The Venezuelan Oil Crisis

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In June 2004, the price of oil reached $42.33 a barrel-the highest point ever in 21 years of trading on the New York Mercantile Exchange-pushing average U.S. gasoline prices to more than $2 per gallon. The surge had numerous causes, including market speculation, shortfalls in the U.S. capacity for refining crude oil, higher Chinese demand, and insecurity in the Middle East. The root of the crisis, however, lay closer to home: in Venezuela, where a general strike in late 2002 and early 2003 had severely constricted the flow of oil and gasoline for several months.

For the first time, the U.S. oil supply was significantly disrupted by strife in a region other than the Middle East. The Venezuelan strike was also the first disruption not caused by a war, revolution, or embargo, but rather by a slow, debilitating political standoff. It came at a particularly bad time for the United States, combining with civil unrest in Nigeria and the U.S. invasion of Iraq several months later. And it highlighted the challenges Washington faces in responding to new threats to its oil supply.

Of course, the U.S. management of the crisis in Venezuela could have been significantly better. Distracted by the Iraq debate and planning for the war, U.S. officials did not focus sufficiently on events in Venezuela prior to the strike. When they did take note, both Washington and the oil industry misread Venezuela's political situation and underestimated the impact the showdown there would have on the flow of oil. Had an early warning system and response strategy been in place, Washington could have ensured that the oil market was better supplied to weather the uncertainty. The Venezuelan crisis should thus serve as a warning: more disruptions in the U.S. oil supply are likely, and unless serious efforts are made to improve Washington's analysis and response mechanisms, the system will continue to fail.

A SHIFT TO INSTABILITY

The world oil market-and Washington's relationship to it-has changed dramatically since 1991, the year of the last major oil disruption (caused by the Persian Gulf War). For one thing, the United States is now more dependent on oil imports than ever before. In 1950, it imported just one-tenth of its oil supplies. By 1973, the share of imported oil had grown to one-third. Today, the United States gets nearly two-thirds of its petroleum from abroad.