Venezuela Watch: Leftist President Hugo Chavez Creating Political Pressure on PDVSA's US Refining &

Venezuelan President Hugo Chavez is continuing to back his anti-US rhetoric with substantive actions which eventually could divert his petroleum production to places other than the United States. As it stands now, the US is the number one customer for Venezuelan oil and Venezuela’s state-owned PDVSA markets much of that through their wholly owned subsidiary, CITGO Petroleum Corporation.

As Chavez ramps up his anti-US message, CITGO has had to deal with an increasingly vocal backlash which has ranged from calls to remove their landmark CITGO neon-lit sign adjacent to Boston’s Fenway Park, the ending of contracts between CITGO and government entities in Maine and Florida, and all the way to a call for a general boycott of CITGO gas stations. Last month, some remote Alaskan villages reportedly rejected free heating oil from Venezuela.

So far, CITGO says that the political winds and threatened actions haven’t hurt their bottom line, but they’ve also launched a pricey AD campaign to tout the thousands of US employees working for the PDVSA subsidiary and the good done by the firm in way of charitable contributions and other causes. Industry experts say that there’s no evidence that the firm has suffered any significant impact, but Chavez’ continued actions and political positions could change all of that. And, the private nature of CITGO’s financial data makes it difficult to assess the effect of any informal pressures against CITGO’s products.

Recent moves to establish relationships with both China and Iran have worried US officials and Defense Secretary Donald Rumsfeld, in a recent visit to Nicaragua, expressed concerns about the Venezuela’s ongoing military build-up. Chavez has inked agreements with the world’s third largest energy consumer designed to increase Venezuelan imports to China and China is now working towards increasing their VLCC fleet to do just that. Beyond this, Venezuela and Iran have, according to the Venezuelan government, established a $2 billion strategic investment fund to finance, among other things, the construction of oil tankers and develop oil production and infrastructure. Another recent announcement by the Venezuelan government has touted a cooperative agreement with PetroVietnam in which Venezuela would help build an oil refinery in that country, using the proceeds from the sale of its minority shares in the Lyondell-CITGO Refinery in Texas.

Venezuela ranks as the fifth largest crude exporter world-wide and is the United States’ fourth most important supplier, to which it sends at least 1.5 million barrels of crude per day, representing more than 10% of US oil imports. Threats by Venezuela’s government to cut off oil sales to the US ring hollow, at present, because most industry observers say that such a move would be economic suicide.

Venezuela’s promises to begin sending its oil to places other than North America hinge largely on being able maintain current production levels, and building infrastructure to produce more. The Iranian deals closely follow other similar pacts with China and ultimately might allow Venezuela to follow through on threats to cut off oil supplies to the US. Such an event would have a significant effect on the US economy and price of crude oil, but at present, would probably have a more deleterious effect on the Venezuelan economy. That could change.

Venezuela is expected to increase oil exports to China to at least 300,000 barrels per day before the end of the year. China is also planning to help Venezuela build as many as 18 new oil tankers by 2012. The move will potentially boost Venezuela's shipping capacity to carry crude oil to China. China’s investment into Venezuelan infrastructure may be as much as $5 billion and the energy deals were the cornerstone of the August visit to China by Hugo Chavez.

China is now closing in on being the world's second largest oil consumer, trailing only the United States and Japan and its growing economy has become increasingly dependent on foreign oil. PDVSA exports to the U.S. fell by at least 15% in the first half of this year, some of which was a function of the planned pullback from the gasoline markets in at least 14 states. One thing is clear: Venezuela and its national oil company PDVSA have embarked upon a course which could eventually divert a significant portion of its energy output to the Far East. Whether they can make good on this plan is another thing altogether.