Oil's New Boss

By Daniel Eisenberg

It's easy to see how the various princes, sheiks and emirs might have felt a bit out of place at last week's 40th-anniversary summit of the Organization of Petroleum Exporting Countries. For one thing, members of the famously fractious group (given up for dead only a couple of years ago amid plummeting oil prices) hadn't been able to see their way through the wars, political infighting and price gouging to convene such a gathering for a quarter-century.

The other jaw dropper was that instead of making a quick jaunt to a neighboring desert kingdom, the heads of state and their massive entourages (Saudi Arabia brought 340 people) jetted all the way to Venezuela--the only Latin American member of this exclusive club, and long a member in poor standing for consistently flouting production quotas.

Why bother? Because their host had incited in OPEC's leaders a belief that their moment had arrived and that they'd better seize it. Hugo Chavez Frias, 46, the fiery nationalist President of Venezuela, saw an opportunity in the booming economies of the developed world to turn a moribund cartel back into a global economic powerhouse. Against the backdrop of soaring energy prices, which have tripled during the past two years to a high two weeks ago of $36 per bbl., Chavez took center stage in Caracas last week to proclaim OPEC's "resurrection."

The U.S. is girding for a potential shortage of heating oil this winter, and European governments are trying to contain protests over the price of petrol. But Chavez boisterously reminded everyone that the supplier of 42% of the world's most precious commodity has the kind of leverage a superpower might yearn for. And by the way, the ex-paratrooper argued, rather than blame OPEC for threatening the global economic boom, the West should look closer to home--at high fuel taxes, market speculators, lagging refining capacity and a Christmas list of other ills.

By the time the historic meeting adjourned, OPEC's leaders had established for themselves not just a new mandate but also a new identity. Gone are the dictatorial Saudi Arabian edicts of Sheik Ahmed Zaki Yamani, who once practically ruled the cartel, if only by virtue of Riyadh's overwhelmingly dominant role as a producer. The new OPEC is, in the words of an Arab diplomat at Caracas, a "management group." Its new strategists are cosmopolitan technocrats, in some cases U.S.-educated. They speak the language of market economics and are unlikely to rock the global boat with sudden embargoes or regional disputes. The President of Iran, Mohammed Khatami, last week acknowledged a tacit partnership with old foe Saudi Arabia, pledging cooperation in raising production "in order to maintain oil prices at a level acceptable to both producers and consumers."

In other words, the new OPEC doesn't want to gouge its customers; it wants global economic stability. That's why at week's end the cartel suggested that its goal was to lift production enough to bring prices down to between $22 and $28 per bbl.--a level that should ease the sense of crisis felt from Washington to Tokyo. Last week the price of crude oil closed at $30.86.

The irony, of course, is that the man who made the Caracas summit possible could also cause OPEC's new unity to blow like black gold out of Spindletop. Before the meeting even began, Chavez showed how immoderate he can be. A former army colonel who spent two years in prison for his role in a failed 1992 coup, the outspoken Venezuelan last month used a weekly radio address to rail against the injustice of the West and hold forth his vision of OPEC as a champion of the developing world, highlighting such issues as debt relief, poverty, trade and the environment. "For a century, they took millions of barrels of oil at giveaway prices," he said. "How nice it would be if they also lowered the prices of things they sell to us, lowered the prices of computers, medicine and cars, and the interest rates on foreign debt."

That kind of rhetoric instills dread in Western capitals--and it's just the sort of tool Chavez loves to wield. The son of schoolteachers, he was raised in a dusty, southwestern Venezuelan cattle town, and joined the army to further his dreams of becoming a professional baseball pitcher. Instead, partly because of a troublesome arm, he rose through the ranks to lieutenant colonel. His rural roots and socialist ideals drew him into the bloody, aborted 1992 coup attempt. During his prison term, he became a voracious reader of everyone from Jean-Jacques Rousseau and Walt Whitman to Che Guevara and his personal hero, Latin American colonial liberator Simon Bolivar.

