Tuesday, August 17, 2004

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

During his six years in power, Mr. 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 alone) 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.

Mr. Chavez uses oil as a political tool to advance his hemispheric and global ambitions. He played a key role in the 1999 and 2003 decisions of the Organization of Petroleum Exporting Countries to cut production and coordinate policy aimed at driving oil prices higher. In 2000, Mr. Chavez visited Iran, Iraq, Libya and Saudi Arabia, further agitating for production cuts and quota enforcement. The 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 Chavez 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, Mr. Chavez 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. Mr. Chavez also proclaimed 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 Venezuela situation, Mr. Chavez called U.S. congressmen “dogs of war, those that intend to dominate the world, those imperialists.”

In Venezuela’s immediate area, Mr. Chavez has aided the narco-terrorist Revolutionary Armed Forces of Colombia (FARC). In Bolivia, Mr. Chavez supported indigenous activists who led an uprising that forced elected President Gonzalo Sanchez de Lozada from office in October 2003. And in El Salvador, Venezuelan troops on a post-earthquake mission urged villagers to support the leftist Farabundo Marti National Liberation Front.

Mr. Chavez’s Fifth Republic Movement (MVR) party is allied with the Brazil-based Foro de Sao Paulo — an organization of some 39 rabidly leftist parties and guerrilla organizations from 16 countries in the hemisphere. It opposes U.S. counternarcotics collaboration with Latin America and the Free Trade Area of the Americas, which it characterizes as a U.S. “annexation.”

In November 2003, Mr. Chavez inaugurated the first Peoples Bolivarian Congress, whose cells now spy on neighbors in Venezuela. It brought together 400 representatives from 20 Latin American countries expressly to condemn the policies of the United States, the U.S. Southern Command, the International Monetary Fund and the World Bank.

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 were 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 3 million barrels (mbd) to 600,000 barrels. Mr. Chavez fired 18,000 skilled managers and workers, further undermining PDVSA’s precarious situation.

Mr. 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, Mr. Chavez’s action threaten its 2004-2009 development plan.

Today PDVSA depends on U.S. refineries, which partially supply its CITGO gas station chain. PDVSA owns refining facilities 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 Chavez 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.

Mr. Chavez has the luxury of cutting deliveries to those who opposed him. Caribbean leaders know opposing Mr. Chavez could result in high prices or delivery cuts. In September 2003, Mr. Chavez punished the Dominican Republic for harboring former President Carlos Andres Perez — who “might” conspire against his government. He stopped oil deliveries, prompting a temporary energy crisis.

Beyond the hemisphere, he is preparing to shift exports to an increasingly oil-thirsty China, making Venezuela less dependent on U.S. petroleum sales. A deal signed on July 14, 2004, to build oil and gas pipelines between the Maracaibo Basin in Venezuela and 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 Mr. Chavez 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. Mr. Chavez brought Cuban intelligence advisers to facilitate what may become a Castro-style dictatorship plus petrodollars.

For years, Republicans have tried to shove Latin America to the foreign policy back burner, while Democrats have feigned interest with insignificant and ineffective foreign aid programs. It’s time for U.S. leaders to stop pretending nothing is wrong. Mr. Chavez wants to harm the U.S. where it hurts the most — in the wallet and the oil tank.

President Bush had better watch out.

Ariel Cohen 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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