Monday, February 11, 2008

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Should the U.S. call Chavez's bluff?

Last week, Exxon-Mobil won a court ruling against Venezuela's state oil company, PdVSA, over Hugo Chavez's expropriation of oil facilities. Bloomberg's Joe Carroll and Steven Bodzin explain:

Exxon Mobil Corp. won court orders in the U.S., U.K., the Netherlands and the Caribbean freezing more than $12 billion in Venezuelan assets amid a battle over the government's seizure of oil projects.

Exxon Mobil, the world's largest oil company, sought the orders on concern the Venezuelan state oil company will shift assets to other Latin American countries and China to put them out of reach of an international arbitration commission, the company said in a U.K. court filing.

Petroleos de Venezuela SA, the state-owned oil company known as PDVSA, seized joint ventures with foreign energy companies last year as part of President Hugo Chavez's program to bolster government control of Venezuela's resources. Exxon Mobil and ConocoPhillips abandoned the projects rather than accept reduced roles and profits....

Exxon Mobil's lawyers scoured regulatory filings, financial statements and PDVSA directors' reports to dig up bank account numbers, details on U.K. office leases, staffing levels and car fleets to bolster its case, the British ruling showed....

The British injunction was granted Jan. 24 without prior notice to the Venezuelan oil company, according to a copy of the ruling. The next hearing on the matter is scheduled for Feb. 22.

Until then, PDVSA is barred from removing any assets in England or Wales up to a value of $12 billion. The Venezuelan company was also ordered not to sell or diminish the value of any assets within or outside those countries up to the same value.

Among the assets cited were refineries in Scotland and northwest England.

PDVSA probably was already withdrawing assets from England and Wales prior to the freeze order "consistent with PDVSA's approach of withdrawing its business operations from the U.S. and Europe and instead focusing on jurisdictions such as Russia, Belarus, Cuba, China, Syria and Iran,'' Exxon Mobil said in the U.K. filing....

The asset freezes will damage PDVSA's ability to raise funds from international investors for drilling and refinery projects, said Asdrúbal Oliveros, chief economist at Caracas- based Ecoanalitica. He estimated PDVSA has $13 billion in "liquid'' international assets.

"This is going to put a lot of pressure on country risk, and on the price of the company's bonds in the international market,'' Oliveros said. ``Loaning money to a company that's in this kind of dispute, and also is facing this kind of injunction, is going to be very delicate.''

Chavez has responded to the ruling in typical Chavez fashion:
President Hugo Chavez on Sunday threatened to cut off oil sales to the United States if Exxon Mobil Corp. wins court judgments to seize billions of dollars in Venezuelan assets.

"If you end up freezing (Venezuelan assets) and it harms us, we're going to harm you," Chavez said. "Do you know how? We aren't going to send oil to the United States. Take note, Mr. Bush, Mr. Danger."....

"I speak to the U.S. empire, because that's the master: continue and you will see that we won't sent one drop of oil to the empire of the United States," Chavez said during his weekly radio and television program, "Hello, President."...

Chavez has repeatedly threatened to cut off oil shipments to the United States, which is Venezuela's No. 1 client, if Washington tries to oust him. Chavez's warnings on Sunday appeared to extend that threat to attempts by oil companies to challenge his government's nationalization drive in courts internationally.

"If the economic war continues against Venezuela, the price of oil is going to reach $200 (a barrel) and Venezuela will join the economic war," Chavez said. "And more than one country is willing to accompany us in the economic war." (emphasis added)

If Chavez were to attempt an embargo, there's no doubt that the United States would feel a twinge of pain.

On the other hand, whatever twinge the U.S. felt would be mild compared to the massive spasms that would rip through Venezuela's economy from such a move -- especially since the only refineries that can handle Venezuelan oil are based in the United States.

