Venezuela: Chavez Secure for Now, but Threats Are Rising

Summary

After surviving an attempted coup in mid-April, Venezuelan President Hugo Chavez likely will not face another military uprising in the near term. Chavez has neutralized his opponents in the armed forces and still has the support of slightly less than a third of the population. However, the economy's continued deterioration poses a much greater threat to Chavez's political survival.

Analysis

Three months after a brief military rebellion nearly toppled his government, Venezuelan President Hugo Chavez has succeeded in neutralizing his opponents within the National Armed Forces (FAN). Meanwhile, the anti-Chavez civilian political opposition is disarticulated and in need of unifying charismatic leaders. As a result, Chavez is unlikely to be forcibly ousted from the presidency this year by another military coup.

With the traditional August summer holidays set to begin in less than a week, Venezuela also will not likely experience more large-scale street protests over the next four to eight weeks. However, the country's crisis is far from over. Political tensions have only slightly subsided, the economy's slowdown is just starting to be felt by the general population and the struggle to force Chavez's resignation now has moved from the country's streets and military garrisons to the Supreme Court and National Assembly.

Although Chavez has toned down his confrontational rhetoric and launched a charm offensive to improve his government's badly frayed relations with the Bush administration, he still faces multiple lawsuits before the Supreme Court seeking his impeachment based on accusations of corruption and mental instability. Moreover, Chavez's onetime key political ally -- former Interior and Justice Minister Luis Miquilena -- last week launched a new political organization called the Solidarity Party.

Miquilena called for a constitutional amendment to shorten the president's term in office and urged Venezuelans to "take and hold the streets" in order to compel the Supreme Court and National Assembly to get rid of Chavez legally and constitutionally, according to news reports in Caracas.

Meanwhile, a recent political report prepared for the ruling Fifth Republic Movement (MVR) party warns that Miquilena's new organization is conspiring with the opposition Democratic Action party to launch a series of street protests, government work slowdowns and strikes in September aimed at forcing Chavez's resignation. The MVR's report also says that Chavez faces growing pressure from efforts in the Supreme Court and National Assembly to secure his impeachment.

Chavez's MVR party still commands a slight majority in the National Assembly, while Attorney General Isaias Rodriguez is working assiduously to block the multiple lawsuits before the Supreme Court. However, there are many visible cracks in the Chavez government's internal unity.

For example, while the Energy Ministry is claiming that Venezuela will not raise oil production in the second semester 2002 -- and will shortly resume oil shipments to Cuba that were interrupted on April 11 -- Finance Minister Tobias Nobrega said recently that the government would hike oil output by some 400,000 barrels per day to cover a fiscal deficit estimated at more than 8 percent of GDP.

Also, high-level sources in the executive committee of state-owned oil monopoly Petroleos de Venezuela (PDVSA) warned that Cuba will not receive any more Venezuelan crude oil until it pays about $150 million owed for oil already received by the island, Caracas daily El Nacional reported. If Chavez attempts to force PDVSA to resume oil shipments to Cuba before Fidel Castro's regime pays its past-due debts, it is possible that the president could face renewed dissent within PDVSA that could encourage opposition forces to launch more street protests.

When Chavez last engaged in a confrontation with PDVSA's top managers, the result was a production slowdown that briefly affected exports and encouraged large-scale protests. This climaxed April 11, 2002, in a deadly government-ordered crackdown against the protesters that triggered the military's brief uprising and removal of Chavez, who retook power only a few days later.

Recent polls show that Chavez still retains the support of between 25 percent and 30 percent of Venezuela's adult population. However, the polls also show that the bounce in popularity that Chavez enjoyed after resuming his position already has evaporated, and that two-thirds of the population perceive unemployment, inflation and personal insecurity as the country's top three problems.

In the meantime, Venezuela's currency has depreciated rapidly, inflation is climbing and more than 15 percent of the workforce is unemployed, according to estimates by private economists in Caracas. Moreover, the latest U.N. Human Development Index reports that 23 percent of Venezuela's population survives on less than one dollar a day, and 20 percent are chronically malnourished.

Also, Venezuelan economist Gustavo Garcia warned on July 24 that real income per capita likely would drop by 7 percent this year, meaning that the average Venezuelan's annual income, measured in constant terms, will have regressed to 1961 levels by the end of this year.

The economy's accelerating decline is fast becoming the greatest threat to Chavez's position. Planning Minister Felipe Perez said recently that the government "promises an economic bonanza" during the second half of 2002, but he did not specify where the resources to fund this promised bonanza would be obtained.

