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Venezuela & Chávez

The nation driving up oil prices

By Howard LaFranchi
Staff writer of The Christian Science Monitor
December 28, 1999

Venezuela sticks to OPEC production cuts, keeping prices high through winter.

If Americans are looking for someone to blame their soaring winter heating bills on, Alí Rodríguez would be as good as anyone.

Mr. Rodríguez is the minister in charge of crude production in Venezuela, the top international supplier of oil to the United States for the third year in a row.

And he is widely credited with the threefold increase in world oil prices in just the past 10 months. In fact, you have to go back to 1991 when Arnold Schwarzenegger dominated the box office (in "Terminator 2") and "Cheers" was the No. 1 TV show to find petroleum prices this high.

Oil costs are now "dangerously" high, said US Energy Secretary Bill Richardson earlier this month, announcing that the White House was drawing up options for pushing prices lower.

But Venezuela's newfound discipline and its good working relationship with Mexico, Saudi Arabia, and the other major oil- producing nations will be a tough force to counter.

Despite devastating floods earlier this month that have necessitated sizable funds for rebuilding, Venezuela is expected to adhere to OPEC production cutbacks that should guarantee current price levels until March, oil analysts say. At that time OPEC will review production levels. Even then, analysts add, Rodríguez will likely push for production that favors price stability.

A year ago Venezuela, an OPEC member, was still flaunting the oil producer cartel's production quotas, operating its vast oil fields with the idea that pumping more oil and taking more market share was the way to go. The result was oil at $7 a barrel.

Then in February, Hugo Chávez took office as president of Venezuela, named Rodríguez his oil minister, and the country's oil policy did a 180-degree turn. Working closely with Saudi Arabia and non-OPEC member Mexico, Rodríguez last March accepted a production quota plan.

More important for skeptical international observers, he has kept Venezuelan oil production pretty close to the agreed cuts. The result: today's average $22-a-barrel oil.

"Minister Rodríguez was the key factor in the OPEC agreement," says Caracas oil analyst Alan Viergutz. "He's the guy who made it work."

But others point out that it took the go-between talents of Luis Tellez, the Mexico energy minister, to get the habitually recalcitrant Venezuelans and the Saudis - fed up with Venezuela's past shenanigans - to sit down long enough to reach an agreement.

"[Mr. Tellez] mended the bridges between Saudi Arabia and Venezuela and achieved a rapprochement," says Leo Drollas, chief economist at the Center for Global Energy Studies in London. "But the key has been the Venezuelan government taking its role seriously. It's really abided by the cuts."

Venezuela's year-to-year production has been cut by 12 percent, more than any other OPEC country. Saudi production is down 8 percent.

The question now is what happens when the current OPEC agreement runs out next spring. Venezuela has called a summit of OPEC-country leaders for March 2000 in Caracas to give the highest profile possible to efforts by OPEC, which controls nearly half of the world's oil market, to set a production policy that would deliver price stability.

Rodríguez favors a "price band" under which higher production would kick in when prices reached an agreed ceiling, and production cuts would follow prices hitting a designated floor. "He's looking for something to avoid the kind of volatility in prices that have hit over the past few years and which really aren't good for either producers or consumers," says Mr. Viergutz.

Saudi Arabia favors a price-stability policy based on world oil stocks, an idea Viergutz says has certain advantages since world oil prices tend to closely follow global oil stocks. The Caracas analyst says he believes OPEC will eventually have to adopt some kind of price stability policy.

"It's time [OPEC] became a lot more quantitative and technical," he says, although whether that can happen in March remains unclear.

Viergutz says that OPEC has actually allowed oil prices to go too high. Those higher prices are likely to incite an acceleration of production that could inflate global oil stocks - and in turn cause the kind of price plunge that occurred in 1998, something OPEC wants to avoid.

Even though Venezuela especially has shown a "new maturity" in its adherence to the OPEC production cuts, analysts say, the political situation in both Venezuela and Mexico in 2000 will favor the temptation to pump more oil.

Mexico holds presidential elections in July, with the months before such a vote historically a time of sharply increased social spending to favor reelection of the governing party.

And in Venezuela, the new constitution approved last week imposes a heavy electoral schedule, with President Chávez himself facing a reelection vote in March at the earliest. Also to be elected are the new unicameral national assembly, governors, and mayors.

While Chávez was already expected to spend heavily in early 2000 to ensure the government's good image before the voting, political analysts now say that after last week's devastating floods that caused billions of dollars in damage, the government's revenue demands are even greater.

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