Refining Power

Venezuela’s Hugo Chavez builds new alliances with oil


Hugo Chavez in a crowd, speakingIISD Linkages

In this fossil fuel-driven global economy, oil means power. Every country relies on oil to some extent these days, leaving them all at the mercy of their suppliers. It’s geopolitical heroin – it might be destroying us, but no one can get enough. Oil is a leveraging point, a fulcrum on which economic stability balances, and as the world’s supplies dwindle this will more frequently be the case.

Oil is qualitatively different from other key natural resources that have been the engines of wars and empires. It is both a tool and a commodity – the spice trade was lucrative, but you can’t run a factory off pepper. Record high prices have given oil-rich countries a new-found power and autonomy previously unachievable outside of the North – you can’t embargo a country that has something you desperately need. This power is beginning to make the traditional elites nervous.

Venezuelan President Hugo Chavez is keenly aware of the power his country’s oil supply gives him. Though high oil prices are a blessing for Venezuela, they are a curse for other countries in Latin America that must pay whatever necessary to import the oil they need. To fill the gap left by this disparity in fortune, Chavez is using both his oil and profits to build strategic alliances with nations ranging from his neighbors to China. Often viewed as something a country can wield destructively, could oil also be something a country could use in a constructive fashion?

Last March, Chavez spoke before a packed stadium in Calcutta, India. “The 19th and the 20th centuries belonged to Europe and [North] America, but this century belongs to Asia, Africa, and Latin America,” he told a boisterous crowd. “If we can unite we can be the strongest power in the world.” Oil has enabled Chavez to pursue this vision of the future and make it a possibility.

A lot has changed in Venezuela in the last few years. Since 2002, more than one and a half million adults have learned to read, making Venezuela the first country in South America to rid itself of illiteracy. Millions more people – many of them residents of Caracas’s destitute slums – have received free health care in the thousands of new state-funded neighborhood clinics. Forty percent of the population now gets government-subsidized food.

At the same time, Venezuela has undergone dramatic economic expansion. In 2004, the economy grew by over 17 percent, one of the highest rates in the world. Further growth was demonstrated in the first half of this year. According to the Venezuelan Embassy in Washington, DC, the GDP is poised to continue rising for at least the next three years.

The driving force behind this social and economic development in Venezuela is the surging global price of oil, which has allowed the government to allocate billions of dollars to fund Chavez’s “Missions” – the name he has given his domestic campaigns – while still maintaining huge trade and budget surpluses. As the planet’s fifth-largest oil producer, Venezuela has benefited immensely from the world-wide energy crisis that has so negatively affected buyers – from the level of individual car drivers all the way up to struggling national economies – and is now awash in profits it has never seen before.

This new money has enabled Venezuela to look beyond its borders and share the wealth with other countries in the region. In June, Chavez announced the creation of PetroCaribe, an agreement that allows participating countries to pay a portion of the price for Venezuelan oil up front and finance the rest at very low interest rates. Additionally, countries can “pay” for the oil with goods and services. Cuba, for example, provides Venezuela with doctors and teachers in return for fuel; many of them have been instrumental in Venezuela’s health and literacy campaigns. All but two countries in the region have signed on to the deal.

In the last year, Venezuela has made plans with other countries in Latin America as well. Paraguay now receives discounted oil while Uruguay exchanges goods for much of its Venezuelan oil imports. Argentina exchanges shipbuilding expertise and farm machinery for oil, and joined forces with PDVSA, Venezuela’s state-owned oil company, to buy a refinery and open two gas stations in Buenos Aires. Hundreds more are planned around the country. Brazil partnered with PDVSA to build a $2.5 billion refinery within its borders. Additionally, the two countries announced plans for a joint venture that will allow Brazil to drill for oil in Venezuela.

Even more unconventionally, Chavez had publicized plans to supply certain low-income communities in the United States with discounted fuel as winter sets in. CITGO, a subsidiary of PDVSA, announced November 22 it will distribute twelve million gallons of heating oil through nonprofit groups to poor households in Boston for 60 to 80 cents below market value. Two and a half weeks later a similar program began in The Bronx, and more are being considered for Chicago and some Native American communities.

Venezuela has taken its oil offerings outside of the western hemisphere. In the last year, Chavez has met and negotiated deals with political leaders from China, India, and Russia, homes to three of the fastest growing economies in the world. Each country now has limited rights to explore and drill for oil inside Venezuela’s Orinoco belt. Venezuela also announced plans to increase oil exports to China five-fold.

Conspicuously absent from these deals are North America and Europe, and it’s no accident. Chavez has made it quite clear that he intends to use the money and power high oil prices have given him to build alliances, both in Latin America and in the rest of the world, that are counter to the traditional geopolitical power blocs.

