TCS Daily

Chávez Victory, Chávez Danger

By Ariel Cohen - August 18, 2004 12:00 AM

After open collar, red shirt-clad Hugo Chavez claimed a victory in the referendum called by the democratic opposition, the global oil outlook turned gloomier than before. Geopolitically, Venezuela has become a flashing red light.

During his six years in power, Chavez has increasingly politicized oil, nationalized and mismanaged the national oil company PDVSA, and used its finances as a political kitty (up to $3.7 billion this year only) to buy off the poor. Beyond Venezuela, he sees himself replacing Fidel Castro as the leader of Latin America's radical left, opposing democracy, free markets, and American influence.

Chávez uses oil as a political tool to advance his hemispheric and global ambitions. He played a key role in the 1999 and 2003 OPEC decisions to cut production and coordinate policy aimed at driving oil prices higher. In 2000, Chávez visited Iran, Iraq, Libya, and Saudi Arabia, further agitating for production cuts and quota enforcement. The same year, he promised Fidel Castro 53,000 barrels of subsidized oil a day in exchange for the services of Cuban teachers -- and intelligence experts.

Until the Chávez presidency, oil-rich Venezuela had been at peace with its neighbors and a firm American ally. The situation changed in 1998. As a presidential candidate, Chávez campaigned against the "savage capitalism" of the United States. He allegedly aided Afghanistan's Taliban government following the September 11, 2001, attack on the United States. Chávez also proclaimed that Cuba and Venezuela were "called upon to be a spearhead and summon other nations and governments" to fight free market capitalism. After a June 24, 2004, U.S. Senate hearing on the situation in Venezuela, Chávez characterized U.S. Congressmen as "dogs of war, those that intend to dominate the world, those imperialists."

Failed the Oil Test

But it is his handling of oil, which reveals an agenda of destructive populism. During its 20-year history PDVSA built a reputation for smooth operation and competence. Even though it nationalized its oil industry in 1975, exploration and production was reopened to foreign participation in 1996.

The 2002-2003 national strike devastated the oil giant. Some 35,000-40,000 skilled workers, including fire fighters, walked out while spillage and fires ensued. Daily production dropped from three million barrels (mbd) to 600,000 barrels. Chávez fired 18,000 skilled managers and workers, further undermining PDVSA's precarious situation.

Chavez arrested oil sector reforms and began expropriating foreign assets. His 1999 constitution prohibited future PDVSA privatization; his 2001 Hydrocarbon Law doubled royalties on foreign operators from 16.67 percent to 30 percent and required a majority government stake in future joint ventures. During the 2002 strike, the Venezuelan military seized an information technology company jointly owned by PDVSA and Virginia-based Science Applications International Corporation (SAIC). Such expropriations jeopardize the investments of international major oil companies-such as Mobil, ChevronTexaco, and ConocoPhillips-in oilfield development projects like those in Venezuela's Orinoco basin. However, while PDVSA projects $37 billion in new investment, including $10 billion from international companies, Chavez's action threaten its 2004-2009 development plan,

Today PDVSA is dependent on U.S. refineries, which partially supply its CITGO gas station chain. PDVSA owns refining facilities located in Louisiana, Illinois, Texas, New Jersey, and Georgia as well as several installations in Europe. Irresponsible tampering with U.S. and international company activities by the Chávez government could prompt legal proceedings against Venezuelan holdings in the West.

Despite recent high oil prices that have provided a fresh infusion of cash, PDVSA remains in disarray. This year's internal investment fell from $5 billion to $4.3 billion while salaries went up 60 percent despite no apparent increase in productivity or number of employees. Without reinvestment in equipment and maintenance, PDVSA will not be able to maintain current production levels.

Besides supplying the United States with 1.5 million barrels of oil a day (mbd), Venezuela provides most of the petroleum for U.S. allies in the Caribbean and Central America. Chávez has the luxury of cutting deliveries to those who oppose him. Caribbean leaders know that crossing Chávez could result in high prices or delivery cuts. In September 2003, Chávez punished the Dominican Republic for harboring former President Carlos Andrés Pérez-who "might" conspire against his government. He stopped oil deliveries, prompting a temporary energy crisis.

Beyond the hemisphere, he is preparing to shift exports an increasingly oil-thirsty China, making Venezuela less dependent on US petroleum sales. A deal signed in July, 2004, to build oil and gas pipelines from the Maracaibo Basin in Venezuela to the Caribbean and Pacific coasts in Colombia would enable Venezuela to ship petroleum to China without using the Panama Canal. This would make it more critical than ever for Chávez to secure a pliant government in Colombia to keep this facility operating in Venezuela's interest.

By destabilizing and replacing democratic governments in hydrocarbon-rich Bolivia, Colombia, and Ecuador, he also could achieve a regional energy monopoly that could support rogue regimes and frustrate U.S. interests in the hemisphere.

Chavez wants to harm the US where it hurts the most - in the wallet and the oil tank. If the opposition is right, and Chavez stole the referendum, US should take steps to kick him out of the Organization of American States. If the victory was fair, Chavez should be held accountable for his oil mismanagement and anti-democratic policy.

Washington needs to constrain Chávez by encouraging timely political and economic reforms. As the 12 percent of the American oil supply is jeopardized, US oil companies need to develop alternate sources of petroleum and gas to avoid energy extortion. Besides increasing domestic exploration, America should be prepared to shift oil purchases to Brazil, Canada, Ecuador, and Mexico to compensate for potential cuts in Venezuelan production. US and other Latin American countries need to promote property rights such as consultations between energy corporations, Latin American governments, and NGOs with expertise in property rights, such as Peru's Institute for Liberty and Democracy, to establish, guarantee, and enforce private and corporate property rights, including rights to subsurface minerals and hydrocarbons.

Either way, President Bush will have his hands full in the months to come.

Ariel Cohen, Ph.D., is Research Fellow for International Energy Security, and Stephen Johnson is Senior Policy Analyst for Latin America, at The Heritage Foundation.


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