Energy Security: Issues Related to Potential Reductions in	 
Venezuelan Oil Production (27-JUN-06, GAO-06-668).		 
                                                                 
Venezuela is the world's eighth-largest oil exporter and among	 
the top 10 countries in total proven oil reserves. Venezuela also
supplies about 11 percent of current U.S. imports of crude oil	 
and petroleum products and wholly owns five refineries in the	 
U.S. Consequently, Venezuela is a key player in the future energy
security of the United States and the world. The current global  
oil market is tight and may be more susceptible to short-term	 
supply disruptions and higher and more volatile prices. Recently,
tension between Venezuela and the United States has caused	 
concern about the stability of Venezuelan oil supplies. On	 
several occasions, Venezuela's President has threatened to stop  
exporting oil to the U.S. or to close Venezuela's U.S.-based	 
refineries. In this context, GAO analyzed: (1) how Venezuela's	 
crude oil production and exports of crude oil to the U.S. has	 
changed in recent years, (2) the potential impacts of a reduction
in Venezuelan oil exports to the U.S., and (3) the status of U.S.
government programs and activities to ensure a reliable supply of
oil from Venezuela. Commenting on a draft of the report, the	 
State and Commerce Departments generally agreed with the report, 
but DOE contended that the report presents an "alarmist view" of 
U.S. energy security. We disagree and believe the report presents
a contextually balanced treatment of the issue. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-668 					        
    ACCNO:   A56019						        
  TITLE:     Energy Security: Issues Related to Potential Reductions  
in Venezuelan Oil Production					 
     DATE:   06/27/2006 
  SUBJECT:   Crude oil						 
	     Energy supplies					 
	     International relations				 
	     Oil importing					 
	     Petroleum products 				 
	     Petroleum refining facilities			 
	     Oil resources					 
	     Strategic Petroleum Reserve			 

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GAO-06-668

     

     * Results in Brief
     * Background
          * Venezuela Has Been a Key Player for Almost a Century
          * U.S. and Other Foreign Companies Have Long Been Involved in
          * Political Situation in Venezuela
          * Involvement of International Organizations
     * Venezuelan Government Actions Have Decreased Crude Oil Produ
          * Venezuela's Total Crude Oil Production Has Fallen since 2001
          * Declines in Production by PDVSA Have Been Partly Offset by I
          * Venezuela's Exports of Crude Oil and Refined Petroleum Produ
          * Future Venezuelan Production Is Uncertain
     * A Drop in Venezuelan Oil Exports Would Have Worldwide Impact
          * A Sudden Drop in Venezuelan Oil Production Would Have Signif
          * A Venezuelan Oil Embargo against the United States Would Hav
          * Closure of Venezuela's U.S. Refineries would Increase U.S. P
     * U.S. Government Programs and Activities to Ensure a Reliable
          * U.S. Programs and Activities to Ensure a Long-Term Supply of
               * Oil Production Technology and Information Exchanges between
               * Negotiations for a Bilateral Investment Treaty Ceased in 199
               * The United States and Venezuela Participated in the Multilat
               * Relations between the United States and Venezuela Have Becom
          * The U.S. Government Has Options to Mitigate the Impacts of S
     * Agency Comments and Our Evaluation
     * GAO Contact
     * Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to the Chairman, Committee on Foreign Relations, U.S. Senate

United States Government Accountability Office

GAO

June 2006

ENERGY SECURITY

Issues Related to Potential Reductions in Venezuelan Oil Production

GAO-06-668

Contents

Letter 1

Results in Brief 5
Background 8
Venezuelan Government Actions Have Decreased Crude Oil Production, but
Exports to the United States Have Changed Little 13
A Drop in Venezuelan Oil Exports Would Have Worldwide Impacts, while
Impacts of a Venezuelan Embargo against the United States or Closure of
Its U.S. Refineries Would Be Felt Primarily in the United States and
Venezuela 22
U.S. Government Programs and Activities to Ensure a Reliable Long-Term
Supply of Crude Oil from Venezuela Have Been Discontinued, but the
Government Has Options to Mitigate Supply Disruptions in the Short Term 28
Agency Comments and Our Evaluation 37
Appendix I Objectives, Scope, and Methodology 40
Appendix II Comments from the Department of Commerce 43
Appendix III Comments from the Department of Energy 44
Appendix IV GAO Contact and Staff Acknowledgments 46

Table

Table 1: Results of Analyses and Studies of Impacts of a Sudden Disruption
of Crude Oil Production and Exports 25

Figures

Figure 1: Venezuelan Oil Production (2001-2005) 15
Figure 2: Foreign Company and PDVSA Production of Venezuelan Crude Oil,
2001-2005 18
Figure 3: Venezuelan Exports of Crude Oil and Refined Petroleum Products
to the United States, Excluding the U.S. Virgin Islands, 2001-2005 19
Figure 4: Changes in Wholesale Conventional Regular Gasoline Prices in the
U.S. Gulf Coast following Hurricanes Katrina and Rita 28

Abbreviations

DOE Department of Energy

EIA Energy Information Administration

GDP gross domestic product

OPEC Organization of the Petroleum Exporting Countries

PDVSA Petroleos de Venezuela S.A.

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United States Government Accountability Office

Washington, DC 20548

June 27, 2006 June 27, 2006

The Honorable Richard G. Lugar Chairman, Committee on Foreign Relations
United States Senate The Honorable Richard G. Lugar Chairman, Committee on
Foreign Relations United States Senate

Dear Mr. Chairman: Dear Mr. Chairman:

The United States imports about 13 million barrels of crude oil and
refined petroleum products each day, or about 65 percent of its total
daily consumption. Venezuela is the world's eighth largest crude oil
exporter and supplies about 1.5 million barrels per day of crude oil and
refined petroleum products, such as gasoline and fuel oil, to the U.S.
market, comprising about 11 percent of current U.S. imports. In addition,
Venezuela ranks among the top 10 countries in the world in the size of its
proven oil reserves-oil that has been proven to exist in the ground and
could be produced. Venezuela is also one of the founders and an
influential member of the Organization of the Petroleum Exporting
Countries (OPEC), whose 11 members control over three-quarters of the
world's total oil reserves and can greatly affect world oil prices.
Consequently, Venezuela is a key player in the future energy security of
the United States and the world. The United States imports about 13
million barrels of crude oil and refined petroleum products each day, or
about 65 percent of its total daily consumption. Venezuela is the world's
eighth largest crude oil exporter and supplies about 1.5 million barrels
per day of crude oil and refined petroleum products, such as gasoline and
fuel oil, to the U.S. market, comprising about 11 percent of current U.S.
imports. In addition, Venezuela ranks among the top 10 countries in the
world in the size of its proven oil reserves-oil that has been proven to
exist in the ground and could be produced. Venezuela is also one of the
founders and an influential member of the Organization of the Petroleum
Exporting Countries (OPEC), whose 11 members control over three-quarters
of the world's total oil reserves and can greatly affect world oil prices.
Consequently, Venezuela is a key player in the future energy security of
the United States and the world.

Most of Venezuela's crude oil that is not consumed domestically in
Venezuela is exported to the United States. The United States is a natural
market for Venezuelan oil because it is so close-about 5 days by tanker to
the U.S. Gulf Coast compared to about 30 to 40 days for supplies coming
from the Middle East. Moreover, Venezuela's national oil company,
Petroleos de Venezuela S.A. (PDVSA), wholly owns five refineries in the
United States and partly owns four other refineries in the United States
and U.S. Virgin Islands, either through partnerships with U.S. companies
or through PDVSA's U.S. subsidiary, CITGO, Inc. These refineries are
unusual in their capacity to refine large volumes of the heavy, sour
(high-sulfur) crude oil that constitute a large part of Venezuela's oil
exports. Most of Venezuela's crude oil that is not consumed domestically
in Venezuela is exported to the United States. The United States is a
natural market for Venezuelan oil because it is so close-about 5 days by
tanker to the U.S. Gulf Coast compared to about 30 to 40 days for supplies
coming from the Middle East. Moreover, Venezuela's national oil company,
Petroleos de Venezuela S.A. (PDVSA), wholly owns five refineries in the
United States and partly owns four other refineries in the United States
and U.S. Virgin Islands, either through partnerships with U.S. companies
or through PDVSA's U.S. subsidiary, CITGO, Inc. These refineries are
unusual in their capacity to refine large volumes of the heavy, sour
(high-sulfur) crude oil that constitute a large part of Venezuela's oil
exports.

Political strife within Venezuela and political tension between Venezuela
and the United States have caused concern about the stability of
Venezuelan oil production and exports to the United States. The election
of Hugo Chavez as President of Venezuela in 1998 signaled a major change
in how the Venezuelan government views the country's oil industry. For
example, the government took steps to shift managerial authority for
Political strife within Venezuela and political tension between Venezuela
and the United States have caused concern about the stability of
Venezuelan oil production and exports to the United States. The election
of Hugo Chavez as President of Venezuela in 1998 signaled a major change
in how the Venezuelan government views the country's oil industry. For
example, the government took steps to shift managerial authority for
Venezuela's oil resources from PDVSA to the Venezuelan Ministry of Energy
and Petroleum. The government also changed the way it deals with foreign
companies-it raised the maximum royalty rates paid by foreign oil
companies from 16-2/3 to 30 percent, established a new "extraction tax,"
raised income taxes for those companies, and instituted provisions
requiring joint ownership structures with majority shares for PDVSA.
Opposition to the new government culminated in a general strike that
lasted from December 2, 2002, until February 2, 2003, and virtually shut
down the oil sector of the economy. This strike temporarily decreased
world oil supplies by about 2.3 million barrels per day, or about 3.0
percent of total world daily oil supply, and reduced oil exports to the
United States by about 1.2 million barrels per day-equivalent to about 11
percent of total U.S. oil imports at the time. More recently, in April
2006, Venezuela seized two oil fields operated by two foreign oil
companies because the companies did not comply with new rules unilaterally
imposed by the Venezuelan government.

Instability in Venezuela's oil sector exists in a broader context of a
tightening global oil supply and demand balance. Surplus global oil
production capacity-the amount by which oil production could be increased
immediately without additional investment-was as high as 5.6 million
barrels per day in 2002, but has since decreased to only about 1 million
barrels a day; Saudi Arabia provides most of this surplus capacity.
Meanwhile, demand for crude oil is growing rapidly in China and other
countries. Market tightness, along with the fact that much of the world's
supply of oil is in relatively unstable regions, may make the global oil
market increasingly susceptible to short-term disruptions and lead to
higher and more volatile oil prices. In this context, instability of oil
supply from any significant individual oil-producing country can create
oil price volatility, which can cause an economic slowdown. Studies of
past oil supply disruptions indicate that sudden increases in oil prices
can contribute to inflationary pressure and economic slowdowns. In extreme
cases, such as the large oil price increases associated with the Arab oil
embargo and Iranian revolution in the 1970s, these high prices were
associated with severe economic recessions.

Four U.S. government agencies have significant involvement in implementing
U.S. energy security policy regarding Venezuela.

           o  The Department of Energy's (DOE) Office of Policy and
           International Affairs establishes and implements U.S.
           international energy policy, and is responsible for monitoring and
           analyzing world energy market developments and the international
           political, economic, and strategic factors that influence these
           developments; managing relevant bilateral energy relationships;
           and ensuring protection of U.S. interests in bilateral and
           multilateral treaties and obligations that affect energy services,
           commodities, and technology. Also, according to DOE officials, the
           office holds dialogues with energy producers, monitors national
           and global energy security, and serves as the U.S. lead in
           coordinating oil supply disruption-response issues and measures
           with the International Energy Agency. The Office of Fossil Energy
           works with various countries through bilateral agreements to
           identify areas of mutually beneficial collaboration in promoting
           and developing fossil energy technologies. These agreements also
           facilitate relationships that may lead to commercial development.
           The Office of Fossil Energy also manages the U.S. Strategic
           Petroleum Reserve, which is a U.S. stockpile of about 700 million
           barrels of light crude oil maintained by the federal government
           for use in the case of a major disruption of oil supplies to the
           United States. DOE is also responsible for collecting and
           analyzing data and information through its Energy Information
           Administration (EIA).
           o  The Department of State's Office of International Energy and
           Commodity Policy is responsible for coordinating U.S.
           international energy policy, participating in dialogue with energy
           producers, and monitoring national and global energy security. The
           Department of State and DOE, in conjunction with other
           stakeholders, advise the National Security Council on energy
           security issues, including the potential impacts of oil supply
           disruptions on the U.S. economy and on possible actions that could
           mitigate these impacts.
           o  The Department of Commerce's Office of International Trade
           Administration plays a role in advising U.S. business interests
           seeking to invest in Venezuela's oil sector.
           o  The Office of the U.S. Trade Representative and Department of
           State co-lead the negotiations of bilateral and multilateral
           treaties, which may contain specific aspects that affect energy
           security, trade, and investment.