Barring a sharp spike in oil prices, the Chavez government likely will not have the fiscal resources to inject more liquidity into the economy except by devaluing its currency or printing more bolivars. However, this would only fuel inflationary pressures, which would offset quickly any potential fiscal benefits derived from devaluation or printing more money.

According to private economists in Caracas, a surge in private investment also is unlikely, since investors have lost confidence in Venezuela due to the Chavez government's less than business-friendly policies and growing domestic perceptions that the rule of law and property-rights protections have been eroded by the government.

Although capital flight has slowed significantly since the first quarter 2002, these economist claim this is because Venezuelans who could transfer the bulk of their savings abroad have done so already. Ricardo Hausmann, a former planning minister who is now a professor at Harvard University, said recently that Venezuelans have over $80 billion deposited outside their country.

Sources at the Central Bank and private Caracas-based economic forecasting firm VenEconomy agree that the economy will contract between 5 percent and 6 percent in 2002, but they disagree on how rapidly inflation will rise this year. While Central Bank economists predict inflation of at least 25 percent, VenEconomy projects that prices will rise on average between 35 percent and 40 percent in 2002.

As the economy continues to weaken and unemployment climbs in an inflationary environment, poor Venezuelans who still support Chavez could turn against him for failing to deliver on his pledge to improve living standards. In fact, many from this demographic have already crossed over to the opposition. Observers at a July 11 anti-Chavez march, which attracted an estimated 700,000 people, said that for the first time since such protest marches started last December, at least a third of the demonstrators were visibly poor Venezuelans.

If Chavez's remaining support continues to erode in the coming months, it is also likely that his remaining political and military support will also vanish. This would leave Chavez in the same position former President Carlos Andres Perez faced a decade ago.

Perez survived two coup attempts in 1992, including one led by Chavez, but in early 1993 he was impeached on corruption charges and forced to resign after his popularity dropped to only 5 percent. If Chavez's popularity sinks that low, it is likely that he also will lose the presidency, as the political and judicial institutions he still controls turn against him as they did against Perez.

For example, while the Energy Ministry is claiming that Venezuela will not raise oil production in the second semester 2002 -- and will shortly resume oil shipments to Cuba that were interrupted on April 11 -- Finance Minister Tobias Nobrega said recently that the government would hike oil output by some 400,000 barrels per day to cover a fiscal deficit estimated at more than 8 percent of GDP.

Chavez can't resist his pattern of driving the country into bankruptcy. He again plans to ship discounted (probably free) oil to Castro and he's draining all the profits from PDVSA. There also are reports he's emptied $2.3 Billion from the country's rainy day fund -- March 2002 - Oil and communism don't mix: Venezuela faces energy standoff at petroleum company*** After years of quiet complaints, the employees of Petroleos de Venezuela have begun to loudly protest the radical changes wrought by President Hugo Chavez……Lameda locked horns with the Energy Ministry on numerous issues, including the new hydrocarbons law that raises royalties and mandates that PDVSA be the controlling partner in any joint venture. Critics said these rules would stifle international investment.

Other bones of contention were the central government's demand that the company hand over $4.4 billion in dividends last year, forcing PDVSA to borrow $500 million to pay the bill; and the oil sales to Cuba, whose leader, Fidel Castro, is Chavez's longtime mentor. [· Chavez has insisted that oil sales continue to Cuba, despite an unpaid $97 million bill for past sales.]

One of the major disagreements centered on the Ministry's insistence on adhering to OPEC production cuts, but forcing PDVSA to continue producing surplus oil that has now filled every available storage facility. Although PDVSA cannot sell the oil, the catch is that it still must pay royalties for producing it to the central government, Lameda revealed after his departure. "I started warehousing" when prices were $26 per barrel, he told El Universal newspaper. "They're now $16. The barrels are worth less every day. I told the minister that I have to go out and ask for $500 million in loans while I have $300 million in the warehouse."***

Saturday's
Interview
with a grandson on the late, great OPEC
A conversation that I'll be ready for.

Frederick P. Leuffer
NRO Contributor
PETROLEUMWORLD
Caracas, July 20

"Hi granddad. Daddy said you could help me with a school project."

My grandson, nine years of age, sure is cute. He reminds me of my son — his dad — when he was a little boy.

"We are studying world history and I have to write a report on something called OPEC. My teacher said it used to be a group of countries that had something to do with oil. Daddy said you would know about it because you were an oil man, or something like that."

