First, here is an outline of this and the next three or four blogs on this topic:

I. Changes on the Venezuelan side that are enhancing the Chinese role:

a.  Chavez’ recent interest in increasing national oil production 

b.  The existential crisis Chavismo faces from the slow collapse of dysfunctional state institutions, civil infrastructure, and nationalized enterprises

II. Changes on China’s side that enhance its role in Venezuela:

a.  China has now loaned Venezuela so much money, and Venezuela so badly needs continued Chinese financing (lately it  also feels a need for managerial and technical assistance), that Beijing has been able to insist Caracas not only begin to come through on long-awaited heavy-oil contracts, but that it also comply with certain  geo-political and fiscal-accountability conditions. A couple of these are pretty amazing.

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I. Changes on the Venezuelan side enhancing the Chinese role:   a. Chavez’ new interest in increasing national oil production

One reason for China’s deepening influence in Venezuela is that PDVSA‘s president and energy minister, Rafael Ramirez, is no longer alone in insisting that PDVSA’s level of production has to rise.  President Chavez now seems to have gotten behind the need to increase national production.  If the price of oil falls significantly (many feel six months at an average of $60/barrel would be ruinous) and PDVSA’s exports per day have not risen to compensate, Venezuela will be in real trouble.  Venezuela is extraordinarily dependent on imported goods, from food to machinery for which dollars are needed; and it also must keep up payments to foreign bond holders, for which a steady stream of dollars are also needed.  Chavez and Ramirez have every reason to expect that the world’s economic woes will lead to a decrease in oil demand over the next year or two, and this of course can lead to significantly lower prices.  These fears were not apparent in the recent past. It has been more or less a tenent of Chavista faith at elite-and-professional levels that the price of oil will never again fall significantly.  I have been told this many times.  Continue reading →