           Until the strike in the winter of 2002-2003, the United States and
           Venezuela had steady diplomatic contacts with respect to oil.
           Since then, the relationship between the two countries has become
           strained. On several recent occasions, Venezuela's President has
           threatened to stop exporting Venezuelan oil and refined petroleum
           products to the United States. He also has made statements
           regarding the possible sale or closure of Venezuela's refinery
           interests in the United States. Furthermore, Venezuelan officials
           have repeatedly made statements that they are trying to develop
           new markets for their crude oil.

           In the context of effects on U.S. oil supplies, we addressed the
           following questions: (1) How has Venezuela's production of crude
           oil and exports of crude oil and refined petroleum products to the
           United States changed in recent years, and what are the future
           prospects? (2) What are the potential impacts of a reduction in
           Venezuelan oil exports, a Venezuelan embargo on oil exports to the
           United States, or sudden closure of Venezuela's refineries in the
           United States? (3) What is the status of U.S. government programs
           and activities to ensure a reliable supply of oil from Venezuela
           and to mitigate the impacts of a supply disruption?

           We used a number of methodological techniques to address these
           questions. To address the first objective, we reviewed studies and
           analyses of the Venezuelan oil sector and its history and met with
           officials of numerous U.S. oil companies and other oil companies,
           industry experts, and federal agency officials. In addition, we
           visited Venezuela and met with the U.S. Ambassador and embassy
           staff; Venezuela's Minister of Energy and Petroleum; PDVSA
           officials, including the president of the company and a number of
           board members and senior managers; the Venezuelan Auditor General;
           members of the financial community; and other individuals with
           expertise in the Venezuelan oil sector. Both in the United States
           and in Venezuela, we spoke with numerous former PDVSA employees,
           executives, and directors, and oil company officials. We also
           collected, evaluated the reliability of, and analyzed data on
           Venezuelan production, consumption, and exports of oil and
           petroleum products. The sources of our data include U.S.
           government agencies, especially the EIA; the Venezuelan government
           and PDVSA; and other international and private sources. We deemed
           these data to be reliable for the purposes of addressing our
           objectives. Finally, we reviewed PDVSA's plan to expand oil
           production, and collected oil industry officials' and experts'
           views on the likely implementation of that plan.

           Regarding the second objective, we reviewed studies of oil
           disruptions, including studies of the impacts of the Venezuelan
           strike. We also analyzed current conditions in the world oil
           market to evaluate what might occur if a similar disruption
           occurred today. Further, we evaluated the potential impacts of
           several different scenarios involving reductions in Venezuela's
           oil production or exports to the United States-(1) a sudden and
           severe drop in Venezuelan oil exports from the world market, (2) a
           sudden diversion of oil from the United States to other markets
           through an embargo, and (3) the closure by Venezuela of its
           wholly-owned U.S.-based refineries. Regarding the first scenario,
           we asked a DOE contractor at the Oak Ridge National Laboratory to
           use an economic oil-disruption model to analyze the impacts of a
           hypothetical Venezuelan oil disruption on world oil prices and on
           the U.S. gross domestic product (GDP).1 For this analysis we
           constructed a hypothetical disruption scenario similar to the one
           that actually occurred during the Venezuelan oil strike in the
           winter of 2002-2003, but using assumptions regarding market and
           economic conditions closer to those that prevailed at the time of
           the analysis (late 2005). We also analyzed data from private
           entities and met with numerous industry experts in Venezuela and
           the United States; officials in the Departments of State and
           Commerce; DOE officials; and officials in the International Energy
           Agency to determine the impact of potential oil supply
           disruptions.

           To address the third objective-identifying the status of programs
           and activities to ensure a continued supply of oil and to mitigate
           a disruption of imports of crude oil and refined petroleum
           products from Venezuela-we met with officials at the Departments
           of State and Commerce, DOE, and the Office of the U.S. Trade
           Representative. We also talked to oil company officials. In
           addition, we spoke with Venezuelan officials and U.S. embassy
           staff in Venezuela. This report focuses on federal programs and
           activities related to U.S. energy security. Diplomatic and
           political actions that may impact U.S. energy security may be
           undertaken for a multitude of foreign policy goals that are beyond
           the scope of this report. Therefore, our assessment of programs
           and activities related to energy security is not an evaluation of
           the U.S. government's approach to these broader goals.

           To obtain the official Venezuelan government position on questions
           relating to all three objectives, we made arrangements with the
           Venezuelan Embassy in Washington, D.C., for an official
           spokesperson.

           A more detailed description of the scope and methodology of our
           review is presented in appendix I. We performed our work between
           March 2005 and May 2006, in accordance with generally accepted
           government auditing standards.

           Results in Brief
			  
			  Venezuelan oil production has fallen since 2001, but exports of
           crude oil and refined petroleum products to the United States have
           been relatively stable except during the strike. EIA data show
           that total Venezuelan crude oil production in 2001 (the last full
           year before the Venezuelan strike) averaged about 3.1 million
           barrels per day, but by 2005 had fallen to about 2.6 million
           barrels per day-a 16 percent reduction. Venezuelan government
           officials dispute these figures, and provided data that indicates
           production has almost fully recovered to prestrike levels, but
           most available data indicate that the Venezuelan government data
           are overstated. Following the 63-day strike, Venezuela's President
           ordered the firing of up to 40 percent of PDVSA's employees,
           including many of the company's management and technical staff.
           Experts told us that this loss of managerial and technical
           expertise, along with Venezuela's underinvestment in oil field
           maintenance since the early 1990s, contributed to the decline in
           PDVSA's oil production. While overall production has fallen,
           shortly after the strike Venezuela's exports of crude oil and
           refined petroleum products to the United States returned (and have
           remained) close to prestrike levels of about 1.5 million barrels
           per day. Most of these exports go to CITGO or other refineries on
           the U.S. Gulf Coast that are owned wholly or partly by PDVSA. In
           2005, PDVSA announced plans to expand its oil production
           significantly by 2012, but oil company officials and industry
           experts expressed doubt about PDVSA's ability to implement the
           plan, in part because, to date, the company has not negotiated any
           of the numerous deals with foreign oil companies that are called
           for in the plan. The absence of such deals increases the
           likelihood that Venezuelan oil production will continue to fall
           because, given that PDVSA's own production is in decline,
           Venezuela needs willing foreign oil company partners to maintain
           the country's current level of oil production.

           A sudden and severe reduction in Venezuelan oil exports would have
           worldwide impacts, while the impacts of a Venezuelan oil embargo
           against the United States or closure of Venezuela's U.S.
           refineries would be primarily concentrated in the United States
           and Venezuela.

           o  A sudden loss of all or most Venezuelan oil from the world
           market under the current tight global supply and demand balance
           would raise world oil prices. For example, a model developed for
           DOE estimates that a disruption of crude oil with a temporary loss
           of up to 2.2 million barrels per day-about the size of the loss
           during the Venezuelan strike-would, all else remaining equal,
           result in a crude oil price spike of up to $11 per barrel in the
           early stages of the disruption. Such an increase would raise the
           price of petroleum products and, because petroleum products are
           important to the functioning of the economy, would likely slow the
           rate of economic growth in the United States and other countries
           until replacement oil could be obtained. The model also predicted
           that U.S. GDP would decrease by about $23 billion. Because a
           severe drop in oil production would also cause large losses for
           Venezuela in export revenues and jobs, Venezuela would likely try
           to restore oil production as quickly as possible.
           o  A Venezuelan oil embargo against the United States would
           increase consumer prices for gasoline and other petroleum products
           in the short term because U.S. oil refiners would experience
           higher costs getting oil supplies from sources farther away than
           Venezuela. Also, some U.S. refineries that are designed to handle
           Venezuelan heavy sour crude oil would lose some of their effective
           capacity if they had to use the lighter replacement crude oil that
           most likely would be available. In this scenario, because
           Venezuelan oil would not be taken off the market entirely, the
           impact on world oil prices would be minimal in the long term. The
           impact of a U.S.-specific embargo would also be smaller on
           Venezuela than if its total oil production fell.
           o  If Venezuela shut down its wholly-owned U.S. refineries there
           would be a reduction in the supply of gasoline and other petroleum
           products-and a corresponding increase in prices of these
           products-until the closed refineries were reopened or new sources
           of refined petroleum products were brought on line. The impacts
           would be obviously most severe in the United States and Venezuela,
           although greater demand by U.S. oil companies to buy petroleum
           products from other countries could cause price increases in those
           countries. Venezuela would suffer direct losses of revenues from
           its U.S. refineries and, if closing the refineries was deemed a
           threat to U.S. national security, Venezuela could potentially face
           sanctions by the U.S. government.

           The U.S. government's programs and activities to ensure a reliable
           long-term supply of oil from Venezuela have been discontinued, but
           the U.S. government has options to mitigate short-term oil supply
           disruptions. DOE has had a bilateral technology and information
           exchange agreement with Venezuela since 1980 to enhance oil
           production in-and secure reliable and affordable sources of oil
           from-that country, but these activities ceased in 2003. According
           to DOE officials, the activities stopped in part as a result of
           diplomatic decisions and in part because Venezuela no longer had
           counterparts to DOE technical staff who could continue the
           cooperative exchanges. In addition, the United States, co-led by
           the Department of State and the Office of the U.S. Trade
           Representative, attempted to negotiate a bilateral investment
           treaty that would have provided rules on investment protection,
           binding international arbitration of investment disputes, and
           repatriation of profits, and assisted U.S. oil and other companies
           doing business in Venezuela, but negotiations broke down in 1999
           because of significant differences between the two countries.
           Officials in many oil companies told us that poor relations
           between the United States and Venezuela had made it difficult to
           compete on new investment opportunities in Venezuela and that a
           bilateral investment treaty would have helped protect their
           investments in Venezuela when the Venezuelan government
           unilaterally changed the way it deals with foreign companies. The
           U.S. government has options to mitigate short-term supply
           disruptions. It has relied on diplomacy in the past to persuade
           oil-producing countries to increase production, and it could use
           oil from the U.S. Strategic Petroleum Reserve. During the
           Venezuela strike, for example, the U.S. government used diplomacy
           to persuade oil-producing countries in the Middle East and other
           areas to bring spare oil production capacity online and make up
           for the lost oil. However, such diplomacy may be less effective
           today because there is currently very little spare production
           capacity. In addition, during the strike, DOE allowed oil
           companies that were to deliver oil to the U.S. Strategic Petroleum
           Reserve to delay those deliveries, which increased the available
           oil supply in the United States. Officials in the Departments of
           State and Commerce, DOE, and the Office of the U.S. Trade
           Representative told us that they do not have Venezuelan-specific
           contingency plans for a potential loss of oil; rather, they
           believe diplomacy to persuade oil-producing countries to increase
           production and using oil in the U.S. Strategic Petroleum Reserve
           are adequate actions to deal with an oil-supply disruption.
           Although the U.S. government has options to mitigate impacts of
           short-term oil disruptions on crude oil and petroleum products
           prices, these mitigating actions are not designed to address a
           long-term loss of Venezuelan oil from the world market. If
           Venezuela fails to maintain or expand its current level of
           production, the world oil market may become even tighter than it
           is now, putting further pressure on both the level and volatility
           of energy prices. In this context, the United States faces
           challenges in the coming years that may require hard choices
           regarding energy sources, foreign relations and energy-related
           diplomacy, and the amount of energy Americans use.

           Background
			  
			  As the United States has become more dependent on foreign sources
           for crude oil, our energy security has become increasingly
           intertwined with that of other countries. Crude oil is a global
           commodity and, as such, any world event that increases instability
           in crude oil prices reduces energy security for all oil-buying
           countries in similar ways. Numerous empirical studies have shown a
           correlation between oil price shocks and economic downturns. When
           crude oil prices rise, this pushes up prices of petroleum
           products. Consumers spend more of their income on energy and less
           on other goods, which can cause an economic slowdown. In addition,
           since much of the oil is imported, there is a greater flow of
           funds overseas rather than increased domestic spending. World oil
           prices have more than doubled since 2003 and are currently higher,
           when adjusted for inflation, than in any time since the early
           1980s. World demand for oil is projected to increase by about 43
           percent over the next 25 years-from about 82 million barrels per
           day in 2004 to about 118 million barrels per day in 2030-with much
           of the increased demand coming from China and other countries.
           Some experts believe oil prices will remain high for the
           foreseeable future as suppliers struggle to increase production to
           keep up with demand. In this tight demand and supply environment,
           even small supply disruptions can create large increases in
           prices. In this way, our energy security is tied to events in all
           oil-producing countries.

