3-29-05, 8:39 am

From Council on Hemispheric Affairs

Over the past few weeks there have been some signs that Venezuela’s president Hugo Chavez has backed down from his earlier confrontational posture towards Washington. According to the Venezuelan foreign minister, Chavez has no intention of reducing oil exports to the United States. The economic importance of oil in terms of Venezuelan-U.S. relations cannot be overstated. Venezuela is the fifth largest oil exporter in the world and the fourth largest supplier of oil to the United States after Canada, Mexico, and Saudi Arabia. Last year, Venezuela’s state owned oil company, Petroleos de Venezuela (Pdvsa) accounted for 11.8% (1.52-million barrels a day) of U.S. imports.

Tensions have been bristling between the two nations ever since April 2002 when Chavez, the democratically elected president, was briefly removed from power in a coup. Chavez, a firebrand politician and former paratrooper, accused (not without merit) Washington of sponsoring the attempted overthrow as well as supporting a devastating oil lockout in 2002-3. Never one to soften his language, Chavez bluntly referred to U.S. president George Bush with an expletive and the United States as “an imperialist power.” What is more, according to Chavez, Bush had plans to see him assassinated. In a further barb, Chavez declared that if he were killed the United States could “forget Venezuelan oil.'

For a time it seemed that their bilateral relations could sink no lower. Though there are many reasons for the deterioration in relations (including Chavez's ties with Washington’s anathema, Cuban President Fidel Castro, the Venezuelan president’s criticism of U.S.-led efforts for a free trade zone in the Americas and Chavez’s opposition to the war in Iraq) oil was surely of paramount importance. When he took office in 1998 Chavez launched a reform of Venezuela's oil policy, seeking to reestablish a predominant role for the presidency in the design and implementation of an oil strategy through the Ministry of Energy and Mining. This move challenged vested interests in Pdvsa, a powerful, almost autonomous, company with total assets estimated at $100 billion. The company’s executives, who earned between $100,000 and $4,000,000 a year, had grown accustomed to taking the lead in defining the oil policy of their virtual fiefdom. While Chavez did not deny the role of the private sector in the oil industry, his reform process aimed at curbing the trend toward the privatization of Pdvsa. On the international front, Chavez worked to achieve a higher price for oil through OPEC, the oil cartel of which Venezuela was a founding member. He also worked to increase the profile and power of OPEC world wide. Chavez additionally sought to guarantee that the state collected a greater share of oil revenues. He imposed royalties on oil output which was applied on foreign producers operating in the country, chief among them U.S. giant Exxon-Mobil. Last year, Venezuela raised royalty taxes on heavy crude projects in the Orinoco oil belt from 1% to 16.6%. Irate Exxon-Mobil representatives say that the company is paying the new rate 'under protest.'

PDVSA Serves the Nation

Keeping Pdvsa under firm government control was politically important. In recent years, Chavez has sought to utilize oil revenue to carry out an ambitious social agenda. In a recent study it was estimated that over 60 percent of Venezuela's 24-million people live in poverty and make less than $2 a day. Accordingly, as a result of record high oil revenues, Chavez has been able to carry out an impressive array of programs promoting literacy, job training, land reform, subsidized food, and small loans. Perhaps most ambitiously, Chavez has used the nation’s oil wealth to extend health care and import Cuban doctors.

As Chavez began to export cheap subsidized oil to Cuba, Fidel Castro sent over 13,000 doctors to Venezuela. Today, the doctors are spread throughout the Andean nation and have access to over half the population, a first in Venezuela’s history. Chavez’s move to bring in Cuban doctors was one of many factors regarding his rule that provoked Washington. In May 2004, the U.S. State Department’s Commission for Assistance to a Free Cuba—the administration’s propaganda office on Cuban issues—issued a report stating that Venezuelan oil shipments to Cuba needed to be halted if political change on the island was to occur – which was tantamount to calling for a de facto embargo against the Castro regime.

Are there any signs that the confrontation between the two antagonist nations will soon abate? Recently, Chavez has publicly stated that he wanted to mend relations with the United States. 'We want to continue to send 1.5 million barrels of oil to the United States on a daily basis and to continue doing business,” he said. What is more, Chavez added that although 'we have said things, sometimes, very harsh things, it has been in response to aggressions.' Chavez explained that, 'what I have said is that if it occurs to the United States, or to someone there, to invade us, that they can forget about Venezuelan oil.' He clarified that this is just 'a theory that we of course do not want, and I hope that the United States does not want it either.'

