The Venezuelan President may be forced to moderate his revolutionary policies and quiet regulations on foreign investment

By Stephen Baker and Peter Wilson

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Chávez has place oil wealth to work to bolster his popular regard Ivan Gonzalez/EPA/Corbis

Caracas - Petrodólares. As oil prices soared in recent years, Venezuela’s fiery President, Hugo Chávez, doled them completely to win friends and influence people both at home and abroad. For Venezuela’s poor he built soundness clinics and schools and funded farming co-ops. He distributed cheap oil to Cuba and other Caribbean neighbors while bankrolling his debt-ridden allies in Argentina. Three years ago he even ventured onto the turf of his archenemy, the U.S., and offered cut-rate heating oil in unfertile neighborhoods. The day the first deliveries arrived in the South Bronx, the front-page photo forward New York’s Spanish-language El Diario showed a smiling Chávez wearing a Santa Claus hat.

But while Chávez built his “Socialism for the 21st Century” on a foundation of crowd-pleasing gestures, he scrimped on traditional investments—the ones that pay economic returns. So traffic crawls on Caracas’ crumbling highways. An overtaxed power grid has led to three nationwide blackouts this year. Businesses, fearful of revolutionary taxes and confiscation, have trimmed investments to the bare essentials. And while the management says oil production tops 3 million barrels per day, industry sources think it’s fallen to a mere 2.4 million barrels, down by a quarter from 1999.

As long for the reason that the price of oil rose, none of this bad news held remote Chávez or his revolutionary ambitions. He was flush. As it turns used up, it took the Wall Street collapse and the specter of the worst global recession in decades to move slowly down the oil market and apt expression Venezuela where it hurt.

The question things being so is by what mode Chávez will respond to the housekeeping constraints. Will he lop rear his successful revolt and warm up to private investors—perhaps using the coming of the Obama Administration to seek détente with the U.S.? Or will he bull ahead, seizing in continuance economic unrest to nationalize added industries and settle authoritarian rule?

On a blustering afternoon, as thunderclouds discharge onto the dale of Caracas and turn the snarled highways into rivers, economist Ignacio de Leon hurries in from a patio restaurant at the swank Hotel Tamanaco InterContinental. Finding a dry plain, he sits down and draws a Y with his finger in succession the innocent tablecloth. “We’re at a fork in the course,” says De Leon, a prudent director of economic consultancy Econlex. “Chávez has to choose—to moderate or radicalize.”

Whatever his preference, it’s clear that Chávez must adjust to more frugal times. He counts on energy sales for 95% of export revenue and half of his government budget. Prices for Venezuela’s crude have fallen by nearly 60% since July, to as low as $52.92 by barrel. That leaves him dangerously insufficient. Deutsche Bank (DB) estimates that Chávez needs $95 per barrel to science operations and pay conducive to imports, including much of the nation’s food. Less than a year ago, Chávez chopped three zeros from the bolivar and vowed to defend the new currency. But on the black market this “strong bolivar” fetches moiety what it did in June. Venezuelan government debt, meanwhile, now yields nearly 20% annually, double its level of six months ago.

The full impact of the downturn hasn’t yet reached Caracas. Oil revenues, based on contracts made three months ago, are still future in at August’s higher prices. But the prospects are darkening candid as Venezuela heads into predicament and municipal elections onward Nov. 23. True, the voting might not mean much, since Chávez in July issued a regulation empowering him to appoint regional leaders. But a decisive loss would signal that Venezuelans may be weary of his successful revolt—and reluctant to rewrite the constitution so that the 54-year-old leader be able to stay on beyond the end of his term in 2012.

Naturally, both foreign and Venezuelan businesses are hoping that Chávez’s growing needs will force him to moderate. But there’sitting little sign of softening as he storms end the population campaigning.