In response to fellow bloggers Brian and Jessica, here is my take on what happened today.
Hugo Chavez’s victory eased the rising price of oil for two reasons. First, oil traders were worried that the referendum would result in widespread violence, which would then lead to disruptions in the supply of oil. This collective fear prompted many traders to buy up more contracts for oil ahead of the vote in order to guard against upcoming supply shocks. When Chavez won, some (relieved) traders sold off some of their oil contracts, helping to push down prices. This is tied to the second reason the price of oil eased on Monday and it is connected to Chavez’s bizarre (but pretty true) statement that he has the backing of Wall Street. In recent weeks, Wall Street has turned sour on the opposition (despite their ideological similarities and mutual distaste for Chavez’s anti-market flair) because the opposition was disorganized. Fears of what the opposition would do to the state oil company and the stability of the country if they won prompted Wall Street firms to essentially root for Chavez.
For all the hooplah surrounding this fear-mongering, the price for a September contract for a barrel of oil in New York settled at $46.05, down from $46.58 on Friday. We’re talking a matter of cents.
Noone particularly gained from this directly in the oil market, but people and institutions investing in the U.S. stock market, did – indirectly.
This is where the idea of herd mentality comes in. Between the Federal Reserve saying the U.S. economic recovery is dwindling because of rising energy prices, and economists saying U.S. economic indicators have been weak recently because of the high price of oil, the hoards of stock traders on Wall Street were looking for any positive economic sign to latch on to. Enter the 53 cent drop in the price of oil from Friday to Monday. Traders saw this as an indication energy prices would continue to ease and this spurred speculation that the Fed, and economists would take back all the mean things they said about a faltering economic recovery in the U.S.
On the whole, the stock market acts on fear, speculation – and herd mentality. A common example of this herd mentality – collective buying and selling for no strong reason – is the notion of “geopolitical uncertainty.” Read stock market comments on a day when not much corporate news is coming out and traders will buy and sell based on the threat or easing of “geopolitical uncertainty!” It is rarely explained, but is always cited as a reason for swings in the market. Traders need cues and today’s cue came from a country most on Wall Street would rather not do business with.
Today, the value of three major stock indeces in the U.S. all climbed as traders bought and sold stocks with greater zeal (and thus raised the share price of many many companies) because of the confidence that resulted from the drop in the price of oil.
This is where the irony of it all comes in. These same traders, analysts, investors and economists – the entire capitalist system which achingly tracks the U.S. stock market – is accustomed to having an underlying hatred for Chavez and his anti-capitalist, anti-US market rhetoric. We hear it all the time. Wall Street investors and politicians are scared Chavez will turn Venezuela into a “Cuban-style, leftist dictatorship,” or they complain about “Chavez and his anti-business practices,” etc. etc. These very people, who have such an ideological hostility to so much of what Hugo Chavez stands for, made money off of him today. Sure, they know this. They don’t care – they’ve made money. What is truly ironic, and rather sad, is that they’ve made this money as Chavez (and all of his supporters) claims a victory against imperialism and capitalism. This is the twisted circle I speak of; Chavez can fire up his supporters with such talk, but Venezuela – if it wants to help its people – will have to be a part of all it struggles against. It’s the curse of being an oil-rich country.
This is not to minimize the triumph in Venezuela or the hopeful improvements in the lives of Venezuela’s poor. The truly impressive aspect of what is going on in Venezuela right now is that the Chavez administration, backed by the Venezuelan people, are changing the rules.