#42 A Soft Landing in Venezuela?

When it comes to oil, there is hardly ever a moment of quiet. If there is, it most likely represents the equivalent as terrestrial quiet does in an earthquake prone country: preparation for a major eruption. In that sense, the latest from Venezuela might be good news. Rather than a sudden, very damaging bang, the nationalization of Venezuelan oil projects will be gradual.

Now ruling by decree, Chavez announced that state oil company Petroleos de Venezuela SA (PDVSA) will take at least a 60 percent stake in the Orinoco river region oil projects, proclaiming that "by May 1, we will occupy these oil fields and have the national flag flying on them." Chavez is referring to four heavy oil-upgrading projects run by BP, Exxon Mobil, Chevron, ConocoPhillips, Total and Statoil. Thus far, foreign companies running smaller projects in various industries have been compensated less than they would have liked perhaps, but clearly more than they had expected. The Orinoco oil fields, however, involve a much larger sum of money.

In light of the announcement, it has not been made clear how the government expects to be able to pay for its increased share in the huge projects (the foreign companies are estimated to have invested some $17 billion). Indeed, a big issue is money. Whereas the average price for the Venezuelan “basket” of crudes in 2006 was $56 a barrel, according to the Economist, last month, that figure was about $46. Nationalization of the oil fields has been made a pertinent part of the 'Socialist Revolution,' but in order to keep the revolutionary engine running, a high oil price is absolutely essential. If prices do not stop declining, there will be a very serious problem for Chavez. The countless subsidised programs are key for popular support. Furthermore, Chavez decided that it would be worthwhile for Venezuela to sell its oil at discount prices to 'friendly' nations, in order to spread the revolution and drum up support. A halting of this philanthropic policy would quite possibly mean a loss of 'good friends.'

With comments from Chavez such as "I am going to send some sulfur to Lula for when the little gentleman comes so that he can place it out there in Brasilia" (in reference to Bush's - who he refers to as the devil - upcoming visit to Brazil), it has become evident that political tact is not his strongest point. Nevertheless, he is no idiot. He will be careful not to end up without friends and stuck with oil fields that cannot be run without help from the outside. His talk is big, but it seems the means employed on the ground will be more docile. While the revolutionary policies will most probably not yield significant positive long term results, the pain at least appears limited.