Hugo Chávez and the Limits to Petropolitics (ARI)

Hugo Chávez and the Limits to Petropolitics (ARI)

Theme: Exxon Mobil’s conflict with PDVSA has revived Hugo Chávez’s perennial threat to cut off oil exports to the US.

Summary: Exxon Mobil has recently taken its dispute with PDVSA, the Venezuelan national oil company, to court in the UK, the Netherlands and the US. This move has provoked Hugo Chávez to halt oil flows to Exxon Mobil and to threaten an oil embargo on the US if further ‘aggression’ against Venezuela is pursued. Oil prices rose to beyond US$100/bbl in the wake of this incident. Nevertheless, a number of political, economic and technical factors limit the capacity of Hugo Chávez to use Venezuela’s oil exports effectively as a political weapon. At most, Venezuelan action in this regard could place further upward pressure on oil prices globally, but they will not be able to effectively ‘punish’ the US without negatively affecting other economies around the world, probably including its own. The real risks, in the short term, for those who trade with Venezuela or invest in its economy are those stemming from a further deterioration of the Venezuelan economy or from possible political destabilisation of the Andean and Caribbean regions.


The Latest Chávez Episode
When Hugo Chávez began to enforce recent changes in Venezuelan energy law, requiring foreign oil companies to renegotiate the terms of their contracts on projects in the ultra-heavy oil fields of the Orinoco Belt (so that the state-owned PDVSA would become the majority partner), almost all the companies in question –including Chevron, Statoil, ENI, BP and Sinopec, among others– agreed to stay on in Venezuela under the new dispensation. Apparently they decided that it would be better business to stay involved in Venezuela, particularly given tightening access conditions to crude oil reserves around the world. On the other hand, two US-based companies (Exxon Mobil and ConocoPhillips) chose to stand their ground in defence of the principle of ‘sanctity of contract’. After having placed the case before the World Bank’s International Centre for the Settlement of Investment Disputes for arbitration (as allowed by its contract), ExxonMobil has now also taken PDVSA to court in the US, the UK and the Netherlands, alleging ‘confiscations of assets’ and claiming compensation. For its part, ConocoPhillips has chosen to continue quietly negotiating with PDVSA over acceptable compensation.

When a court in the UK issued a temporary ruling in favour of Exxon in mid-February, the green light was given for the temporary freezing of an estimated US$12bn of PDVSA’s international assets. A court ruling in the US prompted the first actual freeze on some US$300mn of PDVSA funds deposited in New York banks. This move rekindled a dormant threat of Hugo Chávez to cut off Venezuelan oil exports to the US. Indeed, almost immediately following the New York freeze, Chávez ordered PDVSA to suspend oil deliveries to Exxon Mobil. He further threatened to cut off all exports to the US (nearly 1.5mbd, the bulk of all Venezuelan exports –some 2.2mbd– and more than half of all Venezuelan production –around 2.5mbd–) if the US continued, through its supposed proxy, Exxon Mobil, to conduct ‘economic warfare’ against Venezuela. (These production and export figures, taken from the US’s Energy Information Agency, are disputed by both PDVSA, which claims they are higher, and former PDVSA officials –along with other independent voices internationally– who claim they are in fact lower. See Paul Isbell, ‘Hugo Chávez and the Future of Venezuelan Oil (I): The Resurgence of Energy Nationalism’, ARI nr 14/2007, Elcano Royal Institute; and ‘Hugo Chávez y el futuro del petróleo venezolano (II): el pillaje de PdVSA y la amenaza a su nivel de producción’, ARI nr 15/2007, Elcano Royal Institute).

By the time this controversial episode began, during the week of 11 February 2008, the price of the international reference crudes (WTI and Brent) had fallen to around US$88/bbl (from an all-time nominal high of US$100/bbl a few months ago), mainly on the news of growing crude and product stocks and new projections of weakening demand stemming from a brewing world-wide economic slowdown. But by the end of the same week, crude prices were pushing up towards US$95/bbl again. On 18 February Chávez gave a partial clarification of the Venezuelan position, claiming that oil flows to the US would not be cut off unless ‘imperialism attacks Venezuela’ or engages in some form of aggression. Prices nevertheless continued to rise, topping US$100/bbl again on 19 February, as other worries (Nigeria, OPEC production levels and the depreciating US dollar) combined with Chávez’s threats to tighten the market.