           Venezuela Has Been a Key Player for Almost a Century
			  
			  Oil was first produced commercially in Venezuela in the early
           1900s, and by the late 1920s Venezuela was the world's second
           largest producer, after the United States. Today, Venezuela's 78
           billion barrels of proven reserves-crude oil in the ground that
           geological and engineering data have demonstrated with reasonable
           certainty is able to be produced using existing technology-are the
           seventh or eighth largest in the world. Outside of the Persian
           Gulf, only Canada's proven reserves are considered greater than
           Venezuela's.2

           In 2005, Venezuela was the world's eighth largest exporter of
           crude oil. Most of Venezuela's crude oil that is not consumed
           domestically in Venezuela is exported to the United States because
           of its close proximity; additionally, Venezuela owns significant
           refining assets in the United States and the U.S. Virgin Islands
           that can refine its heavy sour oil. In the 1980s and 1990s, PDVSA
           bought CITGO, Inc. and acquired interests in several other U.S.
           refineries that had the ability or could be reconfigured to refine
           such crude oil. Today, the refining capacity of PDVSA's share of
           the nine U.S. refineries in which it has an interest is about 1.3
           million barrels per day. For example, CITGO's five wholly-owned
           refineries have a refining capacity of about 750,000 barrels per
           day and market their refined petroleum products in the United
           States through about 14,000 independently owned service stations
           using the CITGO name. In addition, PDVSA partners directly, or
           through CITGO, with ExxonMobil, Lyondell, ConocoPhillips, and
           Amerada Hess in the U.S. Virgin Islands. These nine refineries buy
           most of the crude oil and refined petroleum products exported by
           Venezuela. While the United States is unique in its capacity to
           refine large volumes of the heavy crude oil that constitutes a
           majority of Venezuela's oil exports,3 China and other countries,
           such as Brazil, have plans to build refineries that can process
           heavy crude oil, which, if built, may create other attractive
           markets for Venezuela's oil.4 In addition, the Venezuelan
           government has launched several regional initiatives to increase
           its export base, including (1) PetroCaribe, through which
           Venezuela offers oil and some refined petroleum products to 14
           Caribbean countries with favorable financing, and (2) PetroAndina
           and PetroSur, which offer oil under similar terms to,
           respectively, the Andean countries of Colombia, Ecuador, and
           Bolivia and the South American countries of Brazil, Uruguay, and
           Argentina.

           The oil sector in Venezuela consists of a network of oil fields
           and wells that produce crude oil, refineries to process the crude
           oil, and an infrastructure to transport the crude and refined
           products. The bulk of Venezuela's production comes from the Lake
           Maracaibo area in the country's western region and from the Faja
           area in the Orinoco Belt in the country's eastern region. The
           crude oil is processed by PDVSA's six refineries in Venezuela or
           is exported to the United States or other countries. Crude oil is
           shipped by way of 39 oil terminals from Venezuela's major oil
           ports, located in the western and eastern regions of the country.

           U.S. and Other Foreign Companies Have Long Been Involved in the 
			  Venezuelan Oil Sector
			  
			  Foreign oil companies began producing crude oil in Venezuela in
           the early 1900s. In 1976, Venezuela nationalized its hydrocarbon
           industry, bringing control of oil-which is the main source of the
           country's wealth-under the control of the national oil company.
           However, beginning in 1992, the Venezuelan government reopened its
           petroleum industry to foreign and private Venezuelan oil companies
           in what was known as the "Apertura." Between 1992 and 1997,
           Venezuela signed 32 operating service agreements to allow 22
           private Venezuelan, U.S., and other foreign companies to produce
           oil in fields that were considered, at the time, economically
           marginal or high risk. The purpose of these 32 operating service
           agreements was to allow foreign companies to assist PDVSA in
           producing oil, and the contracts were structured so
           foreign-company operators did not have any rights over the
           volumes, reserves, or prices of crude oil but were reimbursed for
           their costs plus a service fee for production. The Venezuelan
           government granted the foreign company operators an indefinite
           "royalty holiday" whereby the companies paid no more than 1
           percent royalty on the extracted crude, instead of the maximum of
           16-2/3 percent at the time.

           Also during this period, PDVSA entered into four joint ventures
           with foreign companies, including ExxonMobil, ConocoPhillips, and
           ChevronTexaco from the United States, to produce crude oil in the
           Faja. These joint ventures, whose majority shares were owned by
           the foreign oil companies, were considered high risk at the time,
           in part due to the challenges of producing "extra-heavy" sour oil
           from the Faja, which is among the lowest quality oil commercially
           produced anywhere in the world. Venezuela's extra-heavy Faja oil
           has higher density (is "heavier") and has a higher sulfur content
           than most commercially produced crude oil. Commercial production
           of extra-heavy oil is relatively expensive-pumping it from the
           ground requires the use of techniques to improve its flow
           characteristics and readying it for market requires "upgrading" to
           prepare it for final refining. During upgrading, the extra-heavy
           crude oil is processed to make it lighter and remove much of its
           sulfur content. In 1997, foreign companies began to produce
           extra-heavy sour crude oil in Venezuela's Faja region, and, by
           2005, the four joint ventures were producing about 600,000 barrels
           per day of Faja crude. The projects in the Faja also paid only 1
           percent royalty instead of 16-2/3 percent. Extra-heavy crude from
           the Faja region is also used to produce Orimulsion, a boiler fuel
           that is a mixture of bitumen and water. Orimulsion is marketed
           internationally, especially to China.

           Effective January 2002, a new law governing Venezuela's
           hydrocarbon industry went into effect. The new law increased
           maximum royalties from 16-2/3 percent to 30 percent, and increased
           the percentage of ownership by PDVSA in all operating arrangements
           with foreign and domestic companies to at least 51 percent. In
           2005, the Venezuelan government took steps to make foreign and
           domestic companies migrate from the terms of the existing 32
           operating service agreements to the terms of the new law.
           Essentially, beginning in 2006, the companies that had been paying
           no more than 1 percent in royalty fees under the operating service
           agreements had to pay as much as 30 percent. Also, instead of
           paying 34 percent in income taxes as service providers, the
           foreign companies had to pay 50 percent as part owners in the
           joint ventures. If the foreign companies did not comply with the
           new rules, the Venezuelan government took control of the
           operations. While the new rules had not been applied to the four
           joint ventures in the Faja, in March 2005 the Faja projects began
           paying 16-2/3 percent royalties. Also, in May 2006, the Venezuelan
           government established a new extraction tax in addition to the 50
           percent income tax. According to a Venezuelan spokesperson, the
           extraction tax is 33.33 percent applied to well production, but
           royalty fees are deducted from this tax. The Venezuelan tax
           authority also issued bills for millions of dollars in back taxes
           to foreign companies conducting production activities under the 32
           operating service agreements after the effective date of the law.

           Political Situation in Venezuela
			  
			  The oil industry is capital-intensive and heavily dependent on
           continuous investment to maintain existing wells, establish new
           wells for crude oil production, and develop and maintain the
           infrastructure supporting the production network. According to the
           EIA, PDVSA is Venezuela's largest employer and accounts for about
           one-third of the country's GDP, about 50 percent of the
           government's revenue, and 80 percent of Venezuela's export
           earnings. PDVSA stated in 2005 that it plans to invest $26 billion
           to expand its oil production to 5.8 million barrels per day by
           2012.

           After Hugo Chavez was elected president of Venezuela in 1998,
           responsibility for the oil industry changed. Managerial authority
           for the petroleum industry was shifted from PDVSA to the
           Venezuelan Ministery of Energy and Petroleum; the way Venezuela
           does business with foreign companies also changed, as discussed
           previously. Domestic resistance to the Chavez administration and
           the changes in hydrocarbon sector oversight resulted in a 63-day
           strike by nearly half of PDVSA workers in the winter of 2002-2003.
           Oil production almost completely stopped, as oil wells stopped
           pumping, refineries closed, oil tankers stopped running, and
           storage facilities reached full capacity. The strike caused a
           temporary decrease in world oil supplies of about 2.3 million
           barrels per day, an amount equivalent to about 3.0 percent of
           total world daily oil supply.

           Involvement of International Organizations
			  
			  Venezuela is a founding member of OPEC, which controls about 40
           percent of the world's estimated 84 million barrels of production.
           Venezuela is the third largest producer within OPEC, according to
           EIA data. OPEC can wield great power in the international oil
           market, particularly by setting production quotas for its member
           countries to raise and lower the supply of oil, thereby
           influencing world oil prices. During the mid-1990s, Venezuela was
           suspected of weakening oil prices by producing above the country's
           quota. Since Hugo Chavez became President of Venezuela, the
           Venezuelan government has favored stricter adherence to OPEC
           quotas, and currently Venezuela is considered a price hawk in the
           ranks of OPEC, generally favoring production restraint to keep oil
           prices relatively high.

           Energy security is a national priority for the United States, and
           the United States has long had programs and activities designed to
           foster energy security. The United States government also strives
           to enhance cooperation with energy consuming and producing
           governments to mitigate the impact of supply disruptions and to
           support U.S. and world economic growth. The United States is a
           member of the International Energy Agency, an organization
           comprised of Organization of Economic Cooperation and Development
           countries that was established to cope with oil supply disruptions
           and coordinate an international response in case of a disruption
           to the global oil supply market. International Energy Agency
           member countries hold about 4.1 billion barrels of oil stocks, and
           for a limited period can release an amount equivalent to 10
           percent of global demand each day in case of a disruption.

           Venezuelan Government Actions Have Decreased Crude Oil Production, 
			  but Exports to the United States Have Changed Little
			  
			  Venezuelan oil production has fallen since 2001, largely as a
           result of actions by the Venezuelan government. Since that time
           the production of Venezuelan crude oil decreased in oil fields
           operated by PDVSA and increased in fields operated by foreign
           companies, but, as of 2005, increased production by foreign
           companies was not enough to bring total Venezuelan oil production
           back to the prestrike level. Despite production declines, exports
           of crude oil and refined petroleum products to the United States
           since shortly after the strike have remained close to prestrike
           levels of about 1.5 million barrels per day. The Venezuelan
           government announced plans in 2005 to expand its oil production
           and exports significantly by 2012, but most experts with whom we
           spoke doubted Venezuela's ability to implement the expansion plan
           in the near term.

           Venezuelaï¿½s Total Crude Oil Production Has Fallen since 2001, 
			  Largely as a Result of Venezuelan Government Actions
			  
			  Data from EIA, the International Energy Agency, OPEC, and the
           Venezuelan government all indicate that Venezuelan crude oil
           production decreased between 2001 and 2005. For example, EIA data
           show that production decreased from 3.1 million barrels per day to
           2.6 million barrels per day, reflecting a decrease of about .5
           million barrels per day, or 16 percent. OPEC, International Energy
           Agency, and Venezuelan government data all indicate varying but
           higher levels of production in 2005.5 While Venezuelan production
           figures should be the most accurate because they have access to
           all the production data, many oil industry officials and experts
           told us that Venezuelan government figures have been overstated.6
           Figure 1 shows production levels for 2001 through 2005 from four
           sources and illustrates the drop in production as a result of the
           strike and the recovery following the strike.

           Figure 1: Venezuelan Oil Production (2001-2005)

           While there are differences of opinion and uncertainty about the
           accuracy of available production data, other data also support a
           significant decline in production. For example, international
           financial data show that foreign investment in Venezuela declined
           between 2001 and 2004. Specifically, net foreign direct investment
           in Venezuela was about $3.5 billion in 2001, declined to almost
           zero in 2002, and recovered to about $1.9 billion in 2004, the
           last year for which investment data are available. Because we were
           unable to obtain reliable, independent data on specific investment
           in Venezuela's oil and gas sector, we analyzed total foreign
           investment in Venezuela as a proxy for the condition of the oil
           sector. Our analysis indicates a high correlation between
           Venezuelan oil production and net foreign investments in
           Venezuela.7 In addition, experts told us that there is a high
           correlation between the number of active oil drilling rigs and oil
           production.8 However, the number of active rigs fell sharply
           during and after the strike and, as of 2005, had not returned to
           their 2001 levels. Specifically, there was an average of 66 active
           drilling rigs in Venezuela in 2001; the number of rigs fell to as
           low as 12 during the height of the strike in January 2003; and the
           average increased to 60 in 2005. This provides further evidence
           that Venezuela's oil production has decreased.

           The Venezuelan government's firing of thousands of PDVSA employees
           following the strike contributed to the decline in production. The
           government dismissed about 40 percent of PDVSA's approximately
           40,000 employees, including many management and technical staff.
           Experts told us that the loss of managerial and technical
           expertise caused a rapid decline in the company's oil production
           from existing fields. In fact, some said that the loss of
           expertise was so critical that after the strike, PDVSA was unable
           to issue invoices for contractor services.

           Venezuelan officials told us that strikers did deliberate damage
           to the company and that this sabotage accounts for some of their
           difficulties since the strike. PDVSA employees with whom we spoke,
           some of whom were fired and others who resigned, disputed the
           claims of sabotage and said that strikers had originally planned
           only a two- or three-day strike, but that the government shut them
           out before they could return to work. Venezuelan officials
           acknowledged that the loss of expertise initially hampered
           operations and said that they have been replacing and training
           lost workers as quickly as possible. However, many industry
           experts told us that a black list of former PDVSA managerial and
           technical staff that the Venezuelan government will not rehire is
           limiting Venezuela's ability to acquire the necessary staff to
           meet its production goals. In addition, officials from foreign oil
           companies with operations in Venezuela told us that since the
           strike, PDVSA has become highly politicized and that PDVSA
           officials are often slow to make key decisions, which have
           complicated foreign companies' decisions to invest in the
           Venezuelan oil sector. Many oil industry officials told us that
           PDVSA's lack of managerial and technical expertise still remains
           one of the biggest challenges in continuing operations in
           Venezuela with PDVSA as a partner. In addition, experts told us
           that Venezuela had underinvested in oil field maintenance since
           the early 1990s, and that this had contributed to PDVSA's
           declining production.

