Petroleum and Politics: A Combustible Mix in Venezuela

Millions of motorists hit the road over the Memorial Day weekend, kicking off the summer driving season. Some might have been pleased that prices at the gas pump have finally started to fall since the spike that accompanied the invasion of Iraq. But before drivers -- or holders of short positions in unleaded gasoline futures -- become too convinced that prices will continue dropping, consider the smoldering situation in Venezuela, OPEC's third-largest producer.

Just last December, labor and opposition groups staged a nationwide strike in an attempt to remove Venezuelan President Hugo Chavez from office. Tanker captains joined strikers at state-owned oil monopoly Petroleos de Venezuela S.A., also known as PDVSA, and refused to move cargo.

Output from the oil-dependent country of 25 million inhabitants plunged to 200,000 barrels a day from a prestrike level of 3.2 million barrels a day. The reduction in supply from Venezuela spurred rallies in unleaded gasoline and crude oil that took prices more than 12% higher during the month.

Chavez survived December's strike and de facto coup, and Venezuelan output rebounded sharply. However, the political and economic situation in the hands of Chavez continues to devolve. The resulting uncertainty greatly increases the odds of another round of social upheaval and threatens to disrupt the supply of oil and refined products from Venezuela.

At the heart of the maelstrom is the government's disenfranchisement of the opposition. A law has been proposed to censor the media and potentially quiet opposing voices. The "gagging law" needs only to be passed by the Chavez-dominated national assembly. But more devastating to the economy has been the imposition of foreign currency exchange controls on the country.

Dollar Politics

Opposition forces say that exchange controls are just a Chavez ploy to undermine the private sector. Venezuela exports oil and imports just about everything else. Dollars are required to complete transactions. Exchange controls have denied importers -- made up primarily of the private sector -- access to dollars to pay for goods brought into the country. Everything from food to medicine is running in short supply. The private sector, those least likely to vote for Chavez, are suffering in what appears to be a deliberate government attempt to damage the opposition's base of support. Businesses are closing, and official unemployment has reached 20%.