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Chávez's 'Oil Weapon' Is a Popgun

By Mary Anastasia O'Grady | The Wall Street Journal

September 9, 2005; Page A17 | Our elected representatives are guzzling publicity with their promises to criminalize high gasoline prices, even though everyone knows that such stupidity creates shortages.

But it is worth pointing out that this is only the latest display of sheer ignorance in the area of energy -- mixing dangerously with personal ambition, of course -- that threatens a policy mess. Another is the overly deferential Washington mindset toward Venezuela's Hugo Chávez, based on the myth that we need his oil.

Word out of Washington yesterday was that an arm of Congress has begun to investigate what damage would result from a "possible cutoff" of oil supplies to the U.S. by a "politically unstable" Venezuela. The study was requested by Chairman Richard Lugar of the Senate Foreign Relations Committee. It follows years of hand-wringing about Venezuela from a Washington establishment concerned about the Chávez "oil power."

This confluence of ignorance and commercial interest has produced a U.S. policy of tip-toe diplomacy toward the aggressive and menacing Venezuelan government. Tragically, that cost the Venezuelan people dearly in 2004, with the State Department endorsing the results of the fraudulent recall referendum. That "victory" is feeding the egomania of South America's newest would-be dictator.

In the wake of Katrina and amid fears of a U.S. energy crunch, it is high time to recognize that Chávez has no such leverage, lest he read our readiness to give him a wide berth in the interest of oil as a sign of weakness. Chávez has very little influence over how much the U.S. pays for oil, unless of course he wants to take Venezuela out of its role as a producer. That's unlikely, since he's now spending like a drunken sailor on arms and politics and relies on oil income to hold onto power.

The world oil market is a huge pool that all the globe's consumers draw from. During the Arab oil embargo, the disruptions of which were greatly magnified by U.S. price controls on domestic producers, buyers and sellers simply repositioned their relationships. There was short-term difficulty but markets adjusted as best they could, given the fact that U.S. producers as well were capping wells to wait for price controls to be lifted. Fuel prices went down, not up, when Ronald Reagan removed the last controls in 1981. Today there are more places to get oil and as the price goes up, more producers are coming online because even difficult extractions are becoming profitable.

Suppose China were to take all of Venezuela's oil out of the pool instead of oil from another country, nothing about world supply changes. If China is buying more from the pool than it did before, demand goes up and prices go up but sellers into the pool of oil cannot punish one buyer over another.

This does not mean that the U.S.-Venezuela oil trade doesn't have some special value. But the relationship is symbiotic. One reason Venezuelan oil is attractive to the U.S. is because the shipping costs are low relative to the Middle East. The U.S. may prefer to get its oil nearby but it certainly doesn't have to. Similarly, countries on the other side of the globe also prefer to keep their shipping costs down if possible.

Washington bigwigs may have trouble with this concept but China understands it well. Venezuela's Minister of Energy and Petroleum was in Beijing last month making a big deal out of the China market. But China's ambassador in Caracas, Ju Yigie, set him straight. Beijing, he said, "doesn't see any necessity" for China to replace the U.S. as Venezuela's largest oil buyer because "the natural markets for Venezuelan oil are North and South America."

The oil magazine Petroleum Intelligence Weekly pointed out this week that "courting China" is one way to "needle the U.S." But, it asks, "What does China's new energy relationship with Latin America amount to?" Venezuela's state-owned oil company, PdVSA, "opened a Beijing marketing office last month and has a target of selling 300,000 barrels per day into China by 2012."

China's reluctance to get close to Venezuela might also reflect a recognition that Chávez is a loose cannon and an unreliable manager and that oil investments with him carry great risk. Take PdVSA's new strategic plan for 2006-2012. According to VenEconomy Weekly, based in Caracas, it proposes to invest $56 billion over seven years to raise production to 5,837,000 barrels per day by 2012. Of that, PdVSA would pump 4,109,000 itself.

The company only produces 1.7 million barrels per day now, so the plan promises a 2.3 million barrels-per-day increase in seven years. VenEconomy says that this is highly unrealistic considering that in the seven year period from 1991-1998, when PdVSA was far more technically and managerially competent, it spent $32 billion and only raised production by 915,000 barrels per day. The weekly newsletter estimates that the plan really would need "an investment on the order of $79.9 billion."

Moreover, the same $56 billion is supposed to cover other investments in gas production, refineries, tankers and infrastructure. It also has to fund "cut-rate oil sales to countries in the region." VenEconomy estimates the government's plans are underfunded by some $72 billion.

China also seems to recognize that oil development in Venezuela will depend heavily on foreign investment and that will depend on an investor-friendly environment. The latest rash of property expropriations by Chávez does not bode well for a booming oil industry.

But what about Venezuela's yearning to cut off Uncle Sam? One reason that's harder to do than the saber-rattling Chávez lets on is the fact that Venezuela owns Houston-based Citgo. It has invested more than one billion dollars in its U.S. refineries to make them capable of processing Venezuelan heavy crude and in 1999 Citgo ranked fifth in U.S. market share. As it is now, Venezuela can only send about 600,000-800,000 barrels per day to its Citgo refineries. The rest of what those refineries need -- a total well over one million barrels per day -- is bought through third parties.

Not long ago, Venezuela was the largest supplier of crude to the U.S. Today, it may only rank fifth. With an annual 20-25% depletion rate of Venezuelan oil fields, a serious lack of investment and technological expertise and new sources of crude from other countries coming online, that number could easily shrink further. But that is something that ought to worry Chávez more than the U.S.



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