           Declines in Production by PDVSA Have Been Partly Offset by Increases
			  in Foreign Oil Companiesï¿½ Production, but Not by Enough to Reach the 
			  PreStrike Production Level
			  
			  Data from EIA, the International Energy Agency, OPEC, and the
           Venezuelan government indicate that, from 2001 through 2005,
           Venezuelan crude oil production controlled by PDVSA decreased,
           while production controlled by foreign companies increased.9 For
           example, using EIA data as the base for total Venezuelan crude oil
           production, of 3.1 million barrels of crude oil produced per day
           in 2001, PDVSA produced about 2.4 million barrels per day (or 77
           percent), and foreign companies produced about .7 million barrels
           per day (or 23 percent). By 2005, these data indicated that of 2.6
           million barrels produced per day, PDVSA produced about 1.5 million
           barrels per day (or about 58 percent), and foreign companies
           produced about 1.1 million barrels per day (or 42 percent).
           International Energy Agency, OPEC, and Venezuelan government data
           show similar trends, but the relative proportion of PDVSA's
           production differs because each of these data sources reflects a
           different total volume of Venezuelan crude oil production. All of
           the data sources indicate that increases in production by foreign
           companies were not enough to totally offset decreases in PDVSA's
           production, resulting in a net crude oil production loss. Figure 2
           shows the increase in foreign companies' production and decrease
           in PDVSA's production for 2001-2005 using EIA's figures as the
           base for total production.10

           Figure 2: Foreign Company and PDVSA Production of Venezuelan Crude
           Oil, 2001-2005

           Note: Foreign companies' production is based on Venezuelan
           government data, and PDVSA's production is based on EIA data for
           total production minus the Venezuelan government's data for
           foreign companies' production.

           Venezuelaï¿½s Exports of Crude Oil and Refined Petroleum Products to 
			  the United States Have Remained Relatively Stable in Recent Years
			  
			  Since shortly after the Venezuelan strike ended, Venezuela's
           exports of crude oil and refined petroleum products to the United
           States have remained close to the prestrike levels. EIA data show
           that Venezuelan exports of crude oil and refined petroleum
           products to the United States (excluding the Virgin Islands) have
           fluctuated month-to-month, but prior to the strike had averaged
           about 1.5 million barrels per day. These exports reached a low of
           about .4 million barrels per day during the strike,11 but by April
           2003 had returned to approximately the average prestrike level.
           Specifically, EIA data show that such Venezuelan exports averaged
           between 1.5 million and 1.6 million barrels per day between April
           2003 and August 2005, as shown in figure 3. The EIA data also show
           that Venezuela exports most of its crude oil to the United States.
           For example, the data show that exports to the United States
           accounted for about 66 percent of Venezuela's total exports of
           crude oil in 2004. Most of Venezuela's exported crude oil goes to
           refineries on the U.S. Gulf Coast that are owned wholly or
           partially by the Venezuelan government.

Figure 3: Venezuelan Exports of Crude Oil and Refined Petroleum Products
to the United States, Excluding the U.S. Virgin Islands, 2001-2005

1GDP is a quantifiable measure of a country's total income for a given
year. A sudden loss of crude oil would, all else remaining equal, harm the
economy by increasing petroleum product prices, resulting in higher costs
and lower employment. However, as will be discussed later in this report,
the United States and other oil-consuming countries may take steps to
mitigate the impact of a disruption, including using strategic petroleum
reserves.

2While Canada's proven reserves include oil sands, which are a low-quality
source of oil, Venezuela's extra heavy oil reserves are only partly
included in its proven reserves. Many industry sources believe that
Venezuela probably has extensive reserves of extra heavy oil. The
Venezuelan government estimates the country has an additional 235 billion
barrels of such crude oil that ultimately will be recoverable. If this
estimate is proven, Venezuela's reserves would exceed over 310 billion
barrels-the largest of any country in the world.

3The oil industry uses a "gravity scale" to characterize grades of crude
oil. Crude that has a higher numerical value is considered light; crude
that has a lower numerical value is considered heavy; crude that is less
than 10 degrees gravity, such as that contained in the Faja area of
Venezuela's eastern region, is considered extra heavy. Faja oil is
upgraded to a lighter synthetic oil.

4DOE told us that these plans are conceptual and have not been finalized.

5To make the data comparable, we made adjustments to the sources, as
necessary, to include crude oil, condensates, and extra-heavy oil, but
exclude natural gas liquids. Venezuelan government data for 2004 and 2005
are preliminary.

6During our review, the Venezuelan government provided many different
production numbers. Some of these numbers changed and some were incomplete
or inconsistent. We used the numbers we believe are most accurate.

7We estimated a correlation coefficient of 83 percent between Venezuelan
oil production and net foreign direct investment for1995-2004, which
indicates a similarity in the trends in oil production and net foreign
investment in the country.

8We calculated a correlation coefficient of 73 percent between Venezuelan
production and the number of active drilling rigs for 1995-2005, which
indicates a similarity in the trends in oil production and the number of
active drilling rigs.

9Production controlled by foreign companies includes extra-heavy oil
produced under joint ventures in the Faja and oil produced under operating
service agreements throughout the country.

10We used EIA data to illustrate the reduction in PDVSA's share of
production. All other sources show a similar pattern, but the reduction in
PDVSA's share would be somewhat less because these sources have varying
but higher 2005 production figures than does EIA.

11Exports to the United States decreased from about 1.6 million barrels
per day in November 2002 to about .4 million barrels per day in January
2003-a decline of about 1.2 million barrels per day.

Figure 3: Venezuelan Exports of Crude Oil and Refined Petroleum Products
to the United States, Excluding the U.S. Virgin Islands, 2001-2005

Venezuelan government data show that, like exports to the United States,
Venezuelan domestic consumption has remained close to the prestrike
level-about .5 million barrels per day. Given that Venezuelan crude oil
production has decreased and Venezuelan domestic consumption and exports
to the United States have remained relatively constant since shortly after
the strike, most of the loss of Venezuelan crude oil must have been
absorbed by decreased Venezuelan exports to countries other than the
United States. Some oil company officials also told us that in recent
years there have been smaller amounts of Venezuelan oil available for
purchase on world spot markets, which would also indicate that less
Venezuelan oil is going to non-U.S. markets. Venezuelan officials gave us
data that showed exports to non-U.S. markets were greater than EIA's
numbers, but we were unable to verify the Venezuelan data.

Future Venezuelan Production Is Uncertain

The Venezuelan government announced plans in 2005 to expand its oil
production to 5.8 million barrels per day by 2012, which is more than
double the figure reported by EIA for 2005. Some industry experts told us
that the expansion plan is technically feasible and that Venezuela's oil
revenue in recent years has been sufficient to fund the plan. However,
many oil industry officials and experts expressed doubt about the
government's ability to implement the expansion plan in the near term for
several reasons.

           o  According to Venezuelan officials, as of late 2005, no
           agreements had been signed or investments made to start
           implementing the major oil production expansions detailed in the
           plan; experts told us that, without agreements, the plan will face
           significant delays, at best. The absence of such deals increases
           the likelihood that Venezuelan oil production will continue to
           fall because, given that PDVSA's own production is in decline,
           Venezuela needs willing foreign oil company partnership to
           maintain its current level of oil production.
           o  PDVSA has not been able to maintain its own level of oil
           production in recent years. U.S. and international oil industry
           officials and experts, as well as Venezuelan government officials,
           told us that PDVSA faces significant challenges in overcoming the
           20 to 25 percent per year rate of production decline in its mature
           oil fields. Venezuelan officials and other experts told us that
           Venezuela faces a challenge in overcoming the normal decline in
           productivity of its older fields, especially in the Maracaibo area
           where oil production dates back to the 1920s.
           o  Future foreign investment is uncertain given the Venezuelan
           government's recent decision to unilaterally change its business
           dealings with foreign companies. Beginning in 2005, the Venezuelan
           administration took steps to make private Venezuelan and foreign
           companies producing crude oil under the 32 operating service
           agreements renegotiate those agreements. Essentially, the new
           agreements increase the maximum royalty from 16-2/3 percent to 30
           percent, increase income taxes from 34 percent to 50 percent, and
           give PDVSA at least a 51 percent share of the operations covered
           by the agreement. Oil industry officials and experts have
           generally reacted negatively to the changes in the agreements.
           Most company officials we contacted told us that Venezuela's move
           to unilaterally impose new agreements increased their risk and
           eroded the investment climate in Venezuela, likely leading to
           future production declines. Many oil industry officials and
           experts told us that the changes in the foreign company
           participation structure, such as mandating a majority share of the
           operation for PDVSA, pose investment risks and uncertainty for
           foreign companies because the Venezuelan government has ultimate
           control in decisionmaking. When France's Total and Italy's Eni oil
           companies failed to sign new agreements, the Venezuelan government
           seized control of their operations in April 2006; five other
           fields were turned over to PDVSA after negotiations, according to
           the Venezuelan spokesperson. Also, ExxonMobil and Norway's Statoil
           chose to sell their minority stakes in smaller fields rather than
           accept Venezuela's required changes. Furthermore, in May 2006, the
           Venezuelan Congress approved a new oil extraction tax. According
           to the Venezuelan spokesperson, the extraction tax is 33.33
           percent applied to well production, with royalty fees deducted
           from this tax.
           o  Venezuela's decision to spend a significant part of its oil
           revenues on social programs such as education and health care,
           instead of reinvesting it in the oil industry, could slow further
           development of the country's oil sector. Venezuela's new
           hydrocarbon law imposes significant social commitments on PDVSA.
           Venezuelan government officials told us that they directly spent
           about $3.7 billion of oil revenues on social programs in 2004 and
           about $5 billion on social programs in 2005. This spending was in
           addition to money companies paid to the Venezuelan government as
           royalties and income taxes, and therefore reduces the amount of
           funds available for investing in oil production.
           o  Future production could be impaired by the Venezuelan
           government's preference to use national oil companies from
           developing countries (such as China) and other geopolitically
           strategic countries (such as Brazil) as partners to explore and
           develop new fields in Venezuela, instead of relying on experienced
           international oil companies. Several oil industry officials and
           experts told us that national oil companies generally do not have
           the expertise of the international oil companies to develop heavy
           oil fields.

           A Drop in Venezuelan Oil Exports Would Have Worldwide Impacts, 
			  while Impacts of a Venezuelan Embargo against the United States 
			  or Closure of Its U.S. Refineries Would Be Felt Primarily in the 
			  United States and Venezuela
			  
			  The potential impacts of a disruption of production and exports of
           Venezuelan crude oil and petroleum products on world oil prices
           and on the U.S. economy would depend on the characteristics of the
           disruption. The greatest impacts would occur if all or most
           Venezuelan oil were suddenly removed from the world market due to
           a Venezuelan oil industry shutdown. A Venezuelan oil embargo
           against the United States would have smaller impacts that would
           primarily affect the United States. Similarly, if Venezuela shut
           down its U.S. refineries, the impacts would be felt primarily in
           the United States. Venezuela would suffer severe economic losses
           from all three types of disruption, especially a shutdown of its
           oil production.

           A Sudden Drop in Venezuelan Oil Production Would Have Significant 
			  Worldwide and U.S. Impacts
			  
			  Given the current tight global supply and demand conditions, a
           sudden loss of all or most Venezuelan oil from the world market,
           for example due to a strike, would, all else remaining equal,
           result in a marked spike in world oil prices and a decrease in the
           growth rate of the U.S. economy as measured by GDP. Because
           Venezuela's economy is so dependent on its oil sector, Venezuela
           would likely try to restore oil production as quickly as possible
           following a strike or similar disruption to avoid large losses of
           export revenues.

           A model developed for DOE by a contractor, using a hypothetical
           oil disruption scenario that we developed to resemble the
           disruption caused by the Venezuelan strike during the winter of
           2002-2003, predicted that, by the second month of a disruption,
           worldwide crude oil prices would temporarily increase by about $11
           per barrel-from an assumed pre-disruption price of $55 per barrel
           to almost $66 per barrel.12 The increase in world crude oil prices
           would, in turn, drive up prices of refined petroleum products.
           Later, as the lost oil was replaced with oil from other sources or
           production resumed, the price of crude oil would return to the
           previous level. The model further predicted that the temporary
           increase in world oil prices caused by a disruption would lower
           the U.S. GDP by about $23 billion relative to what it would have
           been otherwise-about $13 trillion. A loss of this magnitude for a
           given year is likely to cause a small decline in the growth rate
           of the U.S. economy, but is unlikely to result in a recession. In
           this analysis, the rate of GDP growth would be about 0.18 percent
           less than what it would have otherwise been for the year.