Chavez turns on the Charm

Chavez’s recent conciliatory statements have brought little slack from Washington as the Bush administration’s harsh anti-Chavez rhetoric continues to boil over whether its splenetic utterances coming from Secretary of State Condoleezza Rice, Defense Secretary Donald Rumsfeld or routinely from the White House and State Department press offices. On one level, Venezuelan imbroglio seems to be heading towards deeper water. Chavez has repeatedly stated his determination to reduce his country’s dependency on oil sales to the United States. Accordingly, he has begun exploring the sale of parts of Citgo, Pdvsa’s marketing and refining affiliate in the U.S. Citgo owns eight refineries and almost 14,000 gas stations located primarily in the eastern part of the country. Chavez has complained that Citgo, whose refineries are especially adapted to process heavy crude oil from Venezuela, sells oil to the U.S at a discount of two dollars a barrel. “We are subsidizing the U.S. budget,” griped Chavez, who says Citgo contracts were signed before he assumed office in 1999. Moreover, Chavez maintains, 'not one Venezuelan works at these refineries…They don't give us 1 cent of profit. They don't pay taxes in Venezuela. This is economic imperialism.' According to Citgo's 2004 financial reports, the company paid $400 million in dividends to Venezuela but simultaneously paid as much in U.S. taxes. Energy Minister Rafael Ramírez, who also serves as Pdvsa’s president, has announced a freeze on plans to expand Citgo. Meanwhile, though Citgo CEO Félix Rodríguez notes that” the government does not plan to sell off the company's assets,” specialists suggest that Chavez may very well consider such a move after evaluating the profitability of each refinery. Alberto Quirós, a former executive at Royal/Dutch Shell in Venezuela, commented that selling the refineries would not be a bad idea right now. Chavez, he says, could get a decent price for the refineries because oil prices and demand are high. Were such facilities to be sold, however, the process would probably take at least a few years to be finalized.

Caracas Looks to Asia

In order to supplant oil sales to the U.S., Chavez made plans to begin shipping Venezuelan crude to China, the world's second-largest energy consumer after the United States. ”Reaching China is a strategic question,” says Ramirez. “It would be a mistake not to have a presence there. They are switching over from coal to more efficient fuels.” In Beijing last December, Chavez remarked ”We have reached agreements with China to begin to exploit 15 mature oilfields in eastern Venezuela that have more than one billion barrels in reserves, and a large part of that oil will come to China.” What is more, Chavez stated that Venezuela wanted to become a 'secure, long-term' petroleum supplier to India and this month the two countries concluded an energy cooperation agreement. Transporting oil to Asia, however, could prove logistically difficult. Pdvsa has expressed interest in moving oil across Panama to the Pacific Ocean via pipeline. The company is also exploring the idea of building such a facility across Venezuela’s northern border with Colombia, extending to that country’s Pacific coast. Shipping oil to Asia carries other logistical and infrastructural problems. China presently has an insufficient deep conversion refining capacity and transporting petroleum to the Asian giant would be costly due to the long distances involved. Moreover, the Panama pipeline eyed by Chavez already transports 100,000 barrels a day of Ecuadorian crude from the Pacific to the Atlantic. According to analysts, there is no way that the pipeline can be converted into being able to simultaneously ship Venezuelan oil to China in the opposite direction. Finally, China may be only interested in Venezuela in the short run, as Beijing is busy exploring for oil and gas closer to its shores in the South China Sea.

Despite these practical problems, Chavez’s rhetoric suggests the Venezuelan leader earnestly seeks to challenge U.S. regional hegemony by putting together a formidable coalition of like-minded nations. In a recent interview on al-Jazeera, Chavez cited Venezuela’s energy alliance with Cuba as an example of how 'we use oil in our war against neoliberalism.” What is more, when he was recently in Buenos Aires, Chavez launched the first gas station run by a joint venture between Pdvsa and the Argentine company Enarsa. The venture involves production, refining and distribution of petroleum by-products and natural gas. Chavez has also concluded oil agreements with Brazil, Uruguay and Paraguay. His desire to create a South American energy company called Petrosur, which would integrate regional oil and gas industries, is already bearing fruit.

Any interruption in Venezuelan oil exports to the U.S. would bring significant disruption to both countries and Washington is beginning to plan for such a contingency. Oil accounts for half of Caracas’ revenue and 75 percent of its exports. Currently the U.S. purchases 60 percent of Venezuela's oil exports and according to analysts, finding new markets could prove daunting to Venezuelan authorities. The fact is, exporting to the U.S. market is convenient due to close proximity and low transportation costs. Additionally, U.S. refineries are particularly equipped to process Venezuela's sulphur-rich crude.

U.S. analysts doubt that Chavez can afford to drastically cut shipments to the United States. And if Chavez cut off oil supplies, argue government officials, the United States would quickly make up for the loss by seeking other sources. But a potential cut off would represent no small economic loss to the U.S., as oil imported from elsewhere would likely be more expensive. The reality is that for the U.S., purchasing Venezuelan crude is economically advantageous because the South American nation is geographically close to U.S. ports. In Washington, politicians are now hedging their bets. In a clear sign ofconcern, Republican Senator Richard G. Lugar has asked the Government Accountability Office to study how a sharp decrease in Venezuelan oil imports could affect the U.S. economy. Additionally, the Senate recently called for a review of the government’s plans 'to make sure that all contingencies are in place to mitigate the effects of a significant shortfall of Venezuelan oil production, as this could have serious consequences for our nation's security and for the consumer at the pump.'

Even before Chavez was first elected he was explicit in describing his views about petroleum. 'Oil is a geopolitical weapon,' he declared, 'and these imbeciles who govern us don't realize the power they have, as an oil-producing country.' The evidence suggests that Chavez is now trying his best to follow through on this rhetoric.

  --Nikolas Kozloff is a COHA Senior Research Fellow.