Hugo Chavez's Most Dangerous Enemy? It's Chavez Himself

In proven and unproven reserves, Venezuela is believed to control some 270 billion barrels of oil, the deepest supply in the world. As crude prices lurch toward $100 per barrel, President Hugo Chavez would appear to hold the only weapon he needs to further tighten his grip on domestic political power and extend his foreign-policy influence. But a close look at how his government milks the country's cash cow suggests he has serious cause for concern.

Chavez remains popular at home, but if Venezuela's economy turns south and state spending on popular social programs is substantially cut, he may not be popular for long. His fortunes increasingly depend on the future of Venezuela's oil production, because the government's cash comes almost exclusively from the country's state-run energy giant, Petróleos de Venezuela (PDVSA).

As recently as the mid-1990s, PDVSA hoped that joint development projects with foreign firms would lift production to 6.5 million barrels per day (bpd). In 1998, the company produced about 2.9 million bpd. Output has since fallen to around 1.6 million. There are two main reasons.

First, during a power struggle with Chavez in 2003, PDVSA's workers went on strike. The president retaliated by firing 18,000 of them, including the vast majority of the company's most talented and experienced engineers. Nearly five years later, the company has yet to recover from the loss of expertise.

Second, Chavez is bleeding the company of the revenue that might be reinvested in aging infrastructure and new equipment. He has diverted $12 billion into a fund meant to subsidize health and education projects. Some argue that this is a worthy undertaking, but this spending represents three times the amount devoted to oil exploration and the maintenance of PDVSA's existing assets, the source of Venezuela's future income. In addition, all these subsidies are awarded off the books. It's impossible to know exactly how all that money is really being spent.

The company's profit margins fell by about 25 percent in 2006, despite the surge in oil prices. In the first quarter of 2007, the company took on $12 billion in new debt. These are official figures; the reality may be much worse.

The broader economy is already in rough shape. The most optimistic estimates put core inflation at 20 percent, and the real figure might be closer to 35 percent. Foreign investment in the country is severely limited by Chavez's habit of voiding contracts with international firms, creating product shortages across the board. Venezuela is a net importer of virtually everything except oil and remains deeply dependent on its neighbors, including the United States, for goods and services vital to the country's economy.

Convinced that oil production will rise and that high prices are here to stay, Chavez has aggressively antagonized the United States, his best oil customer. He has essentially awarded exclusive rights to future development deals in the country's oil-rich Orinoco belt, believed to hold the largest petroleum reserves in the world, to CNPC (China), ONGC (India), LUKoil (Russia), Gazprom (Russia), Petrobras (Brazil), NIOC (Iran), and Repsol YPF (Spain). He has repeatedly threatened to divert oil exports now destined for the United States toward consumers in Asia.

Herein lies the shortsightedness of Chavez's plans. The new prominence of foreign state-owned energy companies comes at the expense of multinationals like ExxonMobil and ConocoPhillips. Chavez has squeezed these and other international companies operating in the country by tearing up existing contracts to seize a bigger share of their profits. If the economy slows further and Chavez needs more cash, he'll find it a lot tougher to push around the state-owned firms of would-be allies.

In addition, Venezuela needs access to U.S. energy markets, because crude oil shipments to America represent more than half of the country's total exports. Chavez can't simply redirect that much oil toward China and India. Venezuela has no direct access to the Pacific Ocean. Its rusting tanker fleet must pay transit fees to use the Panama Canal, and it takes a Venezuelan tanker seven weeks to reach East Asia. More to the point, neither China nor India will have the capacity to refine that much of Venezuela's heavy crude oil anytime soon.

Hugo Chavez's most dangerous enemy is Chavez himself. His quixotic rule continues to generate damage that his ministers must scramble to minimize. On May 1, the Venezuelan president proudly pledged that his country would withdraw from the International Monetary Fund and World Bank, institutions he considers appendages of an "evil empire" based in Washington. His finance minister was among those taken by surprise by the announcement.

Chavez apparently didn't know that clauses in the country's IMF agreement stipulate that withdrawal from the fund could trigger a large-scale debt default as other lenders were freed to demand immediate repayment of $21 billion in sovereign debt. Informed of this by his ministers, Chavez has now begun to hint that the time might not be ripe for such a bold move.

Chavez has also announced the state takeover of Venezuela's largest telecom company and power utilities along with several ambitious energy projects without a clear plan on how the move should be executed. In response, the country's stock market plunged 20 percent in a single day. These problems underline a worrying trend for Venezuela: When so much power rests with one man, and that man is as whimsical as Hugo Chavez, longer-term economic stability will remain in doubt.

