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Gruff Bluff

Hugo Chávez has an unparalleled knack for making headlines. Rarely a week goes by when the Venezuelan president does not make some incendiary comment, usually directed at the Bush administration or those governments and leaders whom he believes are cowering to U.S. imperialism. In recent months, though, Chávez has made moves that should alarm even those who believe him to be a relatively harmless blowhard. Of particular interest to the United States, given that oil security has become such a pressing policy issue, is Chávez's persistent pressure against American and European oil companies operating in Venezuela.

Indeed, his decree earlier this year that foreign firms hand over operations by May 1 to the national oil company, Petroleos de Venezuela (PDVSA), is sending many Western observers into panic mode. "We are on a collision course with Chavez over oil," Michael J. Economides, an oil analyst, told The New York Times this month. "Chavez poses a much bigger threat to America's energy security than Saddam Hussein ever did." Rex W. Tillerson, the chairman of Exxon, has raised the possibility that ExxonMobil might have to abandon an oil project due to Chávez's intransigence.

Given Chávez's anti-Americanism, it is entirely possible that he will not rest until he has driven the "rancid oligarchy" of Big Oil from Venezuela. But there is also reason to believe that Chávez will pull back from the abyss. That's because Chávez has little to gain and much to lose through such an absolutist stance.

Chávez's attempts to pressure foreign oil companies are not unprecedented in Venezuela. During the heady days of the 1970s oil boom, the Venezuelan government nationalized the assets of operations such as Royal Dutch Shell. Yet, unlike the transformations Chávez is currently eyeing, these were "soft" nationalizations, in that the newly created PDVSA retained the foreign firms' local management and engineers. Since taking office in 1999, however, Chávez has not, by and large, interfered with the foreign firms that signed long-term contracts with his predecessors during the 1990s to explore and process oil in the country's Orinoco Belt. In fact, Chávez's economic policies to this point have been surprisingly "neoliberal" for a leader who based his entire legitimacy on denouncing the savage and heartless neoliberal economic model, and he has governed largely without the expropriations or nationalizations that many feared he would instate. Exxon, Chevron, and other foreign oil corporations have invested close to $20 billion in exploration and extraction in the saturated Orinoco region.

But now, emboldened by his overwhelming victory--winning more than 60 percent of the vote--in December's presidential election, Chávez has been working to consolidate his already strong grip on political and economic power in Venezuela. The legislature--composed entirely of Chávez supporters following the opposition's boycott of elections in 2005--passed the "law of revolutionary laws" earlier this year, granting Chávez the authority to rule by decree in critical sectors such as energy. Brandishing his expanded powers, Chávez soon shut down an independent television station by not renewing its license and announced the nationalization of the telecommunications and electricity industries, all of which he paid for, of course, with oil revenues. Now, he's turning to the oil sector itself.

The Orinoco Belt's current output is around 600,000 barrels per day, and its potential could vault Venezuela over Saudi Arabia as the country with the greatest oil reserves. Yet PDVSA's oil production has declined by a million barrels per day (from approximately 3.5 million to 2.5 million) since Chávez took office. To compensate, Chávez has sought to forge stronger relationships with other government and public oil companies, especially ones that also harbor a deep antipathy toward Washington. Of particular note, Iran's Mahmoud Ahmedinejad has made two visits to Venezuela in recent months. The two leaders have announced plans for Iranian investment and expertise in the Orinoco Belt, as well as an ambitious scheme to trade oil using the euro instead of the dollar. In addition, while Chávez hopes Iran can provide sorely needed know-how in the oil supply sector, China represents the long-term solution to Venezuela's current "demand side" dependency on the United States. China has already demonstrated its interests elsewhere in Latin America, having purchased rights to port facilities on the Panama Canal, and it has had a presence in the Venezuelan oil sector for a number of years. Venezuelan exports to China have also increased ten-fold in recent years and are slated to triple in the near future.

Despite these budding partnerships, however, it would be foolish of Chávez to renounce Western firms--at least anytime soon. Iran and China still represent just a drop in the bucket when compared to the U.S. market that consumes 1.3 million barrels per day, the vast majority of Venezuela's production. China's consumption of Venezuelan oil amounts to less than 10 percent of that. And unlike the U.S. Gulf Coast, China is a long way away, making the shipping of oil there far more expensive. Its refineries are also not equipped to process Venezuela's high-sulfur crude, a problem that will take years to overcome. In addition, oil production by foreign firms in the Orinoco Belt provides billions of dollars each year. Chávez currently uses that revenue to fund his Bolivarian Revolution, which includes subsidized oil sales to Havana and lavish spending on politicized domestic social programs. Following the proposed nationalization, PDVSA would likely be able to maintain current production levels in the short-term, but not indefinitely given the current neglect of maintenance and investment. And Chinese and Iranian support would not come close to compensating for Big Oil's departure.

Given these drawbacks to cutting ties with Western oil companies, a rational course of action would be for Chávez to come to an accommodation with them. This may, in fact, be what is happening. Negotiations over the transfer are bogged down in details of how PDVSA would compensate the foreign firms and who would manage the operations, but, on April 13, Chávez announced that he believed a good share of the foreign oil companies working in the Orinoco Belt would stay on as minority partners after the nationalization. ExxonMobil and others have argued that Chávez's moves are tantamount to expropriation. But Chevron has its eye on a large natural gas investment and has been more accommodating. With Big Oil so willing to agree to stiffer terms with Chávez, what does he gain by ousting them? If he really plans to suck them dry, he should first let them spend years sinking massive amounts of money into the country before taking them over.

If Chávez does proceed with an uncompromising nationalization, however, we will know for certain that he has sacrificed any semblance of economic logic for politics. Then we'd really need to start taking his incendiary rhetoric seriously.

By Russell Crandall