VENEZUELA: Balance Of Power

Hugo Chavez was the featured speaker last week at a football stadium hosting an antiglobalization conference in Brazil. The Venezuelan president dressed for the occasion, wearing a red shirt featuring the familiar image of the iconic Argentine revolutionary Che Guevara. His fiery rhetoric was also tailor-made for the 15,000 leftist activists and environmentalists who greeted him with cries of "Here comes the boss!" at the fifth annual World Social Forum. "The imperialist forces are starting to strike against the people of Latin America and the world," thundered Chavez. "And it's up to our soldiers to defend the people and not submit themselves to the interests of the empire."

Like Latin leftists before him, the 50-year-old Chavez delights in bashing the United States and waxing poetic about how agrarian reform and income redistribution will benefit millions of impoverished Venezuelans. But as he began his seventh year in office last week, Chavez also looked like a man ready to back up his words with deeds. Under his stewardship the government's role in the Venezuelan economy has expanded dramatically in recent months, with the launch of a state-owned airline, television stations and a telecommunications company. The Venezuelan leader has announced plans to expropriate 3 million hectares of privately owned farmland by the end of this year, a stance that's encouraged hundreds of landless peasants to invade farms and cattle ranches in several regions of the country.

And now Chavez seems hellbent on using his country's vast oil reserves as a weapon against the Bush administration. He's sending signals that he wants to do less energy business with the United States, which relies on Venezuela for 12 percent of its oil imports, and more with other countries. Last month Venezuela signed five contracts with China's state-owned oil company to increase exports to Beijing in exchange for the promise of future Chinese investment in Venezuelan oilfields. "From a political standpoint it makes sense," says Michelle Billig, a political-risk analyst at the New York-based consultancy PIRA Energy Group. "Chavez has more control over resources, and he is very skilled at taking advantage of opportunities that have come his way." The U.S. Senate last month requested a study of the possible impact of a total cutoff of Venezuelan supplies. Such a development would, at a minimum, increase U.S. reliance on oil from the Middle East, a decidedly unpalatable option for the foreseeable future.

Chavez's interest in diversifying Venezuela's oil-export markets dovetails with his long-term strategy to promote a "multi-polar" balance of power among nations as a counterweight to U.S. supremacy. For Venezuelans, American might is reflected in the continuing operations of major U.S. oil companies like ExxonMobil and ChevronTexaco inside their country. The state-owned oil company, Petroleos de Venezuela (PDVSA), has already raised the royalties paid by its foreign partners, and the company is reviewing the terms of 33 existing contracts with foreign oil corporations. A telling sign of the adverse political climate came last month when PDVSA officials ordered the Houston-based firm Harvest Natural Resources to cut production by one third, a step that sent the company's stock price tumbling.

China is a natural new partner for Venezuela. Its booming economy has pushed the prices of oil and other commodities to record highs. But experts caution that both countries will have to overcome major obstacles before China can ever become a significant alternative to the United States. One problem is geography: Venezuela has no outlet to the Pacific Ocean. Another is logistical: PDVSA's shipping fleet consists of relatively small vessels that can reach American shores within a week. To reach the Far East, the company would have to acquire supertankers. A third impediment is China's energy infrastructure, which lacks refineries capable of processing Venezuela's high-sulfur brand of crude. " [But] it clearly is in the interest of an oil supplier to diversify your buyers as much as you can," says John Felmy, chief economist of the Washington-based American Petroleum Institute, a trade organization. "[But] the realities are very challenging for Chavez because almost no refinery outside the U.S. can handle the crude that Venezuela produces."

The best-equipped company for handling Venezuelan oil is Citgo Petroleum, a Houston-based firm that PDVSA acquired in the 1990s. But Citgo has incurred Chavez's wrath because it buys Venezuelan crude at a discount and passes on the savings to American consumers at the 13,000 service stations it operates in the United States. During a stopover in Buenos Aires last week, Chavez attacked the company for not giving Venezuela "one cent of profit." In reality, Citgo has been one of PDVSA's leading revenue sources for years, and only last December the company announced it would be paying a $400 million dividend to its parent corporation. Last week the newly appointed Venezuelan president of Citgo was distancing himself from Chavez's pronouncements, telling journalists that no decision had yet been taken on the company's future.

There are practical reasons for Chavez to move cautiously on Citgo. PDVSA is still reeling from the debilitating two-month-long general strike that paralyzed the Venezuelan economy two years ago. Unloading the PDVSA subsidiary would damage the parent company's creditworthiness at a time when the Venezuelan oil conglomerate needs to raise at least $2.5 billion just to maintain its current production level of 1.6 million barrels per day. That figure is roughly half the daily amount of oil PDVSA was producing prior to the strike.

But Chavez doesn't think in terms of investment ratings, productivity and the bottom line. Instead he's accelerating government intervention throughout the national economy. At least three in 10 Venezuelans buy their groceries at the government-owned Mercal chain of retail stores, and the temporary price and foreign-exchange controls Chavez imposed during the 2002-03 general strike have become permanent. Borrowing from Mao Zedong, Chavez has described the government's more activist economic role as an integral part of Venezuela's "great leap forward."

Other governments in the region seem unlikely to copy the Chavez blueprint. "I don't think anything that Chavez is constructing has broad appeal," says Michael Shifter of the Washington-based Inter-American Dialogue think tank. "It hasn't worked in other countries, and there is very little evidence that it makes economic sense." Still, even if Chavez's policies are not exportable, his abundant supply of oil is, and that is making Washington nervous.