The Broader Economic and Geopolitical Context
Over the past years, Chávez has reversed most of the liberalising reforms of the so-called apertura policy that the Venezuelan energy sector had engaged in during the 1990s. By the time Chávez was first elected, the apertura process had, perhaps paradoxically, helped transform PDVSA into one of the leading and most successful state-owned oil companies (NOCs) in Latin America, if not the world; however, in recent years, PDVSA has become one of the most aggressively interventionist NOCs and, despite record revenues, still struggles to maintain investment and production levels. Meanwhile, Petrobras, the Brazilian NOC, has stolen its mantel as the most impressive Latin American oil and gas company.

At first, the Chávez reversal was minor and slow in coming, but the pace eventually picked up and the direction became clear with the fallout from the ‘Great Oil Strike’ at the end of 2002 and beginning of 2003, a deadlock that led to a government purge of the management and technical staff of PDVSA, leaving the company bereft of half of its employees and most of its technical expertise. During the last two years, the government’s policy has continued in the same direction, taking on all the characteristics of a complete ‘re-nationalisation’ of the sector, similar in nature to that which has taken place in Russia.

First, the average sum of royalties and taxes which foreign private oil companies (IOCs) are required to pay to the Venezuelan state has increased from around 20% of revenues to upwards of 80% (similar developments have recently taken place in Bolivia and Ecuador). Secondly, the conditions of access to reserves and participation in production have become increasingly tight and onerous for IOCs; at this stage, all projects require majority participation on behalf of PDVSA, allowing IOCs only the chance to participate as minority partners in joint ventures. This has forced IOCs –even those with previous contracts in place– to either renegotiate the terms of their participation with PDVSA or abandon their projects, as ExxonMobil and ConocoPhillips have done. Third, such new conditions have not only been imposed on conventional oil projects; they have also been extended to the ultra-heavy oil projects of the Orinoco Belt and to most of the gas sector’s activity as well.

A nearly ten-fold increase in nominal benchmark oil prices since Chávez was first elected has buoyed the Venezuelan economy and flushed the state’s coffers. The oil boom has helped Venezuela to improve its terms of trade significantly (110% from 2003 to 2007) and grow at an average annual rate of over 10% since 2003 (although inflation has crept up to stubbornly high levels around 20%). For 2008, the IMF predicts a slowdown, with growth of 6% and inflation of 19%. On the other hand, Venezuelan oil revenues have increased significantly over the past five years, rising from under US$20bn a year in 2003 to nearly US$50bn last year. This implies that while PDVSA and the Venezuelan state have captured much of the increase in oil prices from US$30/bbl to well over US$80/bbl (measured in average annual terms), at least some of the increase has accrued to the IOCs. This development accounts for another reason why most IOCs have chosen to renegotiate their terms and remain in the Venezuelan energy sector. In broad terms, Venezuela’s actions have been in keeping with the world-wide trend of this decade among oil and gas producing countries, almost all of which have tightened fiscal and access conditions in their hydrocarbons’ sectors. Even the UK and Canada have tightened fiscal and access conditions in recent years. (See Robert Mabro, ‘Oil Nationalism, the Oil Industry and Energy Security Concerns’, ARI nr 114/2007, Elcano Royal Institute).

Nevertheless, Venezuela is not just any other energy exporting country that has tightened terms for IOCs wishing to participate in its energy sector, nor is it just another member of OPEC. Under Chávez, Venezuela has not only renewed its role as a price radical within the oil producers’ cartel; it has also taken the lead among a small subgroup of oil and gas exporting countries that have loosely come together to form an informal ‘anti-imperialist’ axis opposed to the US. Chávez has recently visited both Moscow and Tehran in a high profile diplomatic bid to bring together pariah or would-be pariah states with large energy resources in a political front against ‘US imperialism’. Chávez has also spoken of informal agreements on behalf of PDVSA to pursue the collaboration of both Gazprom, the predominately state-owned Russian gas monopoly, and NIOC, the state-owned National Iranian Oil Company, on heavy oil projects in the Orinoco Belt and other gas and international hydrocarbon projects as well. Venezuela has also flirted with other producer states, as well as with NOCs from consumer countries, like China and India, and even transit states like Belarus, although nothing concrete has yet come of such efforts. (See Carlos Malamud, ‘Outside Players in Latin America (I): China’, Working Paper nr 50/2007, Elcano Royal Institute; and ‘Outside Players in Latin America (II): Iran’, ARI nr 124/2007, Elcano Royal Institute).

