By Risa Grais-Targow

With Venezuelan President Hugo Chavez gravely ill and the Castro brothers in their twilight years, debate has begun to focus on the future of Chavez's brand of leftist politics in Latin America. There is widespread speculation as to which leader might assume Chavez's role in the region, even though his influence has arguably been on the decline. Among the possibilities bandied about is Ecuador's President Rafael Correa. Correa easily won a third term in the Feb. 17 elections, beating his closest opponent, Guillermo Lasso, by more than 30 percentage points. Correa also expanded his base of support in the National Assembly, where his Alianza Pais looks likely to achieve an absolute majority. Correa, like Bolivia's Evo Morales and Nicaragua's Daniel Ortega, owes much to Chavez, who served as a model for socialist policies, anti-imperialist rhetoric, and doled out hundreds of millions of dollars to his regional allies. While Correa may aspire to use his strong mandate to assume leadership of the Chavez-created Bolivarian Alliance for the Americas, his ability to do so will be limited.

First and foremost, Correa simply lacks the resources. Ecuador is a relatively small country (its GDP is about 20 percent of Venezuela's), and while it is a major oil producer, it does not boast the quantity of oil that can sustain Chavez-like regional "petro-diplomacy" and aid programs. Moreover, in the likely event that Chavez's chosen successor, Vice President Nicolas Maduro, wins a new election, there is no evidence to suggest that he doesn't want to fill Chavez's regional leadership role himself. So far, Maduro's actions suggest that he will represent policy continuity. He is close with the Cuban regime and has imitated Chavez's playbook thus far, including cracking down on the private sector and suggesting that foreign agents were planning an assassination attempt against him.    

That doesn't mean that Correa won't try. He boasts much of Chavez's charisma, and has taken every opportunity to vault himself, and Ecuador, onto the international stage, typically at the expense of US policy interests. This has been particularly true since Chavez first became ill in June 2011. Correa boycotted last year's Summit of the Americas in protest of Cuba's absence, and more recently made headlines by granting Julian Assange political asylum. While Venezuela grapples with its internal transition challenges, rather than its regional agenda, Correa could heighten his anti-imperialist rhetoric. Regardless, however, Correa's decisive victory-along with the endurance of Morales in Bolivia, Ortega in Nicaragua, and more center -- left governments in Peru and Brazil -- suggests that the left in Latin America has staying power, with or without Chavez.

Risa Grais-Targow is an associate in Eurasia Group's Latin America practice.

By Daniel Kerner

Venezuela's President Hugo Chávez faces the real possibility that he may lose the 2012 presidential election after more than a decade in office, in part because of his administration's failure to ensure adequate power supplies. Venezuela was forced to implement strict rationing in 2010, which thwarted the country's economic recovery. But while last year's problems were caused mostly by shortfalls in rain that stressed hydropower reservoirs, the problems are now the result of the government's failure to meaningfully address capacity and transmission problems.

The recent measures to address the situation are unlikely to solve the sector's problems. On June 13, the government announced it will offer up to 50% reduction in rates to households who reduce their consumption by up to 20%, but will also fine consumers 200% of their bill if they increase consumption by over 20% from a 2009 baseline. In addition, commercial users have been asked to install their own generating capacity, and face surcharges or electricity cuts if they do not. Finally, illuminated billboards will be shut off after midnight. The measures could contain demand, but do not address the fact that the system cannot meet peak demand.

The government has promised to increase generation capacity, the only real solution to the current structural problems. But it is unlikely to deliver given financial and logistical challenges, and Venezuela will still face transmission bottlenecks. The country is estimated to have around 24,000 MW of installed capacity; effective capacity, however, is around 17,000 MW. The government claims it installed 1,250 MW of new capacity in 2010 and will install an additional 2,568 MW in 2011, but the data's reliability is suspect -- the government stopped publishing data on Venezuela's power system last year, a tacit admission that the problems are severe. The government has also promised to invest some $21 billion in the sector over the next several years, but a long list of spending commitments and the government's proven inability to manage the electricity sector means these promises are hard to take seriously.