"Well, son, I worked as a securities analyst, specializing in the oil industry. And, years ago, OPEC was a big deal."

"You were a security guard?" he asks.

"Not a security guard. I was a Wall Street securities analyst. I studied the oil industry and the companies in the industry in order to advise people on buying and selling stocks. In those days — that is, the 1980s, 1990s, and the first decade of this century — OPEC controlled about a third of the world's oil supply."

"That was a long time ago, granddad. A lot has changed."

"You are right," I say. It is hard for me to believe I am retired 15 years now.

"Tell me more about OPEC," he says.

"The Organization of Petroleum Exporting Countries, or OPEC, was started in 1960. It was made up of 13 countries that controlled more than 80% of the world's oil reserves. As OPEC got stronger and better organized in the 1970s, it used its power to raise oil prices and increase member-country revenues. The 'oil shocks' of the '70s led to high prices for everything from gasoline to cars and houses. It caused economies to weaken; people lost their jobs and had less money to spend. Then it happened again in 2000 and 2001, when OPEC cut oil production and oil prices soared once more."

"So, if OPEC was such a big deal, how come we never hear about it now? And what is that stuff you mentioned, uh, gaso-something?"

"Gasoline. It was a product that came from oil that was used to run car, boat, and some truck engines," I explain.

"Granddad, you mean you didn't have fuel cells to run cars? And didn't you use the monorail?"

"Fuel cells weren't around in any meaningful way until the year 2014. We stopped using gasoline around the time you were born. And the U.S. monorail system wasn't built until 2019. You see, by pushing oil prices so high, OPEC encouraged other oil producers to spend more on exploration and production, which increased output outside of OPEC. In 2000, OPEC produced 42% of the world's oil. By 2010, it produced less than 20%, and in 2015 it produced less than 10%. As OPEC tried to hold oil prices up, it asked its members to withhold oil production. The organization gradually broke apart, as its members saw little benefit to being part of the cartel.

"In the 1990s two countries — Ecuador and Gabon — quit. Then, around 2006, Venezuela, Algeria, and Nigeria resigned. Indonesia left in 2007. But the biggest blow to OPEC came with a new government in Iraq. The government successfully re-built the country's oil industry and more than doubled oil production to over six-million barrels per day. Iraq withdrew from OPEC in 2007 and expanded its oil production by another 50% in the following six years."

"Slow down, granddad. I can't dictate to the computer that fast."

"Then, from 2006-2008, oil production in Russia and the Caspian region took off. The governments of those countries eliminated tax and export restrictions on their oil. They signed joint-venture arrangements with oil and transportation companies, which resulted in large oil discoveries being developed and the oil being delivered to markets. Advanced seismic and production technology made it possible to explore offshore Alaska, the Bering and Beaufort Seas, the South Atlantic, and also Antarctica. The cost of producing oil fell to the point where oil companies could produce profitably at less than $8 per barrel. Then advances in technology brought substitutes for oil, such as fuel cells."

"Like the solar panels that heat our house and run my super-18-triga-bit computer?" asks my grandson.

"Yes," I said, "and the wind and nuclear stations that generate our electricity and that of most of the world. We don't use gasoline, jet fuel, or heating oil anymore. You see, OPEC got greedy. It tried to hold oil prices too high, too long. That mistake destroyed the organization and caused great change for its member countries."

"What do you mean?" asks the little tot.

"At one time, Middle Eastern countries held the world's largest reserves of oil. They still do, but the reserves sit in the ground and are worthless now. Up until 2015, these were great countries, with large, modern cities and tall buildings. But, as oil usage fell, the producers' economies fell with it. Now the area is mostly an expansive desert, and many of its people have returned to Bedouin life."

"Oh yes, we learned about Bedouins last month," my grandson says. "But why didn't OPEC just hold the price of oil low enough so that people would keep using it?"

"OPEC focused on revenues instead of market share for too long. They tried to hold oil prices around $25 per barrel," I say. "OPEC was short term in its thinking and did not consider its long-term future. It ignored the economics of the oil business."

"Granddad, you've lost me. But I think I understand some of what you said. It's like if the price of a stick of gum goes from $2 to $5, then I might stop chewing gum and eat some other candy, or I would buy gum from somebody else that sells it cheaper. Right?"

"Right," I say. The boy is not only cute. He's smart, too.

Frederick P. Leuffer
National Review Online-NRO Contributor

July 11, 2002, 8:45 a.m.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.