Venezuelan crisis clouds U.S. Iraq campaign

Oil shortages from strike could raise the cost of a war www.sfgate.com James Dao, Neela Banerjee, New York Times Saturday, January 11, 2003

Washington -- The crisis in Venezuela is creating major new complications for the Bush administration's campaign to oust Saddam Hussein, 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 aimed at ousting President Hugo Chavez 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.

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 an already uncertain U.S. 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 Chavez follows through on a proposal to split the government-owned oil company, Petroleos de Venezuela S.A., into two parts and restructure its central offices.

American officials say Chavez'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 3 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.

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

On Friday, Chavez threatened to send soldiers to seize control of food- production facilities and also fired 700 workers from the oil monopoly, hoping to break the strike.

Chavez, a former paratroop commander, told soldiers to be ready "to militarily seize the food production plants" that joined the strike. He asked state governors belonging to his political coalition to be ready to cooperate.

Rafael Alfonzo, president of Venezuela's food producers chamber, blamed the shortages on Chavez for refusing to cede to opposition demands. He insisted food makers were producing staples but said fuel shortages had hampered deliveries.

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 2 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 OAS, which has spearheaded negotiations, lacks the influence to persuade Chavez to consider concessions.