Editor’s note:

The Peak Oil series continues. In this installment, Dr. Duarte looks at one aspect of the geopolitical equation, the relationship between the U.S. and Venezuela, a key component of future developments.

The article is particularly prescient, given the fact that crude oil closed the week of April 21, 2006 by closing above $75 in the June contract, and some regions of California are already paying over $4 per gallon.

This analysis appeared on April 18., 2006 at www.joe-duarte.com. It has been updated and revised for this series.

Other key installments of the Peak Oil series are below:

• Peak Oil: The Black Gold Rush
• Peak Oil: Long, Hot Summer Looming for Drivers
• Peak Oil: The Covert War & The Uneasy Triangle
• Peak Oil: The Gulf Jitters
• Peak Oil: Bush, the Middle East Conflict, & Alternative Sources
• Peak Oil: China & Iran - The Energy Tightrope
• Peak Oil: Big Oil Companies Want Reserve Accounting Change
• Ethanol Hits the Big Time
• Peak Oil: On the Verge of Hitting Prime Time

As oil prices set daily records, a significant portion of the U.S. oil and gas supply remains off line in the Gulf of Mexico, and the U.S. gasoline industry struggles with switching from MTBE to ethanol as the major clean air additive, there are external forces that are working overtime to further squeeze the U.S. oil market.

And while it could take time for consumers to feel the effect of some of today’s geopolitical maneuvering, the markets are responding now, as they factor in the effects of long reaching policies on tomorrow as key sectors of the stock and commodity markets begin to price in what could be a dramatic set of market moving events.

Slip Sliding Away

Amidst a gasoline supply problem in the U.S., Venezuela's President Hugo Chavez is taking decisive steps to turn off or at least significantly reduce the flow of oil from Venezuela to the U.S., as Venezuela's state owned oil company PDVSA, which owns the CITGO refineries and retail outlets in the U.S., has inked a key deal with India, taking the first key step away from the U.S. as its major oil buyer.

At the same time, PDVSA has announced that it will no longer reveal oil statistics to the SEC after paying off its debts to the U.S. through the purchase of some $80 million in U.S. bonds, according to reports.

The India deal and the refusal to disclose information are not just strategic, but also send a message to the U.S. about Venezuela's future plans with regard to supplying the U.S. with oil.

No Ma’s Disclosure

According to the BBC: "Venezuela's state oil firm has said it will no longer disclose information to US financial regulators after paying off debts in the US. PDVSA said it was no longer obliged to be regulated by the Securities and Exchange Commission (SEC) after buying up $83m in US-traded bonds."  At the same time Venezuela has begun to ship two million barrels of oil to India per month, making use of India's heavy crude refineries, for which Venezuela's sulfur laden oil is no problem.

And although the deal with India is relatively small, given that Venezuela produces more than 2 million barrels of oil in a single day, it is a sign that change is coming, as Venezuela has been working on diversifying its dependence on U.S. oil purchases for some time, having nurtured relationships with Iran and China, as well as India.

But because the U.S. and India are two of the few countries with existing refineries able to process heavy crude, the Chavez regime has had a difficult time getting beyond the conceptual stage with the strategy.

The Chevron Wildcard

The oil world, though, takes strange turns, as Chevron (NYSE: CVX) recently announced a stake in an Indian refinery that will be processing heavy crude shipped from Venezuela, and will provide products to Asia.

According to the BBC: "5% of Reliance Petroleum, a company set up by Indian conglomerate Reliance Industries to operate a new export refinery in north-west India. The 580,000 barrels-per-day site in Jamnagar will process heavy crude and is due to open in December 2008."

There has been no mention of any intention of Chevron's intentions to divert any gasoline from its India projects toward the U.S.

Who Benefits?

Aside from the political gains for Chavez, and the new source of oil for India, it looks as if the green energy complex continues to gain traction as a growth vehicle for energy investors. The Wilderhill Clean Energy Index ($ECO) broke out to an all time high on April 17, on the strength of stocks such as Pacific Ethanol (Nasdaq: PEIX) as well as the fuel cell stocks, including Fuel Cell (Nasdaq: FCEL) and Ballard Power (Nasdaq: BLDP).

Investors who wish to bypass the volatility of the individual stocks in the clean energy sector can trade the Powershares ETF Trust Wilderhill Clean Energy exchange traded fund (AMEX: PBW), which closely tracks the index.

Another key play is the newly minted U.S. Oil Fund (AMEX: USO), which invests in crude oil futures and closely tracks the price of crude oil.

Conclusion

There are several key factors in this story, not the least of which is the international aspect of the oil market, and the effect of unintended consequences of any one party's actions.

PDVSA cuts a deal with an Indian oil company in order to move away from the U.S. as its primary source of oil revenues. Yet, Chevron, a U.S. company, seems to have slipped into the deal through the back door.

Chevron is playing it cool, noting that this venture will concentrate on providing oil to Asia. Yet, all gasoline looks, feels, and smells similarly, which means that while ideologues will try to manipulate the markets; the marketplace will adjust to conditions.

Who's to know where the gasoline we put in our gas tank in 2008 will come from?

The only thing that is certain is that because of geopolitics, it will take a lot more money to take oil out of the ground, send it somewhere to get refined, and eventually deliver it to gas stations.

In other words, the consumer will be paying more because of the idiosyncrasies and conflicts between countries and heads of state. But the oil companies will find a way to make the whole thing as profitable as possible by passing the costs onto the consumer.

© 2006 Joe Duarte, M.D.
Dr. Duarte's Bio and Archive

For investors, one alternative might be clean energy stocks or an indirect road into oil futures through the USO fund. Disclosure: Dr. Duarte owns shares in Pacific Ethanol, the Powershares Wilderhill ETF, and the USO Fund. Dr. Duarte is the author of "Futures And Options For Dummies" and comments on the financial markets daily at www.joe-duarte.com.