The shortages are likely to have a dramatic impact on an economy that is only now slowly recovering -- it grew by 4.5% in the first quarter, the first positive figure in a year and a half. Similar measures in 2009 and 2010 helped cut industrial activity by 6.4% in 2009 and 3.4% in 2010. Energy saving measures could limit industrial production, and blackouts could disrupt oil output.

Higher energy prices and electricity shortages, however, pose a serious political liability for Chávez's hopes of reelection, especially if they affect economic growth. In 2009, power shortages helped reduce his approval ratings from 61% to around 50%. A variety of opinion polls show that Chávez has lost support. The government has done its best to protect Caracas from the power shortages as a means of avoiding the political costs. But the state of Zulia, which recently suffered a day-long blackout, is home to the country's second largest city, Maracaibo.

Chávez will still likely have an edge over the opposition, however. He does have a strong group of core supports among the rural poor who are over represented in the legislature and he is gearing up to expand debt-fueled spending on social programs. But the election is shaping up to be the tightest of his decade-long run as president and Chávez is more vulnerable than ever before to economic and social problems.

Daniel Kerner is an analyst in Eurasia Group’s Latin America practice

By David Bender

Remember when Iraq was all about the oil?

Bush administration officials predicted that a post-war spike in Iraq's oil production would pay for both the conflict and ease the country's transition to democracy. Anti-war protesters countered that the war itself was little more than an oil grab. Now that the American combat mission is officially over, where is all that oil, and how will it change Iraq and the world?  

It seemed for years that violent chaos inside Iraq made a big increase in oil production entirely unrealistic; but now there are growing signs that oil project work could begin on several fields in the south over the next six months. If these projects move ahead, over the next decade, Iraq could begin to contribute enough production to significantly influence the global oil market, providing enough supply to undermine assumptions that energy demand from emerging Asia and increasing production costs will squeeze energy markets and add serious upward pressure on prices in the mid 2010s.

Iraq is now producing about 2.4 million barrels per day. The 12 contracts signed with some of the world's largest oil companies fuel hopes that Iraq can increase production nearly fivefold by 2020. That target is unrealistic, but even the likelier tripling of production levels will have important implications for the global economy and raise interesting questions about regional political dynamics. For the moment, Saudi Arabia is the only producer with enough spare capacity to single-handedly move prices. How will the Saudis respond if Iraq can produce enough oil to usurp some of that market power? How will Iran react if a surge in Iraqi production drives down oil prices, depriving Tehran of badly needed revenue? Globally, will Iraqi oil power Chinese and Indian growth? Will it kill the electric car? Iraqi oil production increases will have widespread effects-if they happen.

But Iraq will be a politically volatile and potentially unstable place to do business for the foreseeable future, and a spike in the country's oil production is anything but a sure thing. Nearly six months after parliamentary elections, U.S. combat troops leave behind a country without a government. Vote winner Iyad Allawi, incumbent Prime Minister Nouri al Maliki, an array of Shia sectarian leaders (including firebrand cleric Muqtada al Sadr), and the Kurds remain locked in a seemingly endless battle of diplomatic nerves, holding fruitless rounds of negotiations, forming and breaking alliances, and making declarations of principle with little bearing on political realities.

Read on

Hugo Chavez will hold his congressional majority in September's legislative elections in Venezuela. His support base remains strong. His government still exerts plenty of influence in rural regions of the country that are disproportionately represented in congress. A new electoral law will maximize the value of every pro-government vote. Majority control of congress will allow Chavez to dominate the legislative agenda in the run-up to a presidential election in December 2012.

But beneath the surface, his popularity across the country is headed downhill as Venezuela's economy buckles beneath the weight of its internal contradictions and an overloaded electricity grid leaves much of the country in the dark.