           Our hypothetical disruption scenario lasts only a few months
           because Venezuela, like any other country that is heavily
           dependent on oil revenue, is likely to exert a great effort to end
           any severe disruption of crude oil production. The country's
           economy in general, and government revenues in particular, depend
           heavily on the revenues that the country obtains from petroleum
           production and exports. For example, oil revenues accounted for
           between 45 and 50 percent of Venezuelan government revenues in
           recent years. A severe drop in oil revenues for more than a few
           months would cripple the economy, resulting in lower economic
           growth and lost jobs; Venezuelan authorities would consider a
           prolonged oil industry shut down as a very grave threat to the
           government and to the country as a whole. Indeed, PDVSA officials
           told us that they restored most of their lost production during
           the first few months after the strike.

           It should be noted that the model somewhat understates the impacts
           on the United States of a sudden and severe loss of oil from
           Venezuela because it treats any disruption of oil supplies as
           equal, regardless of the location or the characteristics of the
           lost oil. In other words, the model does not differentiate between
           heavy sour crude oil (such as that produced in Venezuela) and any
           other type of crude oil-for example, "Arab Medium" (which is Saudi
           Arabia's medium-quality crude oil). Thus, the model does not
           consider the economic cost of replacing, for example, 100,000
           barrels of heavy sour oil with the same amount of lighter, sweeter
           oil.13 In fact, Arab Medium may cost more than some Venezuelan
           crude oils because of its higher quality, and because the
           transportation cost of a barrel of oil from Saudi Arabia is higher
           than that of a barrel of oil from Venezuela. In addition, there
           may be an economic penalty associated with some U.S. refineries'
           switching from their normal significant reliance on Venezuelan oil
           to replacement oil from alternative sources. For example, one U.S.
           oil company that refines Venezuelan crude oil ran its refinery
           optimization model for us to illustrate the impact of switching
           crude oil types on its refining costs. Its model showed that
           replacing a large quantity of the Venezuelan oil that it uses on a
           regular basis with oil from Mexico and the Middle East would cause
           a 7 percent drop in the capacity utilization of one of its
           refineries. This would reduce supplies of petroleum products,
           putting upward pressure on consumer prices.

           The DOE contractor who developed the model acknowledged that the
           model does not account for the effects of higher transportation
           costs or changes in refinery capacity utilization caused by
           switching from one type of crude oil to another. He said that
           higher transportation costs and switching crude oil types could
           result in larger impacts than the model predicts, but that the
           price impact of switching crude oil types is not understood well
           enough to be accurately modeled and is likely to be small.

           We also did an analysis of the impact of the same hypothetical
           Venezuelan disruption scenario on world oil price and on U.S. GDP
           using parameters developed by EIA to evaluate oil price
           disruptions. EIA has also done similar analyses, including (1) a
           slightly larger oil supply disruption and (2) an analysis of the
           impacts of the actual Venezuelan strike. The impacts on the price
           of oil are quite close in all the analyses. However, the impacts
           on U.S. GDP vary significantly as a result of differing
           assumptions about how sensitive the economy is to increases in oil
           prices. DOE officials told us that the impact of such a disruption
           on the U.S. economy would likely fall somewhere between the
           estimates derived in the model and our analysis. The results of
           the analyses and studies are shown in table 1.
			  
			  Table 1: Results of Analyses and Studies of Impacts of a Sudden Disruption
of Crude Oil Production and Exports

                                              Temporary impact                
                                            on world crude oil Impact on U.S. 
                                                  prices (U.S.  GDP (billions 
                        Disruption                 dollars per        of U.S. 
Analyses or studies  description                    barrel)      dollars)a
DOE contractor model Disruption of a                     11          ($23) 
using our            maximum of 2.2                         
hypothetical         million barrels per                    
scenario (January    day for 6 months                       
2006)                                                       
Our analysis using   Disruption of a                   9-13      (2.6-7.5) 
EIA disruption       maximum of 2.2                         
parameters (January  million barrels per                    
2006)                day for 6 months                       
EIA analysis using   Disruption of 2.4                10-18              b 
EIA's own            million barrels per                    
hypothetical         day for 6 months                       
scenario (March                                             
2005)                                                       
EIA study of actual  Actual disruption                 <10c              b 
Venezuelan           of a maximum of 2.8                    
disruption in winter million barrels per                    
of 2002-2003         day                                    

Source: GAO based on Leiby, Paul N. and David W. Bowman, "Disruption
Scenarios and the Avoided Costs Due to SPR Use," Oak Ridge National
Laboratory Working Paper, January 19, 2005; GAO analysis conducted in
January 2006; EIA, Impacts of Hypothetical Oil Supply
Disruptions-Venezuela, Mar. 5, 2005 (unpublished); and EIA, Impacts of the
Venezuelan Crude Oil Production Loss, by Joanne Shore and John Hackworth,
Sept. 25, 2003.

aNumbers in parentheses reflect reductions in the U.S. GDP from what it
would be without a disruption.

bThis analysis did not include impacts on the U.S. GDP.

cEIA attributed the $10 per barrel increase to the Venezuelan oil strike
and low petroleum inventories.

A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts,
Primarily in the United States

A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts, 
Primarily in the United States

An EIA analysis shows (and several industry experts told us) that a
Venezuelan oil embargo against the United States would have a smaller
impact on oil prices than a sudden and severe drop in production. The
impact of an embargo would be smaller because the Venezuelan oil would go
to other destinations instead of being taken off of the world market.
However, since most replacement supplies are farther away than Venezuela,
U.S. oil refiners would experience higher costs and delays in getting oil
supplies; such an embargo would therefore increase U.S. consumer prices
for gasoline and other petroleum products in the short term. Also, as
discussed previously, some U.S. refineries that are designed to handle
large amounts of Venezuelan heavy sour crude oil would operate less
efficiently if they had to switch to different types of crude oil.

EIA's March 2005 analysis estimated that a Venezuelan oil embargo against
the United States would cause the price of West Texas Intermediate crude
oil (a commonly used benchmark oil) to increase in the short term by $4 to
$6 per barrel from the then-current price of $53 per barrel-an increase of
between 8 to 11 percent, as opposed to the 19 to 34 percent increase
associated with a sudden and severe loss of oil. The price would rise
because the embargo would cause (1) higher transportation costs resulting
from longer distances to transport oil from locations farther away than
Venezuela; (2) refinery inefficiencies resulting from switching crude oil
types; and (3) a market psychology premium reflecting fears of further
escalation.

The EIA analysis did not quantify the impact of an oil embargo on U.S.
prices of gasoline and other refined petroleum products. However, an
increase in U.S. crude oil prices by 8 to 11 percent per barrel would
raise costs of refined petroleum products to the extent that the increase
would be passed on to the consumer. All else being equal, such an increase
would add 11 to 15 cents to the price of a gallon of gasoline, assuming
the conditions in March 2005.14

DOE officials told us that their analysis assumes the $4 to $6 per barrel
increase would last as long as the disruption. However, adjustments would
reduce this price impact over time. Refineries, for example, could
reconfigure some of their processes and make other adjustments over time
to improve their ability to efficiently handle replacement crude oil
types. Transportation costs could also adjust over time. For example,
Venezuela likely could switch from the relatively small tankers used for
the short haul to the United States to very large tankers to move its oil
to more distant locations, thereby helping offset Venezuela's increased
transportation costs for shipping the oil longer distances.

A Venezuelan oil embargo against the United States would also affect the
Venezuelan economy, but the impact would not be as great as the impact of
a sudden loss of oil. According to a U.S. company that produces oil in
Venezuela, such an embargo would reduce PDVSA's oil revenues from between
$3-4 billion dollars per year due to the following factors:

           o  Refinery operations that Venezuela wholly and partly owns in
           the United States, which take about 70 percent of Venezuela's oil
           exports to the United States, would be adversely affected by the
           embargo because they would have to obtain crude oil from locations
           farther away than Venezuela and the replacement crude oil would
           likely be of a different quality.
           o  Venezuela's crude oil revenues would be adversely affected by
           the higher cost of transporting oil to locations farther away than
           the United States market.

           In addition, oil company officials and industry experts told us
           that few countries have significant refining capacity that is
           designed to efficiently process the heavy sour oil from Venezuela.
           Therefore, it would be difficult for Venezuela to find markets for
           all the oil it currently exports to the United States.

           Closure of Venezuelaï¿½s U.S. Refineries would Increase U.S. Petroleum 
			  Product Prices and Reduce Venezuelan Revenue
			  
			  If Venezuela shut down its wholly-owned U.S. refineries, the
           supply of gasoline and other refined petroleum products made from
           crude oil would decrease and, correspondingly, the prices of these
           refined petroleum products in the United States would increase.
           Venezuela wholly owns five refineries in the United States through
           its PDVSA subsidiary, CITGO, and these account for about 750,000
           barrels per day of refining capacity-4 percent of total U.S.
           refining capacity. The impacts of shutting down CITGO refineries
           would continue until the closed refineries were reopened or new
           sources of refined petroleum products were brought on line. The
           impacts would be obviously most severe in the United States,
           although increased demand by U.S. oil companies to buy petroleum
           products from other countries could cause prices to rise in those
           countries as well. Venezuela would also lose the profits of these
           refineries for as long as they were shut down, and could face
           sanctions by the U.S. government-including freezing Venezuelan
           assets in the United States-if the closure of the refineries were
           deemed a threat to U.S. security.

           We identified no studies of the impacts of oil refinery shutdowns
           on the prices of refined petroleum products, but a shutdown of
           several large U.S. refineries as a result of hurricanes Katrina
           and Rita in 2005 clearly contributed to sharp increases in U.S.
           fuel prices. For example, Hurricane Katrina caused a shutdown of
           879,000 barrels per day, or 5.2 percent of U.S. refining capacity.
           Figure 4 shows that following hurricanes Katrina and Rita in late
           August and late September 2005, gasoline prices increased by over
           $1 per gallon on the U.S. Gulf Coast Wholesale Market. While these
           price spikes are indicative of what can happen in the event of
           refinery shutdowns, it must be noted that there were other very
           important disruption factors that affected these prices-such as
           major pipeline shutdowns and damage-which make it difficult to
           isolate the impact of the refinery shutdowns.

A Drop in Venezuelan Oil Exports Would Have Worldwide Impacts, while Impacts of
a Venezuelan Embargo against the United States or Closure of Its U.S. Refineries
           Would Be Felt Primarily in the United States and Venezuela

A Sudden Drop in Venezuelan Oil Production Would Have Significant Worldwide and
U.S. Impacts

12This analysis was done in fall 2005. In consultation with the
contractor, we chose a starting price for oil of $55 per barrel-lower than
the actual price of light oil at the time-to reflect a composite of light
and heavy oil and the fact that future oil price forecasts were falling in
the medium term. In the event that an actual oil supply disruption occurs,
the predictive power of the model estimate will depend in part on how
close the actual starting price of oil is to the assumed price in the
model.

13Arab Medium was used to help replace lost oil during the Venezuelan
strike. However, in any disruption, any quality oil may be used to replace
lost oil. According to DOE officials, "Arab Heavy," which has qualities
closer to much of Venezuela's crude oil, constitutes the bulk of spare
capacity in 2006.

Table 1: Results of Analyses and Studies of Impacts of a Sudden Disruption
of Crude Oil Production and Exports

                                              Temporary impact                
                                            on world crude oil Impact on U.S. 
                                                  prices (U.S.  GDP (billions 
                        Disruption                 dollars per        of U.S. 
Analyses or studies  description                    barrel)      dollars)a
DOE contractor model Disruption of a                     11          ($23) 
using our            maximum of 2.2                         
hypothetical         million barrels per                    
scenario (January    day for 6 months                       
2006)                                                       
Our analysis using   Disruption of a                   9-13      (2.6-7.5) 
EIA disruption       maximum of 2.2                         
parameters (January  million barrels per                    
2006)                day for 6 months                       
EIA analysis using   Disruption of 2.4                10-18              b 
EIA's own            million barrels per                    
hypothetical         day for 6 months                       
scenario (March                                             
2005)                                                       
EIA study of actual  Actual disruption                 <10c              b 
Venezuelan           of a maximum of 2.8                    
disruption in winter million barrels per                    
of 2002-2003         day                                    

Source: GAO based on Leiby, Paul N. and David W. Bowman, "Disruption
Scenarios and the Avoided Costs Due to SPR Use," Oak Ridge National
Laboratory Working Paper, January 19, 2005; GAO analysis conducted in
January 2006; EIA, Impacts of Hypothetical Oil Supply
Disruptions-Venezuela, Mar. 5, 2005 (unpublished); and EIA, Impacts of the
Venezuelan Crude Oil Production Loss, by Joanne Shore and John Hackworth,
Sept. 25, 2003.

aNumbers in parentheses reflect reductions in the U.S. GDP from what it
would be without a disruption.

bThis analysis did not include impacts on the U.S. GDP.

cEIA attributed the $10 per barrel increase to the Venezuelan oil strike
and low petroleum inventories.

