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Venezuela’s Oil Gambit

Prepared by: Lee Hudson Teslik
April 13, 2007

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Years of threats and bluster over the operations of U.S. and European oil companies in Venezuela turned more serious this month as President Hugo Chavez set a May 1 deadline (NYT) for nationalizing several major foreign petroleum projects. Chavez’s announcement prompted fear from oil executives, but many analysts say the move could be even more disastrous for Venezuela itself.

Chavez says he intends to return control of Venezuela’s oil fields to the Venezuelan government, and their profits to the country’s people. He claims that by prioritizing local markets, Venezuela will be able to guarantee Latin America energy (Bloomberg) for at least the next hundred years. He is also courting a new wave of potential import markets. Most notable among these is China, which Chavez says will soon surpass the United States (MercoPress) as Venezuela’s largest crude oil customer.

Chavez plans to nationalize foreign-operated oil projects under Venezuela’s state-owned oil company, Petroleos de Venezuela (PDVSA). It’s unclear precisely what the effect will be on PDVSA. The company is already stretched thin, given Chavez’s habit of giving ideologically motivated oil handouts to peoples across the North and South American continents. Reports indicate PDVSA pays a considerable competitive price (AP) because of these handouts. Further consolidation under PDVSA’s umbrella could make things even worse for the company. The Economist’s Free Exchange blog predicts unhappy consequences: “The expropriation will almost certainly see a considerable outmigration of talent and capital from the fields, and PDVSA is already underinvesting in its current properties in order to divert money to social spending.”

Chavez’s desire to expand his regional influence looms behind his oil-market maneuverings. The broader question, then, is what effect an oil showdown might have on U.S.-Venezuelan discord. U.S. officials bristle at Chavez’s taunts, and many analysts, including CFR Senior Fellow Julia E. Sweig, say the purpose of President Bush’s five-country tour of Latin America in March was to counter Venezuela’s growing influence in the region. This CFR Special Report suggests the United States should temper its rhetoric toward Venezuela, but Chavez’s continued provocations could make that a tall order.

So too could basic economics. Despite U.S. efforts to cut back on America’s appetite for Venezuelan crude, the United States still imports about 60 percent of the oil it uses, and Caracas is its fifth-largest supplier, sending just under one million barrels of oil to the United States every day. Bush has launched efforts to expand alternative energy sources, but a recent CFR Task Force report says oil will be a hard habit for America to break. As CFR’s Roger Kubarych put it in this Backgrounder on America’s energy sources: “The only way to cut near-term oil demand is to drive the economy into recession, put on a punishing tax, or ration gasoline. None of these things is going to be done.”

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