Venezuela's GDP shrank by 3.3 percent in 2009 -- and by 5.8 percent in the last quarter of the year -- according to latest central bank estimates. The country remains mired in recession while its Latin American peers have begun to recover. The government is spending freely on the back of higher oil prices in a bid to stimulate the economy, but growth prospects are limited by supply-side bottlenecks and strong disincentives for private investment. Venezuela's mix of heavy government spending with strict price and foreign exchange controls continues to feed inflation, which hit 26.2 percent on an annual basis in March. To keep a lid on the problem, the government has taken over or threatened to nationalize retailers that pass higher import costs to consumers. This strategy will probably make scarce goods still scarcer and prove unsustainable.

But the single biggest challenge to Venezuela's economic health may well come from strains on the country's power grid. Power demand has risen 6 percent a year over the past decade, outstripping the rate of expansion in generation capacity. Officials began rationing power at the end of 2009 and implemented a plan in February to cut electricity for up to four hours every other day across the country (with the exception of Caracas). Nationwide outages will weigh heavily on the country's ability to recover from recession by slowing production for the manufacturing and service industries, which together account for more than 25 percent of GDP and more than 30 percent of jobs in the formal sector. A state takeover of the last three privately run power generation companies in 2007 has reduced incentives to add capacity.  

Hard times are already taking a political toll on the president. According to respected local pollster Datanalisis, Chavez's popularity slipped from 61 percent following his February 2009 referendum victory to 43 percent in February 2010. More than 65 percent of respondents in the latest monthly poll think that Venezuela is in a "critical situation." Chavez's approval ratings remain well above the lows of 2003, when he survived a coup attempt and his support dipped to around 30 percent. But with Venezuela's economy running on fumes and the government unable to turn things around, Chavez's numbers will probably sink further.

Chavez still has formidable political advantages. He holds a virtual monopoly on Venezuela's resources and will take advantage of both higher oil prices and the fiscal boost provided by January's devaluation of the country's massively overvalued currency to increase government spending in ways that limit the economic pain for low-income voters. His government has a formidable patronage-based reach into Venezuela's sparsely populated rural areas, which are disproportionately represented in congress. The government approved an electoral law last year that favors Chavez by weakening the proportional representation system and allowing the largest single group to effectively sweep the elections. Meanwhile, the government-dominated national election council recently redrew electoral boundaries to maximize the impact of government supporters' votes and limit potential opposition gains.

After the September elections, Chavez and his United Socialist Party of Venezuela will no longer have the full control of congress they've enjoyed for the last five years. In 2005, the opposition boycotted legislative elections. With Chavez weakened, his rivals won't make that mistake again, and if they can present a (more or less) unified front this time, they will probably make some limited headway at the ballot box. But they're unlikely to win more than 35 percent of seats. Even a weakened majority in congress will allow Chavez to run the government with few checks or balances, but his political standing will become steadily more precarious as the recession drags on.

The country's oil wealth won't help as much as it used to. Production, now between 2.2 million and 2.3 million barrels per day, will likely stagnate or continue to decline in the next several years as state-owned oil company Petróleos de Venezuela, S.A. (PDVSA) sinks under the burdens of its spending obligations and poor management. In addition to transferring a growing share of its revenues to the government in royalties, transfers, and direct social payments, PDVSA is being tasked with buying and distributing food to combat shortages, on top of financing recent power infrastructure upgrades.

Given Chavez's tendency toward confrontation with foreign oil companies, multinationals are unlikely to make major investment commitments, despite the Venezuelan government's latest efforts to court these firms to develop new projects in the Orinoco region. With the country's oil production in decline, price hikes will yield diminishing returns. In 2006, the government needed to spend about $2.5 billion to generate a single percentage point increase in GDP growth. By 2008, it needed to spend more than $13 billion to generate the same increase.

With less revenue to dull the economic pain, a rising cost of living, and shortages of vital goods, apathetic voters who support neither the government nor the opposition -- and who make up half the electorate -- could step off the sidelines and return to the polls for the first time in years. Chavez will resort to authoritarianism as his popularity sinks, setting the stage for a volatile 2012 election campaign.

It will be harder than ever for Chavez to control what happens next.

Patrick Esteruelas is an analyst in Eurasia Group's Latin America practice.