A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts,
Primarily in the United States

A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts, 
Primarily in the United States

An EIA analysis shows (and several industry experts told us) that a
Venezuelan oil embargo against the United States would have a smaller
impact on oil prices than a sudden and severe drop in production. The
impact of an embargo would be smaller because the Venezuelan oil would go
to other destinations instead of being taken off of the world market.
However, since most replacement supplies are farther away than Venezuela,
U.S. oil refiners would experience higher costs and delays in getting oil
supplies; such an embargo would therefore increase U.S. consumer prices
for gasoline and other petroleum products in the short term. Also, as
discussed previously, some U.S. refineries that are designed to handle
large amounts of Venezuelan heavy sour crude oil would operate less
efficiently if they had to switch to different types of crude oil.

EIA's March 2005 analysis estimated that a Venezuelan oil embargo against
the United States would cause the price of West Texas Intermediate crude
oil (a commonly used benchmark oil) to increase in the short term by $4 to
$6 per barrel from the then-current price of $53 per barrel-an increase of
between 8 to 11 percent, as opposed to the 19 to 34 percent increase
associated with a sudden and severe loss of oil. The price would rise
because the embargo would cause (1) higher transportation costs resulting
from longer distances to transport oil from locations farther away than
Venezuela; (2) refinery inefficiencies resulting from switching crude oil
types; and (3) a market psychology premium reflecting fears of further
escalation.

The EIA analysis did not quantify the impact of an oil embargo on U.S.
prices of gasoline and other refined petroleum products. However, an
increase in U.S. crude oil prices by 8 to 11 percent per barrel would
raise costs of refined petroleum products to the extent that the increase
would be passed on to the consumer. All else being equal, such an increase
would add 11 to 15 cents to the price of a gallon of gasoline, assuming
the conditions in March 2005.14

DOE officials told us that their analysis assumes the $4 to $6 per barrel
increase would last as long as the disruption. However, adjustments would
reduce this price impact over time. Refineries, for example, could
reconfigure some of their processes and make other adjustments over time
to improve their ability to efficiently handle replacement crude oil
types. Transportation costs could also adjust over time. For example,
Venezuela likely could switch from the relatively small tankers used for
the short haul to the United States to very large tankers to move its oil
to more distant locations, thereby helping offset Venezuela's increased
transportation costs for shipping the oil longer distances.

A Venezuelan oil embargo against the United States would also affect the
Venezuelan economy, but the impact would not be as great as the impact of
a sudden loss of oil. According to a U.S. company that produces oil in
Venezuela, such an embargo would reduce PDVSA's oil revenues from between
$3-4 billion dollars per year due to the following factors:

           o  Refinery operations that Venezuela wholly and partly owns in
           the United States, which take about 70 percent of Venezuela's oil
           exports to the United States, would be adversely affected by the
           embargo because they would have to obtain crude oil from locations
           farther away than Venezuela and the replacement crude oil would
           likely be of a different quality.
           o  Venezuela's crude oil revenues would be adversely affected by
           the higher cost of transporting oil to locations farther away than
           the United States market.

           In addition, oil company officials and industry experts told us
           that few countries have significant refining capacity that is
           designed to efficiently process the heavy sour oil from Venezuela.
           Therefore, it would be difficult for Venezuela to find markets for
           all the oil it currently exports to the United States.

           Closure of Venezuelaï¿½s U.S. Refineries would Increase U.S. Petroleum 
			  Product Prices and Reduce Venezuelan Revenue
			  
			  If Venezuela shut down its wholly-owned U.S. refineries, the
           supply of gasoline and other refined petroleum products made from
           crude oil would decrease and, correspondingly, the prices of these
           refined petroleum products in the United States would increase.
           Venezuela wholly owns five refineries in the United States through
           its PDVSA subsidiary, CITGO, and these account for about 750,000
           barrels per day of refining capacity-4 percent of total U.S.
           refining capacity. The impacts of shutting down CITGO refineries
           would continue until the closed refineries were reopened or new
           sources of refined petroleum products were brought on line. The
           impacts would be obviously most severe in the United States,
           although increased demand by U.S. oil companies to buy petroleum
           products from other countries could cause prices to rise in those
           countries as well. Venezuela would also lose the profits of these
           refineries for as long as they were shut down, and could face
           sanctions by the U.S. government-including freezing Venezuelan
           assets in the United States-if the closure of the refineries were
           deemed a threat to U.S. security.

           We identified no studies of the impacts of oil refinery shutdowns
           on the prices of refined petroleum products, but a shutdown of
           several large U.S. refineries as a result of hurricanes Katrina
           and Rita in 2005 clearly contributed to sharp increases in U.S.
           fuel prices. For example, Hurricane Katrina caused a shutdown of
           879,000 barrels per day, or 5.2 percent of U.S. refining capacity.
           Figure 4 shows that following hurricanes Katrina and Rita in late
           August and late September 2005, gasoline prices increased by over
           $1 per gallon on the U.S. Gulf Coast Wholesale Market. While these
           price spikes are indicative of what can happen in the event of
           refinery shutdowns, it must be noted that there were other very
           important disruption factors that affected these prices-such as
           major pipeline shutdowns and damage-which make it difficult to
           isolate the impact of the refinery shutdowns.

14The impact on the price of gasoline at the pump could be higher or lower
depending on many factors, such as whether the refiner passed all crude
oil cost increase on to the consumer and whether the gasoline retailer
passed all the increases on to the customer.

Closure of Venezuela's U.S. Refineries would Increase U.S. Petroleum Product
Prices and Reduce Venezuelan Revenue

Figure 4: Changes in Wholesale Conventional Regular Gasoline Prices in the
U.S. Gulf Coast following Hurricanes Katrina and Rita

U.S. Government Programs and Activities to Ensure a Reliable Long-Term Supply of
Crude Oil from Venezuela Have Been Discontinued, but the Government Has Options
                to Mitigate Supply Disruptions in the Short Term

The U.S. government has programs and activities intended, in part, to
ensure a reliable long-term supply of oil from Venezuela and other
oil-producing countries to U.S. and world markets; these programs include
bilateral technology and information exchange agreements, bilateral
investment treaties, and multilateral energy initiatives. However, these
programs and activities have not been pursued with regard to Venezuela in
recent years. The U.S. government has options to mitigate the impacts of
short-term oil disruptions to global oil supplies, such as the disruption
caused by the Venezuelan strike. These options include diplomacy to
persuade oil-producing countries to increase production and using oil in
the U.S. Strategic Petroleum Reserve, with or without the release of oil
from other International Energy Agency countries' strategic reserves.
However, none of the U.S. government agencies, and few of the U.S. oil
companies that we contacted, have contingency plans specifically to
mitigate a Venezuelan oil disruption, although DOE conducts analyses of
the effects on the market of potential supply disruptions.

U.S. Programs and Activities to Ensure a Long-Term Supply of Venezuelan Crude
Oil for the United States Were Discontinued

The United States has had a bilateral technology and information exchange
agreement with Venezuela since 1980, and this agreement was expanded in
1997 to include policy dialogue on topics such as energy data exchange,
natural gas policy, and energy efficiency. Also, in the 1990s, the two
countries entered negotiations for a bilateral investment treaty and
worked together under the multilateral energy initiative to organize
hemisphere-wide meetings on energy security. By 2004, however, these
programs and activities had been discontinued as the result of strained
relations between the two countries and diminished technical capacity in
Venezuela.

  Oil Production Technology and Information Exchanges between the United States
  and Venezuela Occurred until 2003

According to DOE, it maintains bilateral technology and information
exchange agreements with Venezuela and 21 other oil-producing countries:
Angola, Argentina, Australia, Azerbaijan, Brazil, Canada, China,
Equatorial Guinea, Kazakhstan, India, Italy, Iraq, Mexico, Norway,
Pakistan, Peru, Russia, Saudi Arabia, the United Kingdom, Ukraine, and
West Africa/Nigeria. DOE officials told us that bilateral technology and
information exchange agreements are generally designed to offer avenues to
leverage publicly funded domestic research, accelerate scientific
achievement through technical cooperation, and support U.S. economic
competitiveness by providing U.S. scientists with opportunities to gain
access to (and build upon) other countries' research. They also said that
the agreements with four countries-Venezuela, China, Canada, and
Mexico-include provisions for cooperation on oil and natural gas recovery
technology that DOE requires be based on joint research of mutual benefit.
In the case of Venezuela, the specific purpose of the bilateral technology
exchange agreement was to cooperate on oil and gas technology and, after
1997, incorporate policy dialogue on such issues as the exchange of
information regarding the design and implementation of energy regulatory
systems, the development and evaluation of energy resources and
production, and the application of alternative energy sources. DOE
headquarters and field staff told us that the technical exchanges between
the United States and Venezuela under the agreement were robust. For
example, meetings were held about twice annually where technical staff
from both countries exchanged information.

Since November 21, 2003, however, no formal meetings of the countries'
technical staff have occurred. DOE headquarters and field officials told
us they were directed in 2003 by DOE headquarters to stop activities under
the agreement to accommodate diplomatic decisions. In addition, DOE
officials also told us that the last few technical meetings involved very
little exchange of technology information. Specifically, they said that
after the Venezuelan government fired a significant number of technical
employees following the Venezuelan strike, DOE technical staff had
difficulty identifying technical counterparts in Venezuela to maintain
activities under the agreement.

Venezuelan officials told us that attempts to encourage DOE to continue
activities under the technology exchange agreement were unsuccessful. For
example, Venezuela sent two letters to DOE in 2005 to arrange meetings
between Venezuela's Minister of Energy and Petroleum and the Secretary of
DOE, but DOE's response to one letter stated that the Secretary of DOE was
unable to meet, and, according to the Venezuelan spokesperson, DOE did not
respond to the other letter. Also, the Venezuelan spokesperson told us
that in November 2003, Venezuela presented DOE with a plan to reactivate
projects under the agreement but DOE demonstrated no interest. The
spokesperson also said that in March 2006, DOE officials told PDVSA's vice
president of production that DOE would not resume activities under the
agreement until the political relationship between Venezuela and the
United States improved. DOE officials confirmed this, but said DOE also
told PDVSA's vice president of production that part of the reason
activities could not be resumed was because DOE research on technology to
extract extra-heavy oil and gas was not a high priority, as it had been at
one time, because high energy prices removed the need to subsidize such
research.

  Negotiations for a Bilateral Investment Treaty Ceased in 1999

According to Department of State and the Office of the U.S. Trade
Representative officials, informal bilateral investment treaty discussions
with Venezuela began in 1992 and formal negotiations began in October
1997. The United States has bilateral investment treaties in force with 39
countries, including many oil- and gas-producing countries such as
Bolivia, Kazakhstan, Trinidad and Tobago, and the Ukraine. These treaties
provide rules on investment protection, binding international arbitration
of investment disputes, and repatriation of profits, and assist U.S.
companies doing business in foreign countries. In our 1991 report on
Venezuelan production and conditions affecting potential future U.S.
investment there, we observed that most of the 22 oil companies with whom
we spoke during that effort told us that a bilateral investment treaty
would help increase their investment protection. In that report, we also
noted that an official in the Office of the U.S. Trade Representative said
that, in order for negotiations to be successful, Venezuela would have to
meet standards set forth in the model U.S. treaty-including provisions
prohibiting nationalization of property, providing for repatriation of
profits, and providing for international arbitration to resolve disputes.

U.S. and Venezuelan government officials said that bilateral investment
treaty negotiations broke down in 1999 because of significant policy
differences between the two countries. A Venezuelan spokesperson and U.S.
officials identified three major differences, including the model treaty
provisions relating to performance requirements, such as rules stipulating
minimum content requirements and obligations to compensate investors for
damage done by internal strife.

In May 2001, the U.S. National Energy Policy Development Group recommended
that the United States conclude bilateral investment treaty negotiations
with Venezuela. Department of State officials told us that later in 2001,
when they revisited the issue in response to this recommendation, they
made an effort to reengage Venezuela, but the effort proved unsuccessful
because of continued major differences between the two countries.
Department of State officials said they decided that the probability of
negotiating a treaty that contained the high standards the United States
expects was very unlikely, and they pursued the treaty no further.
Department of State officials told us that in bilateral investment treaty
negotiations generally, it is overall policy to insist on the high
standards contained in the U.S. model treaty to avoid a dilution of
standards across agreements.

Many oil company officials and experts said that a bilateral investment
treaty could have helped protect oil companies' investments in Venezuela
when the Venezuelan government unilaterally required them to change their
existing operating service agreements to comply with the new hydrocarbon
law. For example, officials from one U.S. oil company said new agreements
that companies were required to sign did not contain provisions allowing
international arbitration to settle disputes. The officials said their
company was concerned about the fairness of having Venezuelan arbitrators
settle disputes between U.S. companies and PDVSA or the Venezuelan
government. International arbitration was required under the company's old
agreements, and the current U.S. model bilateral investment treaty
provides for it. Some U.S. oil company officials also told us that some
companies are considering incorporation in other countries that have
bilateral investment treaties with Venezuela, such as the United Kingdom
and the Netherlands, because the treaties would help protect their
investments. Similarly, some oil experts also told us companies from
countries with bilateral investment treaties have assurances that they can
repatriate profits if Venezuela seizes control of their operations.