Pardoned after two years, Chavez sought and won a reputation as a folk hero to the poor and dispossessed, who make up 80% of Venezuela's 25 million people. Donning his trademark bright-red commando's beret, he traversed the country, decrying the rampant corruption of the country's broken two-party system and promising a "social revolution" to lift Venezuela out of a terrible recession brought on by--what else?--a nosedive in oil prices.

In December 1998, Chavez was swept to power in a landslide election victory. He promptly sold off more than a dozen government private jets, installed military cronies in civilian posts, dismantled the congress and the judiciary and rewrote the constitution. His populist rhetoric, touting land reform and resettlement of the urban poor to the countryside, has scared off foreign investment and the elite, who have spirited $8 billion out of the country. The economy, which fell 7% during his first year in office, is expected to rebound by 2% to 3% this year, mostly on the back of large-scale public spending. "Chavez isn't your typical Latin American demagogue," says Anibal Romero, a political scientist at Caracas' Simon Bolivar University. "He thinks he's a man with a mission."

Much of that mission is evidently to craft "a strategy against globalization," as Chavez puts it. He has annoyed the U.S. by refusing to allow its military planes to fly over Venezuela to fight neighboring Colombian drug lords. Last December he went so far as to refuse American emergency assistance during floods that left 5,000 dead and 100,000 homeless. And after the U.N. Millennium Summit in New York City, Chavez criticized the antiquated, Western-dominated power structure of the Security Council, declaring, "We cannot continue navigating the 21st century with a map from 1945."

Chavez saw OPEC disunity as an opportunity to begin redrawing that map. When he came to power, Venezuela was an errant member of a floundering cartel. The 1991 Gulf War had wrecked Kuwait's oil fields, and it also disemboweled OPEC. No sooner had the Saudis pushed through a production increase in late 1997 than Asia's financial crisis infected the world's economies. The resulting drop in demand pushed oil to a measly $10 per bbl., forcing member states such as Saudi Arabia to curtail their generous government spending and confront popular unrest.

So in February 1999, spurred by neighboring Mexico, a producer but not a cartel member, the new Venezuelan President broke with tradition and pledged his support for the cartel. Saudi Crown Prince Abdullah and Iranian President Khatami had already forged a historic alliance, agreeing in 1998 to cut production. (The producers were so desperate that at a meeting in March 1999, it took only 10 minutes for OPEC to approve a cut of 1.7 million bbl. a day.)

The Venezuelan President pushed OPEC's new sense of unity even further with his controversial sweep through the Middle East in August. Before visiting Libya's Colonel Muammar Gaddafi, he called on Saddam Hussein--a gesture that earned him what the State Department tagged the "dubious distinction" of being the first foreign leader to journey to Iraq since the Gulf War. Saddam personally took Chavez on a sightseeing tour of Baghdad, and after strolling along the Tigris with the man, the Venezuelan leader pronounced, "Saddam is not the devil, nor is Iraq hell."

Neither Saddam nor Gaddafi showed up at the meeting in Caracas last week. But everybody else did. The summit, patrolled by 3,000 police and soldiers, who kept the normally teeming, potholed streets empty, was nonetheless quite an accomplishment. "Nobody thought there would ever be another one," said an oil minister at Caracas.

The sheiks may be grateful to Chavez, but they are wary of his tendency toward the extreme. Top Arab officials candidly admit the cartel's fate is now tied to the prosperity of the developed economies, which is why they are willing to keep the taps flowing. If their openness to noncartel members is any indication, this OPEC is more cohesive and consultative than ever.

Still, the organization is vulnerable to the factional battles that have crippled it in the past. Saudi Arabia is powerful enough to increase production unilaterally. And there is Saddam, who U.S. officials fear could disrupt oil supplies by 2.6 million bbl. a day anytime he feels slighted. Of course, Hugo Chavez would not have you forget him, either. "What could they do without oil?" joked the man who counts Fidel Castro a close friend and mentor. "A barrel of Coca-Cola is worth $78.80, a barrel of milk $150, a barrel of good wine $1,370." By Chavez' calculations, at least, the price of oil still has room to move.

--Reported by Scott MacLeod and Tim McGirk/Caracas and Adam Zagorin/Washington

With reporting by Scott MacLeod and Tim McGirk/Caracas and Adam Zagorin/Washington