Zero tolerance

Nov. 16, 2001
Earlier this month the US State Department lost patience with Venezuela, one of the US' top three sources of imported oil.

Earlier this month the US State Department lost patience with Venezuela, one of the US' top three sources of imported oil.

The US recalled its ambassador for a vague "policy review" after left wing President Hugo Chavez criticized the US' bombing of Afghanistan.

The US used to be much more tolerant: policy makers barely criticized Chavez when he visited Saddam Hussein a few years ago.

But the White House's new attitude seems to have paid off: soon after the US made its displeasure known, the mercurial Chavez told a local newspaper he would be satisfied with a crude price of $20/bbl.

Against OPEC

Meeting Washington's higher expectations was a considerable concession for Venezuela, a member of the Organization of Petroleum Exporting Countries.

A $20/bbl market price is below OPEC's $22-28/bbl target price range that Chavez pledged to support when he took office in 1999. Just last month Chavez met with several non-OPEC countries, urging them to follow the lead of the cartel and cut production. Russia and Mexico made sympathetic noises but no meaningful commitments.

Chavez's comments about $20/bbl oil are a welcome signal to US officials that Venezuela recognizes its relationship with the US is as important as the one it has with OPEC.

It also is an acknowledgement that OPEC's latest production cuts may not keep prices as high as the cartel, or the Venezuelan people, will like.

Venezuela relies as heavily on petrodollars to fuel its economy, as does another key US ally, Saudi Arabia. Both nations are among the US' top suppliers: each supplied 14% of the US gross imports in 2000, according to the US Energy Information Administration.

Analysts say Chavez is mindful the US wants to aggressively pursue an energy policy that reduces reliance on foreign oil, especially from the Middle East. EIA says the US imports 52% of its net requirements. Slightly half of its oil imports come from the Western Hemisphere and 24% from the Middle East.

Trading partners

But with two-thirds of the world's proven reserves still in the Middle East, the White House wants to better integrate North American energy markets into a "seamless" border between Canada and Mexico to boost efficiency and protect against supply disruptions.

Canada and Mexico are already key energy suppliers: Canada sent more oil to the US in 2000 than Saudi Arabia or Venezuela, while Mexico supplied 12%.

Venezuela wants a larger piece of the action. Oil imports are part of the picture but the country also would like to see more foreign investment in its oil fields: state-owned Petroleos de Venezuela SA wants to increase production capacity from the current 4.2 million b/d to 5.5 million b/d by 2006.

But Chavez may have to again be pragmatic if he wants to reach that goal. Some US oil companies say his government's new hydrocarbon law boosts royalty rates and discourages investment.