Falling prices squeeze Chavez's oil diplomacy

CARACAS — Venezuela's slumping oil earnings are starting to squeeze President Hugo Chavez's public spending spree and curb the international aid he uses to counter U.S. influence.

State-owned Citgo Petroleum Corp., which is based in Houston and distributes Venezuelan oil in the U.S., suspended a free heating oil program for poor Americans this week, according to Citgo's nonprofit partner Citizens Energy.

Some are now predicting a drastic pullback in Chavez's oil-fueled largesse elsewhere.

"Venezuela's oil diplomacy will retrench," said Larry Birns, director of the Washington-based Council on Hemispheric Affairs. "The government is not in a position to continue the subsidies, so at the very least this is going to reduce Chavez's clout as a regional power-maker."

Citizens, based in Boston, said a program that distributes free fuel for 200,000 American households in 23 states has been suspended by Citgo. Last year the program cost Venezuela $100 million.

Citgo has refused to comment since the announcement Monday.

Oil is the financial engine behind Chavez's socialist government. Accounting for nearly 94 percent of exports and half the national budget, it pays for everything from subsidized food to free universities, allowing Chavez to expand the state payroll and nationalize businesses.

It has also bankrolled an international aid bonanza in which Chavez showers allies with cheap fuel, refining projects and cash donations. With international aid, Chavez has cemented ties with left-leaning allies and promoted his vision of a united Latin America increasingly independent of the United States.

In 2007 alone, Venezuela pledged more than $8.8 billion in aid, financing and energy funding abroad, according to an Associated Press tally at the time.

But oil prices have fallen 67 percent since their July peak and the Venezuelan economy has come under strain. Annual inflation now tops 32 percent in Caracas, and growth fell by nearly half last year to 4.9 percent, the slowest rate since 2003.

Oil prices are now well below the $60 a barrel Venezuela budgeted for 2009, making a deficit likely for the first time in five years. And experts say output is sagging at state oil company Petroleos de Venezuela SA, where profits are often used to finance Chavez's social programs instead of to explore for new oil fields.

Chavez, campaigning to abolish presidential term limits, vows not to cut back on the public spending that has made him popular. He has accumulated $42.2 billion in Central Bank reserves and billions more in savings as a cushion.

But he may now be forced to spend much of that money at home. Critics are asking that Venezuelan ally Cuba pay cash for the nearly 100,000 barrels it receives every day.