friend.”

Oil revenues have an overwhelming impact on both Russia and Venezuela, pointing to the simultaneous vulnerability of their biggest market and their enemy, the United States. This is the starkest win/loss situation in the geopolitics of today.

Ch├?┬ívez, without provocation, said on the day of the Russian military deployment that if the U.S. attacks his country, Venezuela would cut off all oil supplies. The threat is not idle. Venezuela is the fourth-largest provider of U.S. crude oil at just over 1 million barrels per day, approximately 11 percent of U.S. crude imports. A sudden cut-off of Venezuelan crude could raise the global price of oil to $200 per barrel overnight.

The escalation of tensions with Venezuela, coming amidst the flood of other news from the recent hurricanes to presidential campaign rancor, has shifted reports of those tensions to the inside pages of the newspaper. But their impact will be wide and long-lasting.

About the same time that Russian forces reached Venezuela, Ch├?┬ívez’s ally in Bolivia, Evo Morales, expelled Philip Goldberg, the American ambassador, insinuating that the U.S. had encouraged recent protests against his economic and social policies. In a show of solidarity with Bolivia, Ch├?┬ívez followed suit by expelling American ambassador Patrick Duddy, contending that an American-supported coup plot had been discovered. The U.S. responded by expelling the Venezuelan ambassador.

It has become more urgent than ever for the U.S. to develop more oil production capacity, either by pressing its allies in the Middle East (something that President Reagan understood all too well, and which precipitated the fall of the Soviet Union), or by developing its own resources. It is the epitome of naïveté and profound ignorance of the oil industry for American politicians to belittle the impact of incremental domestic production. In a margin business like the oil industry, an over- or under-supply of 1 percent can mean a 50 percent impact on the price of oil.

Meanwhile, the reigning world superpower is being mocked by a tin-pot dictator.

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Written By

Mr. Economides is Editor-in-Chief and Mr. Evans is a writer for the Energy Tribune.

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