US embassy cable - 04CARACAS1350

C O N F I D E N T I A L  CARACAS 001350 
 
SIPDIS 
 
 
ENERGY FOR PUMPHREY AND LOCKWOOD 
TREASURY FOR OASIA - SIGNORELLI 
NSC FOR SHANNON AND BARTON 
USCINCSO ALSO FOR POLAD 
 
E.O. 12958: DECL: 04/21/2014 
TAGS: ENRG, PREL, EPET, VE 
SUBJECT: CHAVEZ RAISES OIL CUT-OFF AGAIN 
 
REF: A. CARACAS 708 
 
     B. CARACAS 851 
 
Classified By: Economic Counselor Richard M. Sanders.  REASON: 1.5 (B) 
AND (D). 
 
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Summary 
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1.  (C)  President Chavez has again raised the threat of 
stopping oil sales to the U.S., this time in response to 
President Bush's alleged "intervention."  The remarks, made 
to an Italian newspaper, follow several weeks in which this 
theme had lain dormant (although he has turned to other forms 
of U.S-bashing).  He suggested that China and Brazil could be 
alternative markets for Venezuelan petroleum.  Meanwhile, 
Venezuela's latest effort to diversify oil sales away from 
the U.S. involves a food-for-fuel swap to Argentina.   We 
remain convinced that withholding oil to the U.S. is likely 
to be technically difficult and financially costly, but 
clearly this high risk option remains on Chavez's mind.  End 
summary. 
 
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Stop Intervening  --  Or Else 
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2.  (U).  In an April 18 interview with newspaper 
"Liberazione," organ of the Italian Communist Refoundation 
Party, published in Spanish on the web site of state news 
agency Venpres (and summarized in an Associated Press story 
of the same day) Chavez referred at some length to the 
prospect of Venezuela cutting off oil sales to the U.S. 
Asked if oil could be a weapon for Venezuela, he said  "It's 
one thing for me to say that I do not want to use it, and 
another that they make me use it.  In (President) Bush's 
case, he should cease the madness of directly intervening in 
Venezuela's internal affairs.  That would spark a conflict 
here, and it would be absurd to continue selling oil to them. 
 Not only the U.S. exists.   Oil doesn't deteriorate.  Oil is 
sold." 
 
3.  (U)  He went on to add that oil could be sold to Europe 
and Asia.  "Chinese companies have asked that I increase 
their quota of business with Venezuela.  We can't because we 
are part of the OPEC quota.  We sell a million and half 
barrels per day to the United States.  It wouldn't cost much 
to place it in other places.  Brazil imports petroleum.  It 
has to buy it in the Middle East.  Why?  Because the strategy 
of the Venezuelan oil company for many years has been linked 
only to U.S. interests.  In the event of conflict, 
contractual obligations would be broken." 
 
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Previous Version 
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3.  (U)  Chavez previously raised the prospect of cutting off 
oil sales to the U.S. in a February 29 speech to political 
supporters (ref A).  There, he had said that "not a drop of 
oil would arrive from Venezuela" if the U.S. were to seize 
CITGO or otherwise "blockade" Venezuela.  He also noted that 
the U.S. had "plenty of installations" in Venezuela that 
could be seized in retaliation.  Following these highly 
publicized remarks, he adopted a more conciliatory tone.  In 
a March 9 ceremony, hastily organized at GOV insistence, to 
mark the award of an important natural gas concession to U.S. 
major ChevronTexaco (ref B), he stressed Venezuela's 
reliability as an energy supplier and his recognition of 
ChevronTexaco as "brothers from the U.S. who come not to 
attack us nor show a lack of respect but come to unite with 
us."  Since then, until this most recent comment, Chavez and 
his government had dropped the oil threat although other 
anti-U.S. themes have in fact become more prominent in his 
discourse in recent weeks. 
 
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Diversification Drive 
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4.  (U)  As the oil threat rises and falls, efforts to 
diversify Venezuela's energy relations away from the U.S. 
have received some prominence of late.  Venezuela will 
reportedly provide Argentina with up to 8 million barrels of 
fuel oil to make up for energy shortages arising from 
insufficient availability of natural gas, and in exchange 
will take quantities of Argentine powdered milk, soybean oil, 
beef and yellow corn.  Chavez was quoted in Buenos Aires 
daily "La Nacion" on April 19, defending the decision in the 
face of allegations that the high sulfur product was 
incompatible with Argentine power generators. 
 
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Comment 
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5. (C)  Chavez thinks in political and personal terms, not 
economic.  His threats may just be an effort to unnerve or 
annoy the U.S., but we believe they also reflect his desire 
to become the Latin American David to the USG Goliath.  As we 
have noted before (ref A), making good on a threat to cut off 
oil to the U.S. would be very costly to Venezuela, given that 
its heavy crudes are best marketed to the dedicated 
refineries in the U.S., and even its more desirable light 
crudes would need to be sold at steep discounts to conquer 
new markets.  And the U.S. Strategic Petroleum Reserve 
remains available to counter the effect on world prices that 
a sudden withdrawal of Venezuelan oil could create. 
Venezuela has high foreign exchange reserves to mitigate the 
domestic economic impact of a cut-off in sales to the U.S. 
Nonetheless, such an oil boycott (in effect a self-imposed 
repetition of the December 2002-February 2003 general strike) 
could have sharp internal consequences.  These include a 
crash of the bolivar on the quasi-legal parallel market, 
which is responsible for half of Venezuela's foreign exchange 
needs, possible legal efforts by those customers left in the 
lurch to attach GOV and PDVSA assets abroad, and a 
generalized collapse in business and consumer confidence 
leading to an end to the current modest and extremely fragile 
economic recovery. 
 
6.  (C)  That said, Chavez clearly has not given up on the 
idea.  By making his comments to a European newspaper, he 
gives the lie to the assertions of spin-doctors Bernardo 
Alvarez (GOV ambassador to the U.S.) and Ali Rodriguez (PDVSA 
President) that such statements are entirely aimed for 
domestic political consumption and should be ignored by the 
international community.  We note that he has ratcheted up 
the threat this time and personalized it, raising the 
prospect of taking the initiative to impose an oil boycott if 
President Bush doesn't "cease the madness of intervening" as 
opposed to doing so only if the U.S. seizes CITGO assets or 
"blockades" Venezuela.  At the same time, read in the context 
of the interview as a whole which rambled through the full 
range of political and economic issues, Chavez's oil threat 
did not appear to be particularly immediate or even made with 
forethought.  Refusing to sell oil to the U.S., far and away 
Venezuela's largest customer, would be at best a high risk 
throw of the dice, which Chavez is likely to consider 
seriously only if our bilateral relations have deteriorated 
considerably more than they have already and he sees such a 
move as important to his survival in power or to his 
ambitions to replace Castro as a regional "anti-imperialist" 
leader. 
SHAPIRO 
 
 
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      2004CARACA01350 - CONFIDENTIAL