Hugo Chavez is being practical, but don't expect it to last.

By Amy Jaffe

Venezuela’s launch of a new bidding round for foreign direct investment in its oil-rich Orinoco Belt region this past December, and Hugo Chavez’s decision last week to allow Western energy companies to bid for them, signals a reality check for international oil players. Despite all the hullabaloo about resource nationalism, re-nationalization, and energy weapons, there is nothing like a good market correction to focus the mind.

More than 19 companies indicated interest in bidding for new contracts in Venezuela, including several major Western oil companies. They seem willing to shrug off Venezuela’s past political difficulties to gain access to its huge reserves. But the question is whether Caracas is willing to offer attractive investment terms to lock in billions of dollars of new investment from Big Oil. With oil revenues crashing and Venezuelan domestic oil production falling, Chavez may have to be more practical than ideological. But it likely won't last.

Populist hopes that the oil boom and bust cycle would end once and for all in 2008 have proven as wrong as they were in 1973. Also wrong were the assumptions that peaking world oil supply would keep oil producers such as Venezuela back in petrodollar surpluses and the geopolitical driver’s seat forever. Both of these faulty assumptions could have dire circumstances for these producers’ fiscal national balances in 2009.

Newly socialist Ecuador has already defaulted on a debt payment, and Venezuela is having to trim spending, devalue its currency, and raise debt as a means to weather the credit crisis and declining oil receipts. The new price and credit environment will retest the notion of whether populist resource nationalism can remain the driving force to political power in Latin America.

In the end, populations will expect social welfare bills to be paid. Chavez may not like to admit it, but increasing foreign oil company participation in the oil sector has been a solution chosen by previous administrations during previous oil price downturns. Now it appears to be the chosen path to survival for him as well.

Still, it remains to be seen whether the oil producer-consumer balance of power is definitively shifting. Though European buyers have raced around frenetically looking for liquefied natural gas to replace disrupted Russian pipeline supplies, a longer term solution to the risks posed by energy supply from Russia seems elusive. When the recession is over and world oil demand begins to recover anew, will we be see the return of the same resource nationalism? History would indicate, yes.     

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