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Venezuela
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GLOBAL INTELLIGENCE UPDATE
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Venezuela's Chavez Takes the Lead in OPEC
August 31, 1999
SUMMARY
Venezuela's nationalist president, Hugo Chavez, has not just taken on the Congress and judiciary, but also the state-owned oil company, the world's second largest. The nationalist president is also trying to grab a lead role in OPEC. If he succeeds on both fronts, he may restore the feeble cartel to some of its previous glory, when it could dictate much of the world's oil production and price.
ANALYSIS
Roberto Mandini resigned August 30 from his position as head of Venezuela's state-owned oil company, Petroleos de Venezuela, SA (PDVSA). Mandini reportedly said he stepped down so as not to interfere with the Venezuelan government's oil policy, but the El Observador newspaper cited unofficial sources that claimed the Chavez administration asked for Mandini's resignation on August 29.
But an apparent conflict was brewing between the company and the government. Last week, Mandini spoke out against the government's use of PDVSA to finance infrastructure and development projects. PDVSA has already committed 12 billion barrels to financing more than half of the 216 projects included in the president's "Plan Bolivar 2000" social agenda, according to Venezuela Online News. Mandini's likely replacement is the vice president of strategic planning, Hector Ciavaldini, reportedly a close friend of Chavez, according to El Universal.
PDVSA's cash flow into state treasury is critical to the president's populist agenda and he is leaving no doubt as to who is in charge. Chavez ran for office on promises to cleanse the government of the gross corruption that squandered the country's oil wealth. He promised to rewrite the constitution, reform the judiciary and purge the Congress. He is dramatically carrying out those promises. The constituent assembly he convened to rewrite the constitution is stripping the Congress and judiciary of most of their powers, recently sparking clashes in the streets between legislators, Chavez loyalists and the national guard.
Chavez is also taking firm - and very public -- control of oil policy. The days when PDVSA told the state what it would and would not do are over. Venezuelan state oil policy will be the state oil policy and the state oil company will be the state oil company. Chavez is not waging street battles with government officials who enriched themselves on oil revenues just so PDVSA executives can spend them as they see fit. The president fully intends to redirect the resources to fund his social platform.
But if free market economics suffer under routine graft and corruption, they will last much less under full-scale, populist state intervention. Chavez not only needs to have firm control over PDVSA and Venezuela's oil policy; he needs to have a degree of control over the larger oil market.
For that, he needs OPEC, and he has set out to prove to his cartel members that he is not merely a team player -- he is the team leader. At the conclusion of a recent meeting in Caracas, the Venezuelan, Mexican, and Saudi oil ministers affirmed their commitment to maintaining existing production cuts through March, 2000.
In a joint statement on August 29, the three ministers noted that if they are strictly observed, cuts in production can boost prices. OPEC has cut production by 1.7 million barrels per day (bpd). Accompanied by a 400,000 bpd cut by non-OPEC Mexico, Russia, Oman, and Norway, the initiative has more than doubled crude oil prices. The ministers also insisted that it is too early to lift production ceilings, with stockpiles not yet at normal levels and demand still down because of sluggish economies in Asia.
Venezuela is quickly trying to seize a leading role in OPEC. At the weekend meeting, Venezuela proposed that production quotas be guided by a price band. If oil prices drop below a lower limit, the cartel would automatically scale back production. If prices rise above an upper limit, encouraging non-OPEC members to boost production, cartel members would raise their output. This plan and others aimed at maintaining oil prices will reportedly be discussed at the upcoming OPEC meeting, scheduled for September 22.
Venezuela is urging another item for the September meeting: Iraq. Iraq is rapidly nearing its UN-mandated production cap of 3 million barrels per day and could drive prices down. Rodriguez told El Universal that the organization should address Iraq's increasing oil production.
Chavez is also planning to host a summit in March, 2000, for the heads of state of oil-producing countries, including all OPEC members and producers such as Mexico, Russia and Oman. The Financial Times cited Ali Rodriguez as reporting that all the heads of state have agreed to attend. The only previous full summit of OPEC leaders occurred in Algeria in 1975 and the participation of non-OPEC leaders is unprecedented.
OPEC is not what it used to be, controlling only about 35 percent of world production, and the participation of non-OPEC nations is vital to controlling production and price. Chavez and other OPEC members are seeking to strengthen and perhaps formalize cooperation with these countries to make cartelism work.
His international strategy is closely tied to his nationalist domestic strategy. He needs increased oil revenues to pay for his domestic agenda; for that he must firmly control state oil policy and the state oil company. But none of this is of any value unless OPEC and other producing nations can enforce greater discipline on production and on price.
Chavez must act quickly, though. Oil prices are leading off of expectations of renewed growth in Asia. But there are indications that growth in that region is just a temporary uptick, not a prolonged upswing. And Iraq is poised to increase supply.
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