  The United States and Venezuela Participated in the Multilateral Hemispheric
  Energy Initiative until 2004

In 1994, DOE and the Venezuelan Ministry of Energy and Petroleum became
the principal coordinators of what was known as the Hemispheric Energy
Initiative. The goal of this activity was to stimulate dialogue and
cooperation on energy issues among countries in the Western Hemisphere and
identify and promote actions to foster regional interconnections through
the development of energy sector projects in the hemisphere. As the
coordinators, DOE and Venezuela's Ministry of Energy and Petroleum
organized a series of hemispheric-wide summit meetings to discuss energy
cooperation beginning in 1995. For example, at the third hemispheric
meeting in Caracas, Venezuela, in January 1998, officials from the 26
countries in attendance agreed to promote policies that facilitated trade
in the energy sector and facilitate the development of the energy
infrastructure, develop regulatory frameworks that are transparent and
predictable, and promote foreign private investment in the sector
throughout the hemisphere. DOE officials told us that this initiative
ended with the meeting in Mexico in 2002, but that, in 2004, Trinidad
offered to host a meeting of hemispheric energy ministers in a less formal
setting to discuss energy security. The meeting, which was held in
Trinidad and Tobago in April 2004, was organized by DOE and Trinidad,
without Venezuela playing a significant role organizationally. The meeting
focused on hemispheric energy security and included high-ranking energy
officials from 35 countries, including the United States, Canada, Mexico,
and Venezuela, as well as other key energy-producing countries from
Central and South America. DOE officials told us that, during the meeting,
Venezuela's Minister of Energy and Petroleum met with DOE's Secretary and
agreed that it was very important not to politicize the oil trade between
the United States and Venezuela and that both countries recognized the
importance of that trade. According to DOE officials, no action has taken
place since the meeting in Trinidad and Tobago.

  Relations between the United States and Venezuela Have Become Strained

According to Department of State and other U.S. government officials, the
United States has had historically strong ties to Venezuela with respect
to oil issues, and the dialogue between the two countries in the past was
robust. But the relationship between the two countries with respect to
energy issues has changed in recent years-some energy related activities
previously used to foster energy security have been discontinued. For
example, DOE officials told us that 3 years have elapsed since the last
formal discussion between DOE and the Venezuelan Ministry of Energy and
Petroleum regarding energy security. Also, officials in the Commerce
Department and in the Office of the U.S. Trade Representative reported
there is no current engagement between them and their counterparts in
Venezuela regarding energy security. Officials in Department of State
headquarters said that they have worked hard for years to build a
productive energy relationship with Venezuela by participating in frequent
consultations with Venezuelan energy officials, meeting most recently in
March 2006. DOE officials also said they have maintained open dialogue
with Venezuelan energy officials.

Most U.S. oil companies have not relied on assistance from the U.S.
government to help with issues in Venezuela in recent years although,
according to DOE officials, DOE stays in contact with companies regarding
the situation in Venezuela, and senior DOE officials frequently report on
the status of U.S. energy investment and overall energy production in
Venezuela at senior-level meetings of the U.S. government. The U.S.
Ambassador to Venezuela told us he does not have good access to Venezuelan
government officials and, correspondingly, it is difficult to help U.S.
companies doing business in Venezuela obtain access to Venezuelan
officials. Officials in the Departments of Commerce and State, and in the
Office of the U.S. Trade Representative, told us companies that might
otherwise seek their assistance in negotiating with foreign governments do
not do so in Venezuela because the companies do not believe that federal
agency intervention would be helpful. For example, an official from the
Department of Commerce said that U.S. government involvement would be
extremely harmful to the relationship between U.S. companies and their
business interests in Venezuela. Officials in several U.S. oil companies
told us that the poor bilateral relationship between the United States and
Venezuela makes it difficult for them to operate and compete for new
investment contracts in Venezuela.

The U.S. Government Has Options to Mitigate the Impacts of Short-Term Venezuelan
Oil Supply Disruptions

Key activities and programs that the U.S. government has used to mitigate
the impacts of short-term oil supply disruptions include diplomacy,
whereby U.S. government officials negotiate with senior officials in
oil-producing countries to increase their supply of crude oil in case of a
disruption; using oil in the U.S. Strategic Petroleum Reserve; and
coordinating with the International Energy Agency, whose members hold
stocks equal to 90 days or more of its net imports to address supply
disruptions.15 Officials in the Department of State and DOE, as the lead
agencies in crafting U.S. energy security policy, consult with each other,
with other U.S. government agencies (as appropriate), and with U.S.
companies doing business in foreign countries to identify potential oil
disruptions and craft responses to the disruptions, if necessary.

15DOE officials also told us that they encourage energy efficiency and
conservation during oil disruptions.

U.S. government agencies used diplomacy to mitigate the impact of the oil
disruption resulting from the Venezuelan strike. Anticipating a potential
oil supply problem in Venezuela, representatives from key DOE offices
began coordinating with the Department of State months before the strike
to produce a plan to bring together data and information about possible
supply problems and to produce an appropriate response to the potential
disruption. The overall effort was headed by the National Security Council
and top U.S. government administration officials, with Department of State
and DOE officials acting as subject experts. After the strike began, the
Department of State and DOE used diplomacy to encourage increases in OPEC
member and other countries' crude oil production by 1.3 million barrels
per day. Also, according to DOE officials, DOE officials responsible for
coordinating oil supply disruptions responses with the International
Energy Agency upgraded their day-to-day contact with emergency response
officials at the agency, focusing on the strike's potential impacts and
assessing possible mitigation measures. According to an EIA study, most of
the replacement oil came from Mexico and the Middle East, especially Iraq.

Not withstanding this success, most oil industry officials and experts, as
well as U.S. government officials, said that using diplomacy to obtain
additional oil likely would be less effective today because there is less
surplus oil production capacity now than there was during the Venezuelan
strike. During the Venezuelan strike, as much as 5.6 million barrels per
day of spare oil production capacity was available from several regions,
including Mexico, West Africa, and the Middle East. Now, experts say that
the total world spare production capacity is only about 1 million barrels
per day, and most of it is in Saudi Arabia. If the oil balance continues
to tighten and surplus production capacity shrinks, increasing production
in response to disruptions will be more difficult, if not impossible.

Aside from using diplomacy, another tool for mitigating supply disruptions
is the use of oil reserves. The U.S. government can use the U.S. Strategic
Petroleum Reserve to increase the supply of crude oil available to U.S.
refineries in three ways: selling oil from the reserve, exchanging oil
from the reserve whereby Reserve oil is replaced at a specified date in
the future, and allowing oil companies to delay delivering oil to the
reserve. Federal law requires that the drawdown and sale of oil from the
Strategic Petroleum Reserve be authorized by the President. However, DOE
can authorize an exchange of oil from or a delay in delivery of oil to the
Reserve. 16 While no set criteria exist for triggering the release of oil
from the reserve in the case of a supply disruption, U.S. agency officials
told us that, during any disruption, the Department of State and DOE
provide analytical and technical advice through the National Security
Council to help the President evaluate his options. U.S. policy makers
believe that providing oil during a supply disruption is the most
efficient mechanism to counteract the impacts of the disruption.

The United States currently maintains about 700 million barrels of crude
oil in the U.S. Strategic Petroleum Reserve. If 1.5 million barrels a day
were released-the amount of crude oil exported by Venezuela to the United
States-the reserve is enough to replace over 450 days of lost Venezuelan
oil. During the Venezuelan oil strike, oil was not withdrawn from the U.S.
Strategic Petroleum Reserve, mostly because other oil-producing countries
increased production by 1.3 million barrels a day. However, the U.S.
government allowed U.S. oil companies to delay delivering oil that they
were committed to deliver to the U.S. Strategic Petroleum Reserve, which
added about 18 million barrels to the U.S. oil supply available to
refineries-an amount equivalent to almost 1 day of U.S. oil consumption,
or almost 2 weeks of Venezuelan oil exports to the United States.

In addition to using the U.S. Strategic Petroleum Reserve to mitigate the
impact of a supply disruption, the United States could also benefit if the
strategic reserves of International Energy Agency member countries were
released. Each International Energy Agency member country is required to
hold stocks equal to 90 days or more of its net imports. Presently,
International Energy Agency countries hold about 4.1 billion barrels of
oil stocks. According to a DOE official, the three countries with the
largest government controlled reserves-the United States, Germany, and
Japan-are able to release about 8 million barrels a day at the onset of a
disruption. This quantity is equal to about 10 percent of total world oil
demand. The International Energy Agency also requires member countries to
release stocks, restrain demand, and share available oil, if necessary, in
the event of a major oil supply disruption. While there are no criteria
for triggering the release of oil from the member countries' reserves, the
International Energy Agency has specified arrangements for the coordinated
use of a drawdown, the restraint of demand, and other measures that member
countries could implement in case of a disruption. Also, International
Energy Agency officials say that a disruption of 7 percent or more of
world supply is a de facto trigger.

16Energy Policy and Conservation Act S: 161(d) as amended, 42 U.S.C. S:
1641(d) et seq. The Secretary is also authorized to carry out test
drawdowns and sales not to exceed 5,000,000 barrels of petroleum products.
42 U.S.C. S: 6241(g).

During the Venezuelan strike, the Department of State and DOE maintained
steady diplomatic contact with members of the International Energy Agency
to discuss the evolving situation and to share concerns in case a drawdown
of member reserves was deemed necessary. A later International Energy
Agency analysis of the Venezuelan disruption concluded that, although
International Energy Agency member-country stocks were not used during the
Venezuelan disruption, the presence of the International Energy Agency
stocks played an important role in reassuring the market. Furthermore, the
availability of government stocks muted speculation on the markets,
according to an International Energy Agency analysis of the disruption.

Although the U.S. government has options to mitigate impacts of short-term
oil disruptions on crude oil and petroleum products prices, these
mitigating actions are not designed to address a long-term loss of
Venezuelan oil from the world market. If Venezuela fails to maintain or
expand its current level of production, the world oil market may become
even tighter than it is now, putting further pressure on both the level
and volatility of energy prices. In this context, the United States faces
challenges in the coming years that may require hard choices regarding
energy sources, foreign relations and energy-related diplomacy, and the
amount of energy Americans use.

Officials in the four U.S. government agencies we contacted said they do
not have contingency plans to deal with oil losses specifically from
Venezuela or any other single country. Officials at the lead agencies for
energy security, the Department of State and DOE, said they do not have
specific plans because the available mechanisms to mitigate the impacts of
an oil disruption-diplomacy to persuade oil-producing countries to
increase production and using oil from the U.S. Strategic Petroleum
Reserve-are adequate to deal with disruptions from any source. According
to DOE officials, it conducts scenario analyses of the vulnerabilities of
disruptions from certain countries and relies on these options to deal
with disruptions. They said that these options have been proven to be
adequate.

Officials in most oil companies we contacted also said they do not have
plans to deal specifically with a disruption of Venezuelan oil because, as
with any oil disruption, if a Venezuelan oil disruption were to occur they
would replace the lost oil with oil from other sources. The officials said
that oil is a fungible commodity and typically available on the spot
market. During the Venezuelan strike, for example, U.S. refiners replaced
Venezuelan crude oil with crude oil from other sources, including Mexico,
Brazil, Russia, Ecuador, and the Middle East.

                       Agency Comments and Our Evaluation

We provided the Departments of State and Commerce, DOE, and the Office of
the U.S. Trade Representative with a draft of this report for their review
and comment. The Department of State and the Office of the U.S. Trade
Representative told us that they generally agreed with the findings of the
report but did not provide written comments. DOE and the Department of
Commerce provided written comments. The Department of Commerce agreed with
the report's overall findings; Commerce's letter is reproduced in appendix
II. DOE neither agreed nor disagreed with the report's overall findings,
noting that the United States has had a long and mutually beneficial
relationship with Venezuela and that our report makes valuable points
regarding the challenges facing Venezuelan crude oil production. However,
DOE raised two issues that it contends provide an "alarmist view" of U.S.
energy security. DOE's concerns and our response to them are summarized
below; DOE's letter is reproduced in appendix III. All four agencies also
provided technical comments, which we incorporated as appropriate.

DOE's first concern is that a $23 billion loss to U.S. GDP, which we
reported and attributed to a model developed for DOE by a contractor, is
misleading and will be taken out of context because the prediction does
not take into account mitigating factors that could influence the impact
of an oil disruption on U.S. GDP. Specifically, DOE said that the
prediction does not take into account worldwide response to an oil supply
disruption, the availability of Arab Heavy oil to replace lost Venezuelan
heavy oil, and the ability to use the U.S. Strategic Petroleum Reserve and
worldwide stocks to mitigate the impact of a disruption. We disagree that
our reporting of the model results is misleading or out of context and
believe all the mitigating factors raised by DOE have been addressed in
our report. Contrary to DOE's assertion, the model that predicted the $23
billion loss incorporates the worldwide response and availability of
replacement oil from surplus production capacity, such as Arab Heavy oil.
However, as our report notes, because there is much less surplus capacity
available today than there was in winter 2002-2003 when a similar
disruption occurred as a result of the Venezuelan strike, relying on
surplus capacity would not be as effective as it was at that time. Also,
our report discusses in detail the options the U.S. government has to
mitigate the impacts of an oil disruption, including using strategic
petroleum reserves, either unilaterally or in concert with other
countries. DOE also states that the report does not contain an analysis of
the impact of a Venezuelan oil supply disruption on that country's
economy. We disagree with this assertion. Our report discusses the severe
impact a Venezuelan oil disruption would have on that country's
economy-the Venezuelan national oil company is the country's largest
employer, and accounts for a third of Venezuela's GDP, four fifths of its
export revenue, and half of government revenue-and notes that Venezuela
would likely take steps to correct any such disruption as soon a possible
to avoid that impact.

