The Danger of Venezuela

The AP did an article today about Hugo Chavez’s desire to use its oil supply to tie the rest of South America to Venezuela at the expense of the US.

Basically, Chavez is looking to pull other South American countries into a free trade zone centered around Venezuela, and counteract US efforts to create a South American/US version of NAFTA. His enticement: guaranteeing cheap Venezuelan oil to those countries instead of sending it to the US like Venezuela has historically done.

Venezuela’s Chavez Expands Oil Initiative

A bit of historical context:

  • Venezuela is an OPEC nation, historically viewed as a “cheater” in that they rarely stayed within their OPEC production quotas. It is 7th in the world in oil reserves, most of it heavy crude that is more expensive to produce and refine than other types of oil reserves.
  • The Venezuelan heavy oil company, PDVSA (pronounced “ped a vay sa”) used to be recognized as the best run state owned oil company in the world, and provides most of Venezuela’s state revenue.
  • After he was elected as a populist President, Chavez took control of PDVSA in a power struggle with the more patrician management as he wanted to use more of its oil revenues to support populist projects. It’s reputation has since suffered.
  • Chavez does not like the US, and has blamed President Bush for supporting the coup against him a couple of years ago.
  • Venezuela has traditionally been a friendly and major supplier of oil the US, and a number of large multi-national oil companies (including a client of mine, ConocoPhillips) have significant operations there.

However in recent years Chavez has reneged on previous deals with oil companies, trying to carve back significantly larger tax rates than previously agreed.

Chavez has also actively attempted to divert Venezuelan oil supplies away from the US in general, cutting supply deals with European and Asian countries including China, not just South America. He has done this in a stated effort to have more leverage over, and less dependence on, the US as a customer.

There is a real danger if OPEC is not dealt with, that one third world country after another, from Saudi Arabia to Iraq, then Iran, and now Venezuela will continue to have too much influence on our energy security. See my earlier post on the oil policy.

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