Venezuela's 'Oil commander' is the joker in OPEC's pack

17 January 2003
Two supporters of President Hugo Chavez were killed in early January as they clashed with anti-government demonstrators. Thousands attended the funeral, but the sad truth is that spilt blood is no longer rare in Caracas.

This is the second time in a year that Venezuela's political turbulence has reached crisis levels. Last April, Chavez was briefly ousted in a three-day coup. He emerged weaker, but still determined to pursue a stridently left-wing agenda.

The impact of the latest crisis on the oil market should not be underestimated. When he won the 2000 elections, Chavez overturned Venezuela's traditionally lax approach to OPEC price policy by enforcing stringent production quotas and forging a strong alliance with Saudi Arabia and Iran. The organisation's first show of real unity in 20 years helped drag the oil price up to more than $30 a barrel.

Oil is the driving force behind Venezuela's economy, representing more than 70 per cent of government revenues. Chavez' price policy was always aimed at financing an ambitious programme of social and economic reform - a programme vehemently opposed by upper and middle class Venezuelans.

So it seems ironic that state oil company Petroleos de Venezuela (PDV) has been at the heart of opposition to Chavez. It has been the PDV strike, which started on 2 December, which has had a greater impact than any other.

Domestically, it has caused delays of several days to petrol supplies, leading to food shortages and an economic collapse. Internationally, it has caused an oil supply shortfall and pushed the oil price through the roof.

The strike has taken roughly 2 million b/d out of the global market at a time when supply concerns are already high over the situation in Iraq. There are further concerns that OPEC spare output capacity is already becoming stretched. And adding to the problem, the Venezuelan crude used in US refineries tends to be more sour than the crude other OPEC members could supply to replace it.

For Chavez, regaining control of the oil company is of the utmost importance. After failing to break the strike by military means or by sacking striking workers, he has resorted to other techniques. In late December he announced that thousands of Brazilian oil workers had been drafted in to bring output back up to near pre-strike levels. Critics said that production had actually fallen to around 200,000 b/d and the imported labour was not a success.

A new tactic was revealed in early January. Oil Minister Rafael Ramirez announced that PDV was to be split into two companies representing its eastern and western operations. Chavez, with typical panache, proclaimed himself 'oil commander' and said the changes would create a new and patriotic oil company.

'This would seem to be a Chavez political manoeuvre,' says Petroleum Intelligence Weekly editor Peter Kemp. 'He is suggesting a massive restructuring ostensibly to make the company more nimble. I think this is a transparent move to get rid of the white-collar technocrats at PDV who oppose his Bolivarian politics.'

But even if PDV remains unified and the strike ends, analysts say it will take months to restore Venezuelan production capacity - variously put as between 3 million-4 million b/d. Capacity is a hot topic at PDV, where executives have often complained that funnelling oil money into the economy has denied PDV the investment it needs to maintain and expand production facilities.

'Nobody knows what the situation really is,' says Kemp. 'Investment upstream has stalled over the past three years and many oil facilities were closed perfunctorily when PDV went on strike and have not been properly managed since. That could mean they have been damaged.'

OPEC's eye will remain on Venezuela in the hope that Chavez survives. Without the flamboyant ex-paratrooper, Venezuelan oil policy is likely to revert to the high production position of old, driving down prices and creating more discord in OPEC. However, a new oil policy would be tempered by two emerging developments: Venezuela's newly reduced capacity; and Caracas' need for cash once the crisis is passed.

In the interim, other OPEC members can relish the high prices and extra leeway on quota discipline afforded them by the PDV strike. This crisis has proved itself more important to oil markets than the one unfolding in the Gulf, with Chavez taking over from Iraqi President Saddam Hussein as the joker in OPEC's pack. Like the Iraqi leader, Chavez fights well from a corner - something he proved last April. No elections are scheduled in Venezuela until 2006 and the constitution will not allow them to be brought forward.

Efforts to negotiate an end to the crisis have now been sheepishly joined by the US, whose tacit support of the April coup left it standing red faced on the sidelines. In mid January, it announced a new initiative to end the strike involving a constitutional amendment to allow fresh elections. It remains to be seen, however, whether Washington can deal more effectively with the joker of Caracas than it has with the knave of Baghdad.

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