Chávez’s recent threat to cut off oil flows to the US is not new. It has been rearticulated in a number of different ways over the years. The most well known plan of this type has been Chávez’s long-standing intention to have PDVSA divert the flow of Venezuelan exports away from the US and towards East Asia, particularly China. Such a plan, however, faces a number of political, economic and technical barriers, on the one hand, and offers Venezuela virtually no geopolitical or economic advantage on the other.

Such structural limitations on the geopolitical use of oil will be dealt with in the following section. Nevertheless, the general context in which Venezuela is now forced to operate also makes such maverick politics difficult to undertake with any hope of lasting success. With the increasingly difficult political situation facing the Chávez government at home, in the Caribbean, Andean and broader Latin American contexts, and in its relations internationally, particularly with the US and Spain, it is easy to understand why Venezuela’s government might think of attempting to knit together a broad ‘anti-imperialist’ alliance among international pariahs, like Iran, or new borderline pariahs, like Russia, and why it might think of threatening to use oil as a political weapon. But the truth of the matter is that Venezuela’s domestic and international political and economic contexts are also conspiring to make such ‘solutions’ increasingly untenable.

First, Chávez and his government are dealing with an increasingly difficult domestic scenario. Chávez rode high while he could surf the rising tides of seemingly unrelenting oil price increases and an international economic boom. Nevertheless, after some limited economic success, punctuated as it was by fall-out from the Argentine and Brazilian crises, the ‘Great Strike’ at PDVSA, and ever greater economic intervention, the Venezuelan economy is now struggling with growing inflation, shortages of basic consumer goods and rising debt at PDVSA, the one firm that should be doing relatively well but which, nonetheless, has been shackled by inflated social spending demands imposed on it by the government. The Economist claims that PDVSA’s debt rose from under US$4bn to US$16bn during the course of last year. The company’s auditor, a subsidiary of KPMG, reports that consolidated net profit fell by 68% to US$896mn during the first half of 2007 (compared with the same period in 2006), after having fallen 16% over the course of 2006. Meanwhile, the company has continued to increase its social spending, which rose from US$6.7bn in the first half of 2006, to over US$7.24bn in the first half of 2007. The company is now even involved in supplying the subsidised food market, through its subsidiary PDVSA Alimentos. The result has been a large flow of state funds to the poor, with seemingly little to show for it in terms of long-term sustainable development and poverty reduction, and a dearth of new investment in Venezuela’s energy sector, which many independent observers fear will soon place current oil production levels in danger, to say nothing of dashing hopes for a significant increase in Venezuelan output over the medium run. The long-time goal of reaching 5mbd and beyond, first set by the PDVSA of the apertura era, but reaffirmed after the ‘Great Strike’, seems unlikely to be achieved by 2012.

While Chávez rode high, he and his government seemingly overcame all the long odds, surviving a coup d’etat, maintaining overwhelming domestic support, registering higher average incomes among the poor and near-poor, and winning an unbroken string of 11 public votes (elections and referendums). But the tailwinds propelling Chávez forward have died down of late. The world economic slowdown is undermining oil demand and with it the foundation for higher oil prices. Last December, Chávez lost, for the first time, a vote put to the Venezuelan public –a referendum that would have sanctioned wide-sweeping constitutional reform, including making the President eligible to stand for re-election indefinitely–. (See Manuel Hidalgo, ‘“Not That Way, Commander”: “21st Century Socialism”’ Checked by Referendum’, ARI nr 3/2008, Elcano Royal Institute). Meanwhile, Venezuelan international relations have soured, not just with latent enemies like neighbouring Colombia, or explicit adversaries like the US, but also to some degree even with erstwhile political friends and understanding and interested economic partners, like Spain under its current social-democratic government.

Secondly, at the same time that Chávez has courted Iran and Russia, along with some other less significant would-be pariahs, the regional scenario has become much more complicated, even explosive. After serving as a mediator between the Colombian government and the FARC, with the objective of brokering a deal for the exchange of prisoners and the release of hostages, Chávez has recently considered the possibility of formally recognising the FARC as a legitimate political entity, as opposed to a terrorist organisation. The mere fact that Chávez has even countenanced such a possibility has not only offended and alarmed Álvaro Uribe’s Colombian government and pushed the US into studying the possible application of its sanctions legislation against Venezuela (and potentially against companies dealing with Venezuela), but also intersected with once-dormant but now re-kindled border disputes between Colombia and two of Venezuela’s regional allies, Nicaragua and Ecuador. The region is now closer to the brink of interstate armed conflict than at any other time in contemporary history. What is more, the various protagonists have been rearming themselves, directly or indirectly, with the finance of the recent Andean oil boom.