DOE's second concern is that by focusing on the discontinuation of
bilateral programs with Venezuela our report leads the reader to believe
that such programs could guarantee U.S. energy security. We disagree;
nowhere in the report do we imply that such programs with Venezuela could
guarantee the United States' energy security. On the contrary, we point
out that instability in Venezuela's oil sector exists in a broader context
of tightening global oil supply and demand balance and that instability of
any significant individual oil-producing country can have a significant
impact on U.S. and world energy security. Further we report that a number
of factors create energy security concerns, including a reduction in
global surplus oil production capacity in recent years, the fact that much
of the world's supply of oil is in relatively unstable regions, and rapid
growth in world oil demand that has led to a tight balance between demand
and supply. DOE also states that our report does not address the
comprehensive actions the U.S. is taking domestically and internationally
to ensure energy security. While a comprehensive assessment of U.S. energy
security was beyond the scope of this report, our report nonetheless notes
that the United States has long had a number of programs and activities
designed to ensure energy security. For example, for those initiatives
identified as within the scope of our report, we listed the 21 other
countries with which the U.S. government has negotiated bilateral
technology and information exchange agreements.

Overall, we disagree that our report, as written, presents an "alarmist
view" of U.S. energy security. We point out that oil supply disruptions
can have adverse economic impacts but that the U.S. government has options
to mitigate such impacts. However, we also point out that these mitigating
options are only designed for short-term disruptions and there remain
potential long-term concerns with regard to Venezuelan oil supply in the
event that Venezuelan oil production continues to fall.

We are sending copies of this report to interested congressional
committees, the Secretary of Energy, the Secretary of State, the United
States Trade Representative, and the Secretary of Commerce. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov .

If you or your staff have any questions, please contact me at (202)
512-3841 or at [email protected] . Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix IV.

Sincerely yours,

Jim Wells Director, Natural Resources and Environment

Appendix I: Objectives, Scope, and Methodology 


The Chairman of the Senate Committee on Foreign Relations asked us to
answer the following questions: (1) How have Venezuela's production of
crude oil and exports of crude oil and refined petroleum products to the
United States changed in recent years, and what are the future prospects?
(2) What are the potential impacts of a reduction in Venezuelan oil
exports, a Venezuelan embargo on oil exports to the United States, or
sudden closure of Venezuela's refineries in the United States? (3) What is
the status of U.S. government programs and activities to ensure a reliable
supply of oil from Venezuela and to mitigate the impacts of a supply
disruption? We used a number of methodological techniques to address these
issues.

To address the first objective, we reviewed studies and analyses of the
Venezuelan oil sector and its history. We met with officials from 10 U.S.
and multinational oil companies, eight refiners, and two service
companies; industry experts from the International Energy Agency, the
Center for Strategic and International Studies, the National Petrochemical
and Refiners Association, an international energy consulting firm, and
other institutions; and officials from the Department of Energy (DOE),
Department of State, Department of Commerce, the Office of the United
States Trade Representative, the U.S. Geological Survey, and various other
U.S. government agencies. In addition, we visited Caracas, Venezuela, and
met with the U.S. Ambassador and embassy staff; Venezuela's Minister of
Energy and Petroleum; Petroleos de Venezuela S.A. (PDVSA) officials,
including the president, the vice president of production, and a number of
PDVSA board members and senior managers; the Venezuelan Auditor General;
members of the financial community; and other individuals with expertise
in the oil sector of Venezuela. We met with operations officials at
various oil exploration, production, and refining centers in the Maracaibo
and Faja regions of Venezuela. Both in the United States and in Venezuela,
we spoke with numerous former PDVSA employees, executives, and directors,
and oil company officials. We also collected, evaluated the reliability
of, and analyzed data on Venezuelan production, consumption, and exports
of oil and petroleum products. The sources of our data include U.S.
government agencies, especially the Energy Information Administration
(EIA); the International Energy Agency; the Venezuelan government and
PDVSA; and other governmental and private sources. We deemed these data to
be reliable for the purposes of addressing our objectives. Regarding
Venezuela's plans for future production, we analyzed plans and data
provided by the Ministry of Energy and Petroleum and PDVSA officials. We
also discussed the feasibility of Venezuela implementing its plans with
Department of State and DOE officials, as well as with numerous oil
company officials and industry experts.

To address the second objective, we reviewed several studies of the
impacts of oil disruptions, including the impact of the Venezuelan strike
in the winter of 2002-2003. We also analyzed current conditions in the
world oil market to evaluate what might occur if a similar disruption
occurred today. We also evaluated the potential impacts of-(1) a sudden
and severe drop in Venezuelan oil exports from the world market, (2) a
sudden diversion of oil from the United States to other markets through an
embargo, and (3) the closure by Venezuela of its wholly-owned U.S.-based
refineries. Specifically, we asked a DOE contractor at the Oak Ridge
National Laboratory to use an economic oil-disruption model to analyze the
impacts of a hypothetical Venezuelan oil disruption on world oil prices
and on the U.S. gross domestic product (GDP). For this analysis we
constructed a hypothetical disruption scenario similar to the one that
actually occurred during the Venezuelan oil strike in the winter of
2002-2003, but using assumptions regarding market and economic conditions
closer to those that prevailed at the time of the analysis (late 2005). We
also conducted our own analysis of the same scenario using EIA's oil
disruption rules of thumb that predict how oil prices and the U.S. GDP
respond to disruptions in world oil supplies. For the analyses of the
potential impacts of a Venezuelan embargo against the United States, we
relied largely on EIA analyses. For the impacts of Venezuela's sale or
closure of its CITGO refineries in the United States, we analyzed the
response of gasoline prices to the major loss of refinery capacity that
accompanied hurricanes Katrina and Rita in 2005. In addition, we discussed
the impact of potential Venezuelan oil disruptions with numerous industry
experts in Venezuela and in the United States; officials in the
Departments of State and Commerce, and DOE; and International Energy
Agency officials.

To address the third objective, we met with officials at various U.S.
government agencies, including the Departments of State and Commerce, DOE,
and the Office of the U.S. Trade Representative, to identify the status of
programs and activities to ensure a continued supply of oil and to
mitigate a disruption of imports of crude oil and refined petroleum
products from Venezuela, as well as to determine whether the agencies have
Venezuelan-specific contingency plans. We also met with officials of 10
U.S. and multinational oil companies, eight refiners, and two service
companies; industry experts from the International Energy Agency, the
Center for Strategic and International Studies, the National Petrochemical
and Refiners Association; Purvin and Gertz; and other institutions. In
addition, we obtained information on Venezuelan decrees and legislation
governing foreign investment in the petroleum industry. We reviewed our
previous work on U.S. energy security, especially our 1991 study,
"Venezuelan Energy: Oil Production and Conditions Affecting Potential
Future U.S. Investment."

Because the Department of State advised us that visiting port facilities
may be considered too sensitive to the Venezuelan government given that
government's apprehension about the U.S. government, we did not assess
port or other facilities for vulnerability to sabotage or attack. However,
the Coast Guard, as part of its port security responsibilities, identifies
countries that are not maintaining effective antiterrorism measures.
According to Coast Guard officials, Venezuela has not been identified as
such a country.

This report focuses on federal programs and activities related to U.S.
energy security. Diplomatic and political actions that may impact U.S.
energy security may be undertaken for a multitude of foreign policy goals
that are beyond the scope of this report. Therefore, our evaluation of
programs and activities related to energy security is in no way intended
to evaluate the U.S. government's approach to these broader goals.
Department of State officials reviewed a draft of our report to ensure we
did not include information in our report that could influence diplomatic
relations.

To obtain the official Venezuelan government position on questions
relating to all three objectives, we made arrangements with the Venezuelan
Embassy in Washington, D.C., for an official spokesperson. Generally, we
submitted questions to the spokesperson who then asked for answers and
explanations from the appropriate officials in Venezuela and provided the
answers to us, usually in writing. In addition, the spokesperson made
several presentations to provide information on Venezuela's oil sector. We
did not verify the information provided by the spokesperson. In addition,
we did not independently review Venezuelan laws and decrees, and relied on
secondary sources such as interviews.

We performed our work from March 2005 through May 2006 in accordance with
generally accepted government auditing standards.

Appendix II: Comments from the Department of Commerce 

Appendix III: Comments from the Department of Energy

Appendix IV: GAO Contact and Staff Acknowledgments

                                  GAO Contact

Jim Wells (202) 512-3841

                             Staff Acknowledgments

In addition to the individual named above, Philip Farah, Byron S.
Galloway, Carol Kolarik, Michelle Munn, Cynthia Norris, Melissa Arzaga
Roye, Frank Rusco, and Barbara Timmerman made key contributions to this
report.

(360592)

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Highlights of GAO-06-668, a report to the Chairman, Committee on Foreign
Relations, U.S. Senate

June 2006

ENERGY SECURITY

Issues Related to Potential Reductions in Venezuelan Oil Production

Venezuela is the world's eighth-largest oil exporter and among the top 10
countries in total proven oil reserves. Venezuela also supplies about 11
percent of current U.S. imports of crude oil and petroleum products and
wholly owns five refineries in the U.S. Consequently, Venezuela is a key
player in the future energy security of the United States and the world.

The current global oil market is tight and may be more susceptible to
short-term supply disruptions and higher and more volatile prices.
Recently, tension between Venezuela and the United States has caused
concern about the stability of Venezuelan oil supplies. On several
occasions, Venezuela's President has threatened to stop exporting oil to
the U.S. or to close Venezuela's U.S.-based refineries.

In this context, GAO analyzed: (1) how Venezuela's crude oil production
and exports of crude oil to the U.S. has changed in recent years, (2) the
potential impacts of a reduction in Venezuelan oil exports to the U.S.,
and (3) the status of U.S. government programs and activities to ensure a
reliable supply of oil from Venezuela. Commenting on a draft of the
report, the State and Commerce Departments generally agreed with the
report, but DOE contended that the report presents an "alarmist view" of
U.S. energy security. We disagree and believe the report presents a
contextually balanced treatment of the issue.

Venezuelan oil production has fallen since 2001, but exports of crude oil
and petroleum products to the United States have been relatively
stable-except during a 2-month strike in the winter of 2002-2003, during
which the oil sector was virtually shut down and exports to the United
States fell by about 1.2 million barrels. Energy Information
Administration data show that total Venezuelan oil production in 2001
averaged about 3.1 million barrels per day, but by 2005 had fallen to
about 2.6 million barrels per day. Following the strike, Venezuela's
President ordered the firing of up to 40 percent of Venezuela's national
oil company employees. U.S. and international oil industry experts told us
that the resulting loss of expertise contributed to the decline in oil
production. In 2005, the Venezuelan government announced plans to expand
its oil production significantly by 2012, but oil industry experts doubt
the plan can be implemented because Venezuela has not negotiated needed
deals with foreign oil companies as called for in the plan.

A model developed for the Department of Energy estimates that a 6-month
disruption of crude oil with a temporary loss of up to 2.2 million barrels
per day-about the size of the loss during the Venezuelan strike-would, all
else remaining equal, result in a significant increase in crude oil prices
and lead to a reduction of up to $23 billion in U.S. gross domestic
product. A Venezuelan oil embargo against the United States would increase
consumer prices for petroleum products in the short-term because U.S. oil
refiners would experience higher costs getting replacement supplies. A
shutdown of Venezuela's wholly-owned U.S. refineries would increase
petroleum product prices until closed refineries were reopened or new
sources were brought on line. These disruptions would also seriously hurt
the heavily oil-dependent Venezuelan economy.

U.S. government programs and activities to ensure a reliable supply of oil
from Venezuela have been discontinued, but the U.S. government has options
to mitigate short-term oil disruptions. For example, activities under a
U.S.-Venezuela oil technology and information exchange agreement were
stopped in 2003, in part, as a result of diplomatic decisions. In recent
years, U.S. oil companies have not sought assistance from the U.S.
government with issues in Venezuela because the companies do not believe
that federal agency intervention would be helpful at this time. To
mitigate short-term oil supply disruptions, the U.S. government could
attempt to get oil-producing nations to increase their production to the
extent possible, or could release oil from the U.S. Strategic Petroleum
Reserve. While these options can mitigate short-term oil supply
disruptions, long-term reductions in Venezuela's oil production and
exports are a concern for U.S. energy security, especially in light of
current tight supply and demand conditions in the world oil market. If
Venezuela fails to maintain or expand its current level of production, the
world oil market may become even tighter than it is now, putting further
pressure on both the level and volatility of energy prices.
*** End of document. ***