While Venezuela’s agreements with other countries center around oil, oil is just the beginning. “The goal is in no small part to try and put together some sort of coalition that will stand by Venezuela rather than the United States,” says Vinay Jawahar of the Inter-American Dialogue, a think tank in Washington, DC. “In that sense, it’s to try to create a bloc of countries that furthers Venezuela’s interests rather than US interests in the region.”

Predictably, this is a troubling prospect to the United States government, traditionally the dominant force within the region. In his opening statement at a hearing of the Senate Committee on Foreign Relations in November 2005, Committee Chairman Richard Lugar noted that: “Massive infusions of oil revenue distort regional politics and can embolden leaders hostile to US interests… Increasingly, oil is the currency through which countries leverage their interests against oil dependent nations such as ours. Oil is not just another commodity.” Lugar cited Venezuela as an example of one of these nations.

Chavez is an extremely outspoken critic of Washington, especially on the issue of free trade, which he often equates to a form of imperialism. “As Chavez sees it, this is really about solidarity,” says Jawahar. “Basically, what he thinks would be in Venezuela’s interest is to put together a bloc of countries that could, for instance, oppose the US on something like trade, which he thinks Latin America has traditionally gotten a raw deal out of. This way, they can come together and stand up for their own interests rather than having to accept whatever Washington foists upon them. He sees it as being a way to stand up to the power in the region.”

The Summit of the Americas in November 2005 was a clear manifestation of Chavez’s attempts to build support for his vision of Latin America. The meeting of the heads of the 34 countries in the hemisphere (Cuba was excluded) turned into a referendum on the US-proposed Free Trade Area of the Americas (FTAA), which would more or less extend NAFTA all the way to Tierra del Fuego. In the end, Venezuela and four other countries voted against the agreement: Brazil, Argentina, Uruguay, and Paraguay. Interestingly, each of these countries has inked oil deals with Chavez.

“Venezuela has used its oil to bring more countries into the fold of what it sees as an alternative to a US-driven integration process,” says Teo Ballve, editor of the North American Congress on Latin America. “[Chavez has] used his oil wealth to offer these countries that are sort of teetering between the US and, for lack of a better word, the anti-US position, [an alternative], to bring them over to Venezuela’s side.”

There are practical limits on the power of Chavez’s oil diplomacy, however. Oil revenue comprises the vast majority of the Venezuelan economy, and the United States is the largest buyer of Venezuelan oil – which constitutes 12 percent of US imports. “There’s an umbilical cord that works in both directions,” says Larry Goldstein, president of PIRA Energy Group, an international energy-consulting firm. “There’s a symbiotic relationship, like it or not. We need them and they need us, for the moment.”

Proximity is a key factor that would make it expensive for Chavez to shift all his exports away from the US. Additionally, Venezuela produces a type of crude oil that only certain refineries can process, most of which are in the United States. “I don’t think they could start shipping oil elsewhere quickly in the short term,” observes Linda Giesecke, oil analyst for Energy Security Analysis, Inc. “But I think in the long term, Chavez does hope to reduce this dependency on the US as one of his main export markets.”

That Venezuela has its hands tied by geography is precisely the reason Chavez is aggressively pursuing the development of regional markets and cooperation. Many of the agreements he’s made with neighboring countries involve the construction of refineries so processing can be done in-country. “The entire Global South is part of an emerging market for Venezuelan oil,” says Eric Wingerter at the Venezuela Information Office. “The ultimate goal is not just charity or giving these things away to these other countries, but a real economic interdependence in the region.”

People outdoors listening to speakers, in an industrial settingOscar FlaminiChavez (center) listens to Argentina’s Prisident Néstor Kirchner speak in
Buenos Aires, 2002

Mark Weisbrot, co-director of the Center for Economic and Policy Research, echoes this idea: “He has this vision of Latin America being more independent, more integrated economically, less dependent and subject to the political directives of the United States.”

To further this goal, Chavez has put forward other, as yet undeveloped initiatives that would more deeply unite the region. He has plans for PetroAmerica, an agreement similar to PetroCaribe that would extend to all of Latin America. ALBA, the Bolivarian Alternative for the Americas, was unveiled last year as a proposed substitute for the FTAA. The South American Community of Nations formed last December and aspires to emulate the European Union. Chavez also suggested the formation of a regional development bank to fund projects on the continent that could, over time, include nations from Asia and Africa as well.

While Chavez may be the loudest proponent of such regional integration, he is not alone in his dissatisfaction with the role of the United States in Latin America. “Part of the reason Chavez has struck a chord in the region is the whole region is moving in a certain direction,” Weisbrot observes.

Since 2000, four other Latin American countries – Argentina, Brazil, Uruguay, and Ecuador – have voted left-leaning presidents into office. In Chile, socialist candidate Michelle Bachelet won a plurality of votes, falling just short of the majority needed to take office. A runoff was scheduled for January 15. In Newsweek, Joseph Contreras and Phil Gunson wrote that this has been “a way of registering anger and disenchantment with the alleged failures of the Washington-backed free trade economic policies that so many leaders embraced during the 1990s.”