The Limits to Chávez’s Petropolitics
Even if Venezuela was not facing a deteriorating political and economic context at home and abroad, there are important structural limitations checking the efficacy and lasting impact of any potential use of oil as a political weapon –presumably against the US–. First, the US has sufficient flexibility to replace Venezuelan crude oil. Between commercial and strategic stocks, the US has over 140 days of total import cover. At current US oil import levels, this is more than enough to cover well over three years of oil imports potentially lost from Venezuela. Furthermore, it is unlikely that the US would ever be required to run down stocks to any significant degree, given that Saudi Arabia has more than enough spare capacity (2.2mbd versus 1.4mbd of US imports from Venezuela) to bridge the gap. The marginal barrel of oil coming from increased use of Saudi spare capacity is also relatively heavy, the kind of oil that would fit well with the special refinery capacity in the US geared to process heavy oil (much of which is at least partly-owned by the PDVSA-subsidiary CITGO) that would be left idle by any Venezuelan cut-off. It is unclear what PDVSA would try to do with its idle refinery capacity in the US in the event of any cut off. It might conceivably extend a recent trend to sell off its subsidiaries in the US; but in the worse case scenario of a full-blown economic war, CITGO refineries could easily be seized by the US government and commandeered to refine heavy oil from Saudi Arabia. In light of the legal implications of the recent court decisions in the UK, the Netherlands and the US, a court order would suffice to open the door to the seizure of CITGO assets.

Should a temporary US stock drawdown, together with increased Saudi production, prove insufficient to replace lost Venezuelan oil in the US fast enough to nullify all market impact, the result would be an increase in global prices, given the globally unified nature of the oil market and the fungible nature of the oil commodity itself. Therefore, even in the unlikely event that Venezuela were to cut off its exports for any appreciable length of time, the ultimate worst-case scenario would be a bidding up of world oil prices that would affect all world economies, directly infusing ‘stagflationary’ pressures into net importing economies, and placing additional indirect budgetary pressures on governments that subsidise their own domestic oil consumption. The point is that such a cut-off would affect most world economies to differing negative degrees. The impact could not be targeted solely at the US, as price increases could not be limited to the North American market; it would affect many countries around the world, thereby soiling Venezuela’s already tarnished image. Only net exporters would gain, at least in the short run, but really only those that kept production and exports flowing, to say nothing of other exporters that might actually increase production levels in a bid to take advantage of even higher prices (generating, in the process, countervailing softening pressures upon price). The impact on Venezuela –which in this scenario would have slashed its production in half and its exports by an even greater percentage– would not be nearly so benevolent.

However, this analysis assumes the drastic possibility that Venezuela would not only cut off all (or some) exports to the US, but would actually take such quantities off the world market as well. There are a number of reasons why Venezuela would probably prefer to exercise a different option if it could –ie, stop oil exports to the US, but re-route them to alternative destinations–. Obviously, the Chávez government would prefer to avoid forgoing oil export revenue as the price to pay for such an action, if that were possible, while still ‘punishing’ the US, or engaging in what it perceives as an appropriate ‘retaliation’ in an ‘economic war’ provoked by the US. After all, Venezuelan oil exports account for over 75% of total export earnings and more than half of all government revenues. Given that economic and social circumstances on the ground seem to be deteriorating (the Chávez government might claim that rising inflation and basic goods shortages are due to hostile private sector monopolies gouging the public in an attempt to destabilise the government, but most economists –even those with a clear social-democratic hue– would be at least as suspicious of excessive government intervention and price controls, as well as what could easily be a dose of Dutch Disease), it would be a major gamble to reduce government and export revenue so drastically, even for a short period of time. Most likely, Chávez would quietly attempt to do what the Arab states did during the 1973 oil embargo imposed on the US and the Netherlands: offload the excess petroleum somewhere else in the global market. (See Paul Isbell, ‘Revisiting Energy Security’, ARI nr 123/2007, Elcano Royal Institute).

