Red Oil.TUESDAY 10 FEBRUARY 2009. By Hannah baldock

TUESDAY 10 FEBRUARY 2009JOURNALIST - HANNAH BALDOCK
Venezuela, on the Caribbean coast of northern South America, is a country of striking natural beauty, ranging from the snow-capped Andean peaks in the west, through the Amazonian jungles in the south, to the beaches of the north.

Among the most highly urbanised countries in Latin America, Venezuela is the fifth largest oil exporting country in the world with the largest reserves of heavy crude oil as well as huge quantities of coal, iron ore, bauxite and gold.

Despite this, most of the 28m Venezuelans live in poverty, many of them in shanty towns, some of which sprawl over the hillsides around the capital, Caracas. Unemployment is high and, according to official figures, around 60% of households are poor.

President Hugo Chávez, a firebrand former paratrooper, was elected President in 1998 on a promise to aid Venezuela's poor, who re-elected him in 2000 and in 2006. Chávez says he is leading the country - which has enjoyed a windfall from high oil prices in recent years - through a socialist revolution.

This revolution has split the country between his red-wearing supporters and the opposition, mainly the upper and middle classes, who have staged massive protests against his rule and unsuccessfully tried to end it in a 2004 recall referendum.

After Chávez won a third term in elections in December 2006, he was granted sweeping powers to rule by decree for the next 18 months and used them to nationalise key sectors of the economy, assert more control over the oil industry and to raise taxes on the rich. His opponents say the new laws he introduced amount to an abuse of power.

Chávez has diverted up to $14bn a year of Venezuela's record oil revenue into social spending on grass roots projects to combat disease, illiteracy, malnutrition, poverty, and other social ills. He has also exported his revolutionary values via cheap oil deals from Bolivia and Nicaragua to, controversially, Boston, the Bronx and London (this last brokered by left wing former London Mayor Ken Livingstone and cancelled last May by new Tory Mayor Boris Johnson).

Chávez's current term is until 2013 and on February 15th 2009 he hopes to win a referendum that would remove all political term limits, a first step to realising his 'modest' ambition to remain in power until at least 2030.

However, analysts warn that the end of the oil price boom may spell doom for Chávez and his populist policies.

Chávez's supporters claim he has already transformed his country for the better by empowering the poorer and darker-skinned among its citizens, who had sometimes felt their country had been cursed, not blessed, by the crude oils and asphalts that have seeped up through the ground for centuries. Venezuela's traditional ruling classes, whom Chávez has called 'the rancid oligarchy', have siphoned off revenues vulnerable to global price swings while failing to diversify the economy or address chronic poverty.

The indigenous people of Venezuela had already encountered oil before the Spanish conquistadors arrived in 1499, using the thick black liquid primarily for medicinal purposes, lighting, and for the caulking of canoes. Upon arrival in the early 1500s, the Spanish conquerors learned from the indigenous people to use the naturally occurring hydrocarbons for caulking their ships as well, and for treating their weapons.

Despite this local knowledge, the first significant oil wells were not drilled until the early 1910s. As the word spread internationally of Venezuela's oil potential, representatives of large foreign companies came to the country and started lobbying then president Juan Vicente Gómez for rights of exploration and exploitation. Gómez began to grant huge concessions to family and friends and the Venezuelan concessionaires leased or sold their holdings to the highest foreign bidders.

A 1970s oil boom largely benefited the middle classes, but a subsequent price collapse condemned many of this class to poverty while eroding the living standards of the already impoverished. The country officially nationalized its oil industry in 1976, and Petróleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned petroleum company was born.

It now owns around $100 billion in assets worldwide, including refineries in the United States, the Caribbean and Europe. PDVSA, which has raked in up to $90bn a year in recent years, has been required by Chávez to divert part of its investment budget to social spending, including free health care staffed with 10,000 Cuban doctors, subsidised food and land reform.

Critics have accused Chávez of trying to emulate Cuba's communist system and of increasing state intervention in business - and rumours of foreign backed conspiracies to oust him have abounded. He was forced out of office by the military in April 2002, only to be reinstated within 48 hours after a post-coup opposition government collapsed in the face of a rebellion by loyalist troops and massive protests.

Embarrassingly, the United States, 11% of whose oil imports come from Venezuela and Chile were quick to acknowledge the de facto pro-US government, but ended up condemning the coup after it had been defeated. Then, in December 2002, PDVSA officially went on strike, creating a complete halt in oil production in Venezuela, which was intended to pressure Chávez into resigning and calling early elections. The strike lasted approximately two months, costing the economy $10bn in lost oil production.

In the aftermath, the government fired 19,000 PDVSA employees and replaced them with workers loyal to Chávez. When the strike ended unemployment was up by 5 percent, rising to 20 percent by March 2003. Now, analysts are warning that oil has been Chávez's political oxygen and without it his populist policies will damage the economy.

The fall in poverty owes everything to the surge in the oil price since 1999. When Chávez took office in 1998 the price was $11 a barrel. It peaked in July 2008 at $147. Since then it has halved. Despite Chávez's talk of diversifying the economy, Venezuela is more dependent on oil now than it was when he took power, and it accounts for more than half of government revenue.

Analysts warn the end of the oil boom may spell doom for Chávez and his '21st century socialism' - a torrent of central government spending. This is up from 22% of GDP in 2001 to 32% now, meaning millions more Venezuelans depend on the state for jobs and handouts than did so a decade ago. And PDVSA, run now as a political project, produces around a quarter less oil than it did a decade ago, while its debt has almost doubled.

The most reliable opinion polls suggest that Chávez will win the referendum on February 15th, albeit by a small margin. Despite the complaints, just over 50% of respondents in polls approve of him personally.

Chávez still commands high approval ratings despite prolonged food and electricity shortages, rampant inflation and spiralling crime. But this could be regarded as less a ringing endorsement of him, and more an eloquent indictment of the opposition…