Venezuela Crisis Complicates Iraq Situation, Experts Say

www.nytimes.com January 11, 2003 By JAMES DAO and NEELA BANERJEE

ASHINGTON, Jan. 10 — The crisis in Venezuela is creating major new complications for the Bush administration's campaign to oust President Saddam Hussein of Iraq, causing oil shortages that would probably make a Persian Gulf war more costly to the economy than once anticipated, American officials and industry experts said.

The 40-day strike has virtually shut down Venezuela's oil industry, the fifth-largest in the world, and proven more difficult to resolve than the administration expected, the officials said.

Efforts to end the stalemate between President Hugo Chávez and his opponents have been hamstrung not only by the intransigence of both sides in Venezuela, but also mistrust toward American diplomats, the officials added.

Venezuela has for decades been one of the most dependable sources of petroleum for the United States, where industry analysts say the strike has already hurt some refineries and driven up the retail price of gasoline by at least a dime a gallon.

Those shortages will only worsen, and prices continue to rise, if the United States attacks Iraq, they predicted. That means that war in the Persian Gulf could prove more costly to the American economy than had been projected if the Venezuelan standoff is not ended soon.

For that reason the Bush administration has been debating plans to release oil from the Strategic Petroleum Reserve, which contains nearly 600 million gallons of crude. For now, though, the White House has decided to defer those plans, mainly to keep oil available in case of war in Iraq, administration officials said.

"A few months ago everybody thought that if we went to war in Iraq oil wouldn't be a major problem, because there was enough spare capacity to make up for lost Iraqi oil," said Larry Goldstein, president of the Petroleum Industry Research Foundation Inc., a research organization. "But no one then was contemplating lost Venezuelan oil."

"Now," he said, "we won't have enough spare capacity to take care of both those events."

The crisis could be compounded if President Chávez follows through on a proposal to split the government-owned oil company, Petróleos de Venezuela S.A., into two parts and restructure its central offices.

American officials say Mr. Chávez's true goal is to install political loyalists in place of the union leaders and senior managers at the oil company, known as PDVSA, who have joined the strike.

The result could be a more pliable but less efficient company that produces less oil than the roughly three million barrels a day that Venezuela produced before the strike, officials and experts said. That could leave the United States even more dependent on Middle Eastern oil, the experts said.

"Petróleos is one of the few state-owned oil companies in the OPEC group that approximates a normal integrated major oil company," said Leonidas P. Drollas, chief economist with the Center for Global Energy Studies in London. Echoing other industry analysts, Mr. Drollas added, "To break it up into anything sounds obviously politically motivated."

The Bush administration, acknowledging the growing danger from the Venezuelan strike, has stepped up its efforts to calm the oil markets, lobbying major oil exporters to increase production. At a meeting in Vienna this weekend, the Organization of the Petroleum Exporting Countries is expected to vote to increase production by 8.7 percent, or nearly two million barrels a day, officials said.

The United States is also working with Mexico, Brazil and the Organization of American States to cobble together a coalition of South American governments to broker a truce. Diplomats working on the crisis are worried that the O.A.S., which has spearheaded negotiations, lacks the influence to persuade Mr. Chávez to consider concessions.

That will be a topic of discussion when foreign ministers and heads of states from Latin American countries gather in Quito next week for the inauguration of Ecuador's new president.

But senior Venezuelan officials have already expressed suspicions about the administration's intentions.

"We trust that the United States will not take a stand that will divide this country into pro-Americans and anti-Americans," Venezuela's foreign minister, Roy Chaderton, said in an interview. "We want them to respect that this is a democratically elected government."

The Venezuelan Constitution allows for a recall vote halfway through a president's term, which in Mr. Chávez's case would be August. The opposition has said that is too late.

The Constitution could be amended by the national legislature to allow for earlier elections, but Mr. Chávez has rejected that idea. A third option would be a nonbinding referendum on Mr. Chávez's popularity in February. The opposition is proceeding with plans for one, but Mr. Chávez has challenged its constitutionality.

American officials say they do not care which electoral option is accepted, as long as an agreement is reached that ends the violent confrontations that have been occurring and allows renewed oil production.

"This is an incredibly important moment in Venezuelan history," a senior State Department official said. "Things are happening now that are going to affect Venezuela for decades: its energy relationship with the United States, the structure of PDVSA, the integrity and credibility of its democratic institutions — all of these things are at stake."

But many Latin American experts say the administration's efforts have been too little, too late. They contend that the Bush administration, distracted by Iraq, allowed Venezuela's problems to fester.

Others say the administration committed two blunders last year that have hurt its credibility with Mr. Chávez and other Latin American leaders: in April, by appearing to endorse an attempted coup against the Chávez government, and in December by briefly joining the opposition's call for early elections.

In addition, the State Department's Latin America desk has been leaderless through much of the strike. The last assistant secretary of state for Western Hemisphere affairs, Otto J. Reich, was reassigned in November after his temporary appointment expired. The White House intends to nominate Roger F. Noriega, the representative to the Organization of American States, to replace him.

"There is no one at the wheel here," asserted Moisés Naím, the Venezuelan who is the editor of Foreign Policy magazine.

Some oil analysts argue that the administration should have moved faster to stabilize the oil market. Those analysts, along with some members of Congress, have urged the administration to release oil from the Strategic Petroleum Reserve.

Even a relatively modest "loan" of 20 million to 30 million barrels to American refineries would stabilize prices and ease short-term disruptions, giving the OPEC countries time to ramp up production. It typically takes 30 to 45 days for Persian Gulf oil to reach the United States.

The impact of the Venezuelan crisis has been widely underestimated by officials and consumers, oil experts said. Venezuela once exported 2.7 million barrels a day, 1.5 million barrels of that going to Untied States, or about 14 percent of America's crude oil imports.

Now, Venezuela says it is producing about 600,000 barrels a day, though outside experts estimate the volume at less than 400,000 barrels.

That means that more than two million barrels a day of Venezuelan crude have been removed from the global market, making this the worst disruption in supply since the Persian Gulf war of 1991, experts said.