Although this strategy would face various technical and commercial difficulties in the short run, and require some fast manoeuvring on the part of PVDSA, as well as significant collaboration from various private and public actors on the international stage (which might come from Iran, but not likely from Saudi Arabia), to actually succeed at re-routing Venezuelan oil exports quickly and successfully would ultimately eliminate much, if not all, of the resulting impact on international prices. The end result would be neutral, a wash. Remember that oil prices rose dramatically in 1973-74 not because the Arab states placed an embargo on the US and the Netherlands, but rather because the broader OPEC membership simultaneously agreed and implemented significant production cuts and export restraints which affected the global market and pushed up global prices. This leads to the all-important question, then, of any Venezuelan embargo on the US: what is the point? It is likely that, under any conceivable scenario (cut-off to the global market or mere re-routing of Venezuelan exports), prices would rise, at least temporarily, as the markets reacted in fear to what traders perceived as yet another dangerous component to build into the current ‘geopolitical premium’. The fact that prices have risen well over 10% since the Exxon-Chávez news hit the world, breaking a downward trend that had been supported by perceptions of weakening demand, suggests that this would be the likely outcome. Perhaps this is really all that Chávez, and other energy exporters, actually want right now. Perhaps it is all they can realistically hope for.

Nevertheless, there is another important technical aspect to consider in this context. Forgetting, for the time being, Venezuela’s ultra-heavy crudes (with an API density of 8º to 10º), the country’s conventional oil is also relatively heavy (15º to 30º) and is largely sold to refineries with special capacity (typically hydrocracking or other conversion) to economically process crudes with lower API. Given that such heavy oil refinery capacity is limited globally (beyond CITGO refineries in the US, the Caribbean and Europe), it might be possible for some heavy oil refineries to take on more Venezuelan crude, but much of Venezuela’s re-routed oil would have to be heavily discounted even more than it already is, in order to induce conventional refineries without hydrocracking capacity to take on more heavy crude. This would seem to be necessary if such refineries were to face the prospect of refining less petrol and diesel, and more fuel oil, per barrel of heavy Venezuelan oil than would be possible from a lighter barrel from say, Nigeria or the North Sea, or be forced to bear the extra costs of subsequently converting fuel oil to lighter distillates (if and when conversion capacity exists).

Chávez’s longer-run strategy to reroute oil exports to China faces similar obstacles, only in addition to a lack of specialised heavy oil refinery capacity in Asia, the plan presupposes enormous investment in pipeline capacity through rival Colombia –not a likely proposition at the moment– to allow oil (or, should Venezuela invest directly in more heavy oil refining capacity at home, product flows) to flow to an outlet on the Pacific coast. And, in the end, what would have been achieved by this more expensive export route for Venezuelan crude, beyond a mere offsetting re-route of Persian Gulf exports from China and the Far East to the US? (See Paul Isbell, ‘The New Energy Scenario and its Geopolitical Implications’, Working Paper nr 21/2007, Elcano Royal Institute).

In the end, Chávez would be faced with two possibilities, each with a similar outcome: (1) take its US exports off the global market altogether; or (2) sell much of this oil at much larger discounts in order to place it elsewhere within the global market. Both options imply accepting lower oil revenues. Option 2 affects global price only marginally at most, but implies somewhat lower Venezuelan revenues given the necessary higher discounts. (A third option might involve selling Venezuelan oil to intermediaries who would then pass the oil on to the US). Option 1 might drive up prices more (assuming spare capacity and stocks were not called upon to offset this effect), but it would also imply damaging the world economy at its current critical juncture –and creating more enemies internationally than friends– and potentially undermining future oil demand. While higher prices might partially offset the lost sales of what would amount to more than half of current Venezuelan production, the ultimate effect would be a significant loss of revenues for Chávez’s government.

Historically, there have been very few cases –if any– of individual countries cutting off oil or gas flows for political purposes without a broad OPEC agreement to reduce total cartel production in support of higher prices (as was the case in the original Arab Oil Embargo). Even Russia has been unwilling to cut off gas to any market in a way that would substantial affect revenues –and certainly not in the context of a political battle as quixotic as Chávez’s duel with ‘Mr Danger’ appears to be at the moment–. Venezuela itself, if anything, has a long track record as a notorious cheater with respect to OPEC-agreed quotas and production levels –both before the 90s apertura and after–. The only energy exporting country of any significance that has unilaterally reduced production levels (and with them, short-term revenues) has been Saudi Arabia, the oil market’s only credible swing producer which, in the mid-1980s, slashed production in an attempt –not to punish any consumer country for political or economic motives, but rather– to impose discipline on cheating OPEC members who were increasing production at a time of collapsing world oil demand and prices in a beggar-thy-neighbour attempt to maximise short-term revenues. But Saudi Arabia was the richest oil producer at the time, enjoyed relative internal stability and had the lowest production costs in the world.

