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US-Venezuela Energy Ties Endure Despite Deteriorating Political Relations

The war of words between Venezuela and the United States reached new heights last month, when Venezuelan President Hugo Chavez called U.S. President George Bush "the devil" and a "world dictator" in an address to the United Nations General Assembly. But, despite escalating diplomatic tensions, the United States remains Venezuela's Number-One oil customer, a commercial relationship that appears likely to endure.

The Venezuelan president stunned U.N. diplomats with his September 20 address, one day after President Bush spoke from the same podium.

He said, "The devil came here yesterday. Right here. And it still smells of sulfur today. The hegemonic pretensions of the American empire are placing at risk the very survival of the human species."

U.S. legislators from both parties denounced the speech, as well as other Chavez comments, describing Mr. Bush as an alcoholic and a "sick man."

The Bush administration has had little comment. "Those are words we do not feel should be responded to, or that are worthy of being part of the discourse," said Deborah McCarthy, the U.S. State Department's special coordinator for Venezuela.

Hugo Chavez, a self-proclaimed socialist, is doing more than give colorful anti-American speeches. He is backing Iran's pursuit of nuclear capabilities, taking sides against Israel in Middle East conflicts, and purchasing billions of dollars in Russian weaponry. He has made Venezuela Cuba's closest ally, openly backed leftist candidates in nations throughout the Americas, and led a campaign to derail a U.S.-proposed hemispheric free trade zone.

Analysts say Mr. Chavez is emboldened by his country's status as the world's fifth biggest oil exporter, and by oil revenues that have skyrocketed in recent years.

Jose Toro Hardy is a former director of Venezuela's state-owned oil company.

He says, "In the last seven years, under President Chavez, Venezuela's oil revenues have been higher than the sum of all the oil revenue accrued during all previous governments put together."

And Venezuela's biggest customer, by far, is the United States, which imports about 1.3 million barrels of Venezuelan oil per day. At a price of $60 a barrel, that adds up to annual U.S. petroleum purchases of more than $28 billion, about 70 percent of the Venezuelan government's total expenditures in 2005.

Days after President Chavez' General Assembly speech, a major U.S. convenience store chain confirmed it would not renew a contract with the Venezuelan-owned retail gasoline chain, Citgo. Some Citgo stations have reported a modest drop in business since Mr. Chavez visited the United States.

If bilateral relations continue to deteriorate, would the Bush administration consider a boycott of Venezuelan crude? The State Department's Deborah McCarthy downplays that possibility.

"The [oil] market is a private market in the United States, managed by the private sector. They make decisions, they decide [from] where they want to import," she said. "And they certainly assess risks, costs, etc."

President Chavez has accused the Bush administration of plotting to overthrow him, and threatened to cut off oil sales to the United States.

But, such a move would be economic suicide, according to Johns Hopkins University Latin American studies Professor Riordan Roett.

"Venezuela would find out very, very quickly, it has nothing else to export; it [oil] is easiest to export to the United States," noted Roett.

Even so, Mr. Chavez has pledged to reduce his country's dependency on U.S. petro-dollars, and shift oil exports toward China. Most analysts, including former Venezuelan petroleum director Jose Toro Hardy, are skeptical.

He says, "More than 75 percent of Venezuela's proven oil reserves are heavy crude, with high sulfur and metal content. There are very few refineries in the world capable of processing this type of crude." He says, " As a matter of fact, in China there are none."

Nevertheless, the Bush administration has already contemplated the possibility of a future without Venezuelan crude. In a June report, U.S. investigators concluded that, if President Chavez were to cut off oil exports, gasoline prices in the United States would spike, but only briefly, until other crude suppliers made up for the gap. The report said the long-term effect on the U.S. economy would be minimal.

In fact, gasoline prices in the United States rose only moderately during a 2003 strike by Venezuelan oil workers that decimated the country's crude production for a three month period.

Venezuela accounts for up to 15 percent of U.S. crude imports.

In short, the Bush administration says Venezuelan officials are mistaken, if they believe the United States can be intimidated by threats of an oil cut-off.

"It is clear that they [Venezuela] depend on us far more than we will ever depend on them," said the State Department's Deborah McCarthy.

Just the same, energy experts say the United States would be wise to reduce its consumption of fossil fuels.

"During the Arab oil embargo in the '70s, we [the United States] imported 30 percent of our oil. Today, we import over 60 percent. And that dependence is growing," commented Anne Korin, who co-directs the Institute for the Analysis of Global Security in Washington. "And it causes us to be dependent on regimes that we do not like, that do not like us, whose values are very different from our own. And it causes us to be forced to make compromises, in terms of how we would like to deal with certain countries."

Venezuela's total oil reserves have yet to be fully certified, but many experts believe the country could be sitting on the world's largest supply of crude. Paradoxically, Venezuelan oil production has fallen in recent years, from more than three million barrels a day to about 2.5 million. Analysts note that President Chavez fired thousands of the country's most-experienced petroleum technicians and engineers following a 2003 strike, and has reduced investment in Venezuela's oil infrastructure to help fund domestic social programs.