What happens when oil prices fall? It won't take $30 per barrel oil to drain Chavez's government of capital, leaving him at the mercy of a people who've been led to expect growing prosperity. The current consensus among market analysts is that $60 per barrel oil would create fiscal and currency crises within the Venezuelan government. Unless Chavez changes course, that floor will rise higher over the next two years.

Today, Venezuela has large oil revenues and a popular president. But if oil profits begin to evaporate -- because of a fall in price or PDVSA's inability to maintain production levels -- Chavez will be in real trouble.

Ian Bremmer is president of Eurasia Group, a political-risk consultancy. He is the author of the book The J Curve: A New Way to Understand Why Nations Rise and Fall. He can be reached via e-mail at [e-mail].

Comments

[fourex]

Wouldn't most OPEC countries suffer if oil dropped to $30? Why would the OPEC cartel allow it to fall so far?

[WorkingClass]

People are starving to death in Africa because they don't have any money. There is no shortage of food. There is no shortage of oil either. The United States will run out of money long before the world runs out of oil. The United States is broke. When it cant borrow any more and when all the ports and bridges have been sold the U.S. economy will collapse. This will, of course bring down the price of oil. Which will be a problem, I suppose, for Chavez.

[factanonverba]

If all buffoons were as intelligent as Chavez then this world would be a better place. Your argument that Chavez's regime falls apart if oil prices fall back to $60 a barrel is self-defeating. Oil is more likely to hit $120 a barrel than $60. It is true that PDVSA was better managed prior to Chavez in terms of being an oil company. There was more reinvestment in technology, in rigs and in exploration, all at the expense of the Venezuelan people. Chavez has chosen to scale back investment in the company in favor of improving the lives of the average Venezuelan. No doubt, PDVSA cannot be allowed to deteriorate seriously as Venezuela's future depends on it but under previous administration the only ones who got wealthy were the elite.
As for tankers not being able to go through the Panama Canal, that is being taken care by building a pipeline through Colombia to Bahia Solano. Both the pipeline and the oil port terminal will be financed by the new Bank of the South, another Chavez answer to failure of neo-liberal economic policies. The Washington Consensus has been replaced by the Caracas Consensus and that's one that I am willing to fight for.

[Stevelagain]

Chavez may be his own biggest enemy but as a petty would be dictator he will aways have massive support from the socialist democratic party left wing.

[avicenna]

So, among Chevez's many blunders - these weighed heavily in your argument:
1) he invested heavily in health and education of the people (almost as if these were the most important investment a nation could make for the future of its people)
2) he has limited the influence of Exxon in destroying, polluting, raping, and otherwise, drinking dry Venenzuela
3) he has found other powerful international partners in trade to avoid making the US its main oil-junky - making him less vulnerable to the turbulent American economy and Bush's manipulations.
What on earth is this guy thinking? Why is he thinking so much???

[Spookcatcher]

The IMF needs to be held for War Crimes for all the activities it has been involved in. If Chavez screws up its Venuzuela's business and for their own growing pains and lessons, whether anybody ever gets another drop of oil out of their country! A soveriegn nation's resources are not the property or the unalienable rights of Exxon, the Bush Fascists, or any other Mobster Racketeering Globalization Elitist Cronies. Chavez mismanaging THEIR oil is nothing compared to the Bush Cartel's management of Wall Street, Iraq, Our Economy, Our Military, Our National Defense, you name it. Why don't you just come out from under your cover and tell us: you want Venezuela's oil and you are gonna support violence with the U.S.Military used as your thugs of choice to do it (for Venuzuelans own good and the spread of democracy, no doubt).

[SamThornton]

I doubt seriously whether the tender mercies of ExonMobile (one of Mr. Bremmer's Eurasia Group clients, by the way) would improve the lot of Venezuela's populace over the current management.

If the corporate giants kicked out of Venezuela by Chavez had acted more responsibly, they probably would still be there. Live and learn.

[TrickleUp]

CHAVEZ IS ONLY A PRODUCT OF IMF AND OIL COMPANY ABUSE .. IF THEY HAD PLAYED THEIR CARDS A LITTLE BETTER AND LESS GREEDILY,, THERE WOULD BE NO CHAVEZ TO DEAL WITH , .. I GIVE CHAVEZ 2 YEARS AT MOST BEFORE HE IS OUSTED OR KILLED.