Does Hugo Chávez really think that Venezuela is in a position to take such a risk? No one should feel secure in assuming that Chávez will resist overplaying his hand. Still, it seems more likely that the most recent threat to cut off oil exports to the US –which Chávez actually played down, almost immediately– is merely a rhetorical weapon designed to lend some short-term support to oil prices in a weakening global economic environment and to rally support at home, in the wake of the December referendum defeat, around Chávez’s ‘anti-imperialist’ attacks aimed at President Bush –admittedly an easy target, rightly or wrongly, for better or for worse, among much of the world’s poor masses, but particularly in Latin America–. Both of these probable political objectives, however, can produce only short-term success at best, and it is likely that the rhetoric Chávez needs to employ to achieve them might soon reach the point of diminishing marginal returns –if it has not already–.

Conclusions: The real risks to the world generated by Hugo Chávez’s policies, and from his diplomatic tussles with the US, stem not from any particularly damaging implications of potential oil supply cut-offs, but rather from the deteriorating political, economic and social situation in Venezuela, and the brewing instability that Venezuela is injecting into intra-regional relations. Over the middle run of five to 10 years into the future, however, the excesses of Venezuelan energy nationalism –reinforced by the excesses of Chávez’s rhetoric– are placing future Venezuelan energy production levels –and revenues– at risk. Unless PDVSA can rapidly reverse its recent profit and investment trends, and harness more international investment and technical expertise in an effort to enhance production at Venezuela’s many aging mature conventional oil fields and to significantly ramp up production in the ultra-heavy oil fields of the Orinoco belt, the already tenuous pillar upon which the economy rests will weaken further. The implications for the world will be simple: little prospect that Venezuelan oil production will help ease an increasingly tight supply and demand balance in the global oil market, with all the likely implications for price.

For the US there is seemingly very little more that it might lose –economically or politically– from the way things are going in Venezuela –short of a potential civil war or regional military conflict–. With most of the economic damage already done to its business interests there, and with its key oil imports under no real threat with any tangible implications, the US can afford to sit on its hands, waiting for Chávez to either return to more pragmatic and less confrontational politics or simply hang himself with the rope they have lent him.

For Spain, Chávez represents somewhat more of a diplomatic and economic challenge. Although Spain imports little, if any, oil from Venezuela (and usually none), it does have diplomatic and economic interests there. Depending on who is measuring it, and depending on how it is measured, Spanish economic interests have anywhere between €800mn and €2bn invested in Venezuela (accounting for anywhere between less than 1% and up to 2% of all Spanish investment in Latin America), the key elements of which involve the banking and energy sectors. This is nowhere near the levels of investment Spanish companies have sunk into Brazil, Argentina, Chile and Mexico, but it is not without its importance to Spain. Venezuela is even more important to Spain when considered for its significant upside potential in the future, in terms of both political and economic influence (given Spain’s economic and diplomatic positioning there over the last 15 years), should Venezuela transform itself into a stable and prosperous democratic society. It is unfortunate for both Venezuela and Spain, that Chávez –who considers himself a great leader and a masterful politician– has recently done so much to spoil the potentially mutual benefits that can come from the bilateral relationship, leaving the two potential allies of very little use to each other, at least in the current circumstances.

In the end, however, the one country that has the most at stake in the current trajectory of Venezuela is neither of these two major external influences in Latin America, but rather the region’s giant, Brazil. Now that Brazil has become an international leader of the emerging market economies, demonstrating to the world that it deserves its designation as the ‘capital B’ of the BRICS, and has managed to transform its national oil company, Petrobras, and its energy sector into international leaders, Venezuela poses a major challenge to its potential role as the true and natural leader of South America. Given that Lula’s government has been patient and tolerant, sympathetic but not imprudent with Hugo Chávez’s government, its nascent leadership role will be questioned if Venezuela and its neighbours actually descend into conflict. However, it Brazil manages to insert itself into the dynamics of the Andean region in a way which helps avoid such a denouement to the current dynamic, then it will have gone a long way to crafting itself a leadership role which would command the respect of not only Latin American countries and Spain, but also of the world.

Paul Isbell
Director of the Energy Programme and Senior Analyst for International Economy and Trade, Elcano Royal Institute