Step by Step

The Bolivarian Revolution of Hugo Chavez has taken a few more big steps in its transformation of Venezuela from a democracy into a sort of Cuba with oil. President Chavez yesterday announced the nationalization of the country's telecommunications and utility industries, and reiterated his earlier decision that the foreign oil projects in the Orinoco Belt should become state property. At the same time, he apparently asked for the authority to make the country's central bank subject to his orders, and to issue laws by decree. These are clear signals of Sr. Chavez's intention to create a fully autocratic, cult-of-personality style socialist dictatorship, in a country that supplies 11% of the crude oil that the US imports. This constitutes yet another warning that we should prepare for the eventuality of a complete breakdown in ties between our two countries.

Ever since the 2002 coup that temporarily unseated him, President Chavez has become increasingly anti-American and anti-capitalist, and more unpredictable. His recent re-election has emboldened him to consolidate power and continue re-shaping the Venezuelan economy to conform with his version of socialism. In effect, the Venezuelan people voted for this, and it would be a matter merely of interest, rather than concern to us, if it didn't infringe on the property rights of US corporations--as it does in the current nationalizations--or threaten our energy security. Since we can apply little meaningful pressure on Sr. Chavez without harming our own interests further, the most prudent step we can take is to ensure that we have plans in place to minimize the impact of a disruption of Venezuelan oil supplies that could happen at any time, on a whim.

Aside from the volume involved, currently running at about 1.4 million barrels per day, there are two other aspects of Venezuelan oil that would make its replacement in extremis challenging. Because of the country's proximity to the US Gulf Coast, Venezuelan crude oil tankers have a short voyage, compared with those coming from the Persian Gulf. Any cutoff of supply would entail a time lag of more than a month between the time the last tanker from Maracaibo docked here, and when the first replacement tanker from the Middle East could arrive. That means that the Strategic Petroleum Reserve (SPR) should be primed to begin supplying emergency oil on short notice, to minimize the shock to the market. Affected companies should have exchange agreements with the SPR in place and up to date, along with any inter-company exchanges necessary to parlay the SPR oil into more suitable grades.

The latter point is important, because most Venezuelan crude oil is heavy and high in sulfur, normally selling at a substantial discount to West Texas Intermediate. Refineries optimized for a diet of this crude cannot easily switch to more expensive light, sweet crudes without serious penalties of cost and product yield. Companies with supply agreements with Venezuela should begin immediately to shop for suitable replacement crudes, and begin to reduce their reliance on Venezuela. The net result of such a switch would likely increase our dependence on the Middle East, and on Saudi Arabia in particular--as the likeliest supplier of similar oil. While that might create additional vulnerabilities in the long run, it is preferable to continuing to rely on such an unpredictable supplier.

Although he certainly has his supporters at home and abroad, Sr. Chavez is doing incalculable harm to his country's economy. The foreign investors he is alienating have poured substantial sums into his country, and much of this occurred before high oil prices provided their current bonanza. The Orinoco projects, in particular, constituted the main bulwark against a collapse of Venezuelan oil production after the disastrous 2003 oil strike, and they are a major source of the funds Sr. Chavez taps for his social and foreign aid programs. Nationalization will cut off further investment, by increasing the country's political risk to unacceptable levels, and accelerate the decline of Venezuelan oil production, which is not being sustained by appropriate levels of reinvestment. Losing his steady outlet in the US would compound these problems by reducing net revenues on Venezuela's exports to alternate markets in Asia. As undesirable as all this sounds, for both Venezuela and the United States, it is beginning to look like an unavoidable outgrowth of President Chavez's strident nationalism.

Update 1/11/07: Now the other shoe drops; Chavez will abolish the limit on his term of office to become the archetypal Latin American President-for-Life.