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Venezuela's Chavez Is Roiling Oil Markets Again

Continued military tensions between Colombia and its neighbors Venezuela and Ecuador--both OPEC members--are expected to keep upward pressure on oil prices. But analysts say it won't cause a significant spike in crude as long as armed conflict is avoided.

Venezuela continued Thursday to fortify some 9,000 troops sent to the Colombian border in response to Bogota’s weekend cross-border attack into Ecuador, a Venezuelan ally, to hit a camp of the Revolutionary Armed Forces of Colombia (FARC).

Hugo Chavez
Howard Yanes
Hugo Chavez

The bombing attack on Saturday, which killed roughly 24 guerillas, including FARC’s second in command, Raul Reyes, triggered the current crisis which has led to the recall off ambassadors and bellicose talk, especially from Venezuela president Hugo Chavez.

“Is this having some effect on oil prices? A little bit – these days all kinds of surprises get priced in,” said Lou Pugliaresi, president of the Petroleum Industry Research Foundation. “But I don’t see this spinning out of control – it’s not in Venezuela’s interest. Chavez is stupid, but not that stupid.”

But if a full-fledged military conflict seems unlikely, Chavez is continuing to stoke tensions. He's now threatening to nationalize Colombian companies with operations in Venezuela.

“We could nationalize some, take them over, we aren't interested in Colombian investments here," Chavez said at a joint news conference in Caracas with Ecuador President Rafael Correa, a political ally, late on Wednesday. Similar Venezuelan threats against Spanish firms last year were not carried out.

Ecuador also sent more than 3,000 Ecuadorian troops to their border with Colombia although Bogota has not matched this mobilization and sought to downplay the chances of conflict.

"The Colombian government has been very clear it won't use force," Colombian Vice President Francisco Santos told Reuters Thursday. "It won't fall into the game of provocation."


At the same time Colombian officials have said they plan to file a charge of state-sponsored terrorism in the International Criminal Court against Chavez for significant support to the FARC – reportedly more than $300 million in connection with the recent Chavez-brokered release of several hostages held by the rebels.

Evidence From a Computer

Details of what appear to have been a budding strategic alliance between Chavez and FARC are reportedly contained in a computer seized at the rebel camp in Ecuador, which Bogota officials say they will submit to international examination.

There have long been suspicions that Chavez supported the FARC, including offering them safe haven inside Venezuela territory, but if confirmed this could prove politically embarrassing and may further undermine his political support at home, perhaps even with some portion of the military officer corps.

Some analysts suggested that Chavez’s strong reaction to the attack on Ecuador was partly to distract attention from his shadowy relations with the FARC, which has waged a four-decade long insurgency against the Colombia government.

FARC rebels attacked an oil pipeline in southwest Colombia on Wednesday, the first one since the current crisis began.

Meanwhile, the Organization of American States, the region’s main diplomatic group, is trying to diffuse tension by deciding Wednesday to send a commission to study the attack, while also adopting a resolution that it violated Ecuadorian sovereignty, which has been roundly condemned in the region.

Pugliaresi added that ExxonMobil’s recent success in getting international courts to freeze $12 billion in assets owned by Petroleos de Venezuela – for unilaterally nationalizing the company’s stake in a heavy oil field - will likely make Chavez more cautious.

“I think he is still shocked by that…..[and now] Venezuela is looking for different ways out of that,” he said, besides legal challenges that may eventually succeed in reducing the amount of assets frozen.

Venezuela exports 68% of its oil to the U.S., which in 2006 earned the country $35 billion.

Venezuela is the fourth largest supplier of oil to the U.S. after Saudi Arabia. Mexico and Canada, providing 11% of total U.S. crude imports.

Why Oil Output Is Dropping

Chronic underinvestment--as well as the firing of many of Petroleos de Venezuela's most experienced managers--has resulted in Venezuela’s daily oil production dropping to 2.3 million barrels per day currently, down from 3.3 million barrels per day in 1999, when Chavez first came to power.

Petroleos de Venezuela, already drained by having to spend billions to support Chavez’s extensive social programs and subsiding the energy needs of allied countries, recently had a new function added – food distribution – which is now being handled by a new subsidiary, known as PDVAL.

The new role reflects concerns about chronic food shortages of basic commodities, such as eggs, milks and chickens, amid signs of rising public frustration, including several recent incidents of food market looting.

This helps explain why, after the Venezuelan agriculture minister made a show of closing the border to Colombian exports in protest, it was reopened after just 24 hours, to allow vital supplies, especially of food from Colombia.

Colombia enjoys a significant trade surplus with Venezuela, which rose from $1.26 billion in 2006 to $3.9 billion last year, reflecting increasingly production difficulties inside Venezuela due to price and other controls.

Another investor concern is the impact continued tension, and possible conflict, could have on Colombia’s growing role as an exporter of coal, most of which takes place near the 1,400-mile border with Venezuela.

Colombia is the world’s fifth largest net coal exporter, sending more than 56 million metric tons in 2006 to North America, Europe and elsewhere in Latin America.

Roughly half of that went to the U.S., which was 70 percent of U.S. coal imports--although only 2 per cent of total U.S. coal consumption.

Foreign investors - including Anglo-American, BHP Billiton, Glencore and Alabama-based Drummond-- own the largest coal mines in the country and are planning significant additional investments to boost production, which is expected to double in the next few years.

“Continued instability will create economic difficulties in Ecuador, Colombia and Venezuela, so it’s in all their political and economic interest to resolve this as soon as possible - you don’t invest in the country if you think it is going to go up in military conflict,” said Mark Schneider, senior vice-president of the International Crisis Group.

“The most urgent and essential step now ….is for Venezuela to move its troops away from the Colombian border,” he added.

Colombia relies on hydropower for most of its electricity, freeing up most coal production for export, according to the U.S. Department of Energy.

The oil industry in Ecuador also suffers from underinvestment and authorities there were recently forced to announce they would not be able to meet upcoming export obligations because of problems with a state-owned pipeline.

"The Colombian government is ready to do whatever is needed to sort out the situation but on one fundamental, clear and concrete condition -- that there should be no support nor camps on the other sides of the borders," added Colombian Vice President Santos.

At the OPEC meeting Wednesday Venezuelan Oil Minister Rafael Ramirez complained that legal actions, such as launched by ExxonMobil, were a force are “keeping oil (prices) at their current levels."

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