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Count Venezuelan President Hugo Chavez among the most aggressive of price hawks when OPEC ministers gather for an emergency meeting tomorrow in an effort to agree on production cuts to stem the slide in crude prices.

More than most members of the Organization of Petroleum Exporting Countries, Mr. Chavez is desperate to the stop the erosion of oil profits, which he has spread widely to support his popularity at home and abroad.

He has used the country's petrodollars to fund social programs that have garnered him tremendous support among the poor in Venezuela, where he faces an increasingly competitive election in seven weeks. He also financed international aid commitments that bolstered his image abroad, including his as-yet unsuccessful attempt this week to win a seat on the United Nations Security Council.

But Chavez-watchers say Latin America's champion of the underdog will have to rein in his ambitions and make some tough choices if crude prices fall much further.

“They're totally stretched,” said Riordan Roett, professor of Latin American studies at Johns Hopkins University.

“I think Chavez is about to hit a wall in that his commitments in Venezuela, but also his commitments throughout the region, are based on very high and continuing high oil prices,” he said.

“Unless he is able to convince other members of OPEC to have a sharp drop in production — which I think is what he needs to achieve his goal — Venezuela is in trouble.”

OPEC ministers agreed to meet in Qatar tomorrow in an attempt to halt the slide in crude prices, which have dropped from a record $78 (U.S.) a barrel this summer to below $58 last week. Tuesday, the benchmark West Texas intermediate fell $1.01 to close at $58.93 on the New York Mercantile Exchange.

But analysts question whether the OPEC ministers will be able to agree on the mechanics of the production cuts, given that countries such as Saudi Arabia, Algeria and Libya have invested heavily in additional capacity, while such members as Indonesia, Iran and Venezuela are producing well below their quotas.

For Mr. Chavez, record crude prices over the past year have masked a growing problem. His cash cow, the state-owned oil company Petroleos de Venezuela SA (PDVSA), has seen its production decline as a result of the government's sacking of 18,000 workers after a failed coup four years ago, and the lack of reinvestment.

Venezuela as a whole is now producing far less oil than allowed under its OPEC quota of 3.2 million barrels a day. Latest estimates from the International Energy Agency suggest the country produces about 2.5 million barrels — a cut in output would hurt, but a fall in prices would bite much harder.

Petroleos de Venezuela, which was the country's sole operator 15 years ago, once pumped more than three million barrels of oil a day. Now it accounts for only about half of the country's production, though Mr. Chavez has forced international oil companies to accept PDVSA as a joint venture partner, meaning the state-owned company's nominal output will rise.

Roger Tissot, director of the Latin America group for Washington-based PFC Energy consultants, said Mr. Chavez likely needs a $60 price to stave off serious financial problems. He said the Venezuelan government is already operating in a slight deficit position, despite record prices.

Mr. Tissot said Mr. Chavez has boosted spending dramatically to further his domestic and international agenda, including the bid for UN Security Council seat. That effort has resulted in a humiliating setback for the Venezuelan leader as his country trails Guatemala in voting after several rounds; neither has won the two-thirds support in the General Assembly needed to take the two-year position.

Mr. Chavez is also facing a challenge as he runs for re-election Dec. 3 against opposition candidate Manuel Rosales, who is attempting to outdo the President in his populist, big-spending appeal.

Though few observers expect Mr. Rosales to defeat the incumbent, Mr. Chavez is stepping up his spending campaign to keep the support of the people. Oil profits currently subsidize energy costs, as well as basic food products and health care for the poor.

“Most of the money the government is spending comes directly from PDVSA ... and because of that, there is less money available for investment,” Mr. Tissot said. He added that lack of investment — and the attacks on foreign involvement — stand in the way of the government's stated intention of doubling output to five million barrels per day by 2012.

Shaw Mccarthy is a columnist of Toronto's Globe and Mail. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by Globe and Mail, on 10/18/2006. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 10/19/06

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