What’s more, 11 elections are coming up in the next year in the region, and Washington is worried Chavez’s influence will skew the results. In Bolivia, Nicaragua, and possibly Mexico, leftist candidates that may ally themselves with Chavez have a chance of winning.

Yet Chavez’s oil diplomacy can’t last forever – just as fluctuating oil prices made it possible, another change would challenge many of his initiatives. Much of his support, both domestically and regionally, derives from his social spending and oil deals. While he may have the upper hand at the moment, Chavez is engaged in a race to get as much as he can out of what he has now.

“He’s taking advantage of the window he’s got,” says Wingerter. “Prices are not going to be this high forever. So a lot of the spending right now is… sort of the overhead that goes into building all of these new schools, building all of these health clinics, establishing some of these trade relationships, while the economy is stronger than it ever has been.” Once the foundations are laid, the cost of maintaining these programs should be lower, Wingerter suggests.

But this groundwork is currently incomplete. More generally, the overall sustainability of Chavez’s projects is questionable. According to Dr. Julia Buxton, a research fellow at the University of Bradford in the UK, one of Chavez’s original intentions when coming to office was to reduce Venezuela’s dependence on oil by using oil revenue to diversify the economy. Venezuela is still taking steps towards diversification by emphasizing industrialization and agriculture, but now, she contends, “This dependence has been increased as a result of the reliance on petroleum export revenues for public spending (specifically the Missions) and foreign policy.”

There is also speculation that Venezuela’s oil industry is suffering. Chavez unilaterally raised royalty rates on oil operations and changed the terms under which foreign companies may function within the country, creating a new element of instability for these companies. This uncertainty discourages much-needed foreign investment in the oil industry. “Long term, PDVSA will pay a price,” predicts PIRA Energy Group’s Goldstein. “Venezuela needs a substantial amount of new investment, not only to grow, but just to maintain their existing production…There’s no doubt the investment flow is slower than it would otherwise be and producuction is substantially lower than it would otherwise have been.”

Oil has enabled Venezuela to establish relationships that are materially very beneficial to the countries on the other end of the deal – who would turn down subsidized oil? The ultimate hope, it seems, is that the relationships will be strong enough that when the oil runs low, the countries will still be able and willing to move forward on the regional cooperation. “It’s part of a larger plan to really integrate the economic development of the Caribbean region within South America,” says Wingerter. “It’s not just a wealthy country giving away resources to countries that are needier – there’s a real exchange of goods going on.”

“Imagine if the Iraqis,
Saudis, etc., followed this
autonmy line?”
– Eric Wingerter

The ideas of regional cooperation and resource sharing in Latin America are not new ones. Trade alliances like MERCOSUR in the Southern Cone and CAN in the Andes have existed for years, though each has met with variable degrees of success. Venezuela and Mexico, the only oil exporters in the region, have been providing discounted fuel to some of their neighbors since 1980. But Chavez is now attempting to combine the two and create a solid, unified Latin America that can stand on its own.

Chavez’s goals are ambitious and the ultimate feasibility debatable. But his willingness to stand up to the United States may have a lasting effect on a region already beginning to assert itself more firmly. “One thing that I think is changing in Latin America that’s never going to go back, that I think Venezuela has really helped push forward, is this idea of sovereignty, the sort of inherent equality between nations,” Wingerter continues. “I think that’s one of the things that’s really scaring the Bush administration. The people in Bolivia, Ecuador, Argentina, for the first time are saying, ‘Wait a second, we can make these decisions for ourselves, we don’t always have to look to the North for approval.’”

Dr. Buxton agrees: “I think it impacts on the rest of the world in terms of the emphasis on sovereignty and autonomy – imagine if the Iraqis, Saudis, etc., followed this autonomy line?”

The resolve of these other countries in the face of significant US opposition is largely unknown – much of Chavez’s appeal, in fact, results from the gross lack of engagement in the region by the US. But in an era often characterized by the consolidation of power and the spread of markets, signs of independence in Latin America are encouraging. Chavez has a dream of a multi-polar world with room enough for everyone to thrive, and this may be the beginning.

Hunter Jackson is an Earth Island Journal intern.

You Make Our Work Possible

You Make Our Work Possible

We don’t have a paywall because, as a nonprofit publication, our mission is to inform, educate and inspire action to protect our living world. Which is why we rely on readers like you for support. If you believe in the work we do, please consider making a tax-deductible year-end donation to our Green Journalism Fund.

Get the Journal in your inbox.
Sign up for our weekly newsletter.

Subscribe Now

Get four issues of the magazine at the discounted rate of $20.