Furthermore, it's not like Venezuela's economy is all sweetness and light these days:

These should be the best of times for Venezuela, blessed with the largest conventional oil reserves outside the Middle East and oil prices near record highs. But this country’s economic and social problems have become so acute lately that President Hugo Chávez is facing an unusual onslaught of criticism, even from his own supporters, about his management of the country.

In a rare turnabout, it is Mr. Chávez’s opponents who appear to have the political winds at their backs as they reverse policies of abstention and prepare dozens of candidates for pivotal regional elections. Mr. Chávez, for perhaps the first time since a recall vote in 2004, is increasingly on the defensive as his efforts to advance Venezuela toward socialism are seen as failing to address a growing list of worries like violent crime and shortages of basic foods.

While Mr. Chávez remains Venezuela’s most powerful political figure, his once unquestionable authority is showing signs of erosion. Unthinkable a few months ago, graffiti began appearing here in the capital in January reading, “Diosdado Presidente,” a show of support for a possible presidential bid by Diosdado Cabello, a Chávez supporter and governor of the populous Miranda State.

Outbreaks of dengue fever and Chagas disease have alarmed families living in the heart of this city. Fears of a devaluation of the new currency, called the “strong bolívar,” are fueling capital flight. While the economy may grow 6 percent this year, lifted by high oil prices, production in oil fields controlled by the national oil company, Petróleos de Venezuela, has declined. Inflation soared by 3 percent in January, its highest monthly level in a decade.

This is one of those situations where, if economic warfare breaks out, the U.S. holds most of the cards.

I strongly suspect that Chavez's self-preservation motive will force him to back down -- but it would be kind of amusing if he believed his own bluster.

posted by Dan on 02.11.08 at 08:59 AM


Oil is fungible. If Venezuela refuses to sell oil to the US, US oil purchasers will just buy oil somewhere else.

posted by: Tracy W on 02.11.08 at 08:59 AM [permalink]

To have any real impact, Venezuela would have to refuse to sell at all, not just to the United States, because, as noted in another comment, oil is fungible.

posted by: Linc Wolverton on 02.11.08 at 08:59 AM [permalink]

To have any real impact, Venezuela would have to refuse to sell at all, not just to the United States, because, as noted in another comment, oil is fungible.

posted by: Linc Wolverton on 02.11.08 at 08:59 AM [permalink]

Amusing? I certainly hope he backs down, but it's unlikely. Chavez is turning Venezuela into Zimbabwe. Even granting that Chavismo has some appealing elements, the way he has refashioned a stable middle-income country into a one-party (even one-man) machine is pretty dangerous. If the economy is held together with duct tape and baling wire now, imagine what it will look like if/when oil prices fall.

posted by: George Wolf on 02.11.08 at 08:59 AM [permalink]

Furthermore, it's not like Venezuela's economy is all sweetness and light these days

I thought that point was that Venezuela's economy was never sweetness and light... it's sourness and heavy, right? ;) /bad joke

posted by: John Thacker on 02.11.08 at 08:59 AM [permalink]

I would pay real money to see Bush do his best Eastwood impression:

Go ahead, make my day.

posted by: Peter on 02.11.08 at 08:59 AM [permalink]


He's already done that shtick with his "Wanted Dead or Alive" comment about bin Laden, who is probably still alive and href="">hasn't seemed to be wanted by the Bush administration for some time.

Chavez is a blowhard who spends much of his time crying wolf. He did cut oil exports to the Dominican Republic briefly in 2003 when Carlos Andre Perez, the kleptocrat ex-president of Venezuela was living there, but that's the metier of a bully: picking on the little guys and merely talking trash to the big ones.

posted by: Randy Paul on 02.11.08 at 08:59 AM [permalink]

While your post looks economically sound, I think you may have missed one small consideration: while the U.S. holds most of the cards, the currently ruling U.S. party does not. Making a decision that would exacerbate the current recession during an election year is something I suspect that they would try to avoid until there was no other option.

posted by: Zed on 02.11.08 at 08:59 AM [permalink]

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