Chávez's Cash Crunch

Here's another reason to worry about recent signs that the U.S. dollar is again heading south: A slumping dollar could grant much-needed relief to Yankee-baiter Hugo Chávez, whose presidency is beginning to buckle from a shortage of the greenbacks he needs to pay for imports and to keep the national oil monopoly running. Even the Venezuelan despot is panicking.

Last month he accelerated his crackdown on freedom. But far from being a sign of strength, the steps he took were desperate measures designed to stave off an economic debacle.

At issue is the dollar price of oil, Venezuela's dominant source of hard currency. The bubble generated by a loose U.S. monetary policy in the early part of this decade reversed a period of historically low oil prices in the late 1990s and gifted Mr. Chávez with a windfall in oil revenues for most of his 10 years in office.

Chavez's Dollar Shortage

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WSJ's Mary Anastasia O'Grady discusses the political implications of falling oil prices for Hugo Chavez and the Venezuelan government.

But an oil economy is a double-edged sword, and in the past year the Castro wannabe has become more vulnerable. A stronger dollar and reduced demand for crude has meant fewer dollars flowing into Venezuela. Add in what industry analysts say is a significant drop in output due to the politicization of the oil monopoly known as PdVSA, and it's easy to see why central bank reserves have been shrinking.

Mr. Chávez has felt the pinch. He has had to pare back his practice of financing revolutionary allies in the rest of the hemisphere. The country's ability to pay for imports -- of everything from food and pharmaceuticals to industrial machinery and automotive parts -- has also deteriorated. The exchange rate is fixed at 2.15 bolivars to the dollar, but the central bank cannot supply importers at that rate. The black market rate is 6.5. Fewer dollars for greasing the palms of the domestic interests that keep Mr. Chávez in power is also a looming problem for the tyrant.

No one understands how much the future of the regime depends on restoring Venezuela's gusher of dollars than Mr. Chávez. If the Fed accommodates him by continuing to weaken the dollar, he might survive. In the meantime, he is scrambling to stay ahead of the snowballing economic catastrophe heading his way.

On the political front, he is working to make sure that his opponents have no resources. He has been stripping opposition mayors and governors of their budget revenue and their authority over schools, hospitals and police. Caracas Mayor Antonio Ledezma, an important Chávez critic, has also been physically locked out of city hall by chavista street thugs since he was elected in November.

On the economic front, PdVSA appears to be in increasing financial trouble due to graft and incompetence. This explains Mr. Chávez's nationalization of more than 70 oil service contractors last month.

The Caracas-based VenEconomía newsletter noted that he made a big deal about the seizures in a photo op on the shores of Lake Maracaibo. But it said a larger concern ought to be the simultaneous takeover of five gas, steam or water injection plants, which "sustain roughly half of today's [crude] output." The report notes that "many analysts warn that PdVSA does not have the knowledge or the skills to run those plants efficiently" and if that's true, the company could lose significant capacity. Injection revives spent wells.

So why did he do it? VenEconomía theorized that the government may have sought to stop the companies "from closing down operations in protest [of] PdVSA's failure to pay several billion dollars worth of past-due bills." Others have said PdVSA is trying to save money.

In either case, the reason is the same: Mr. Chávez is short of hard currency. And while the president boasted last week that Venezuela has plenty of money to pay for all its takings, that's doubtful. Some whose property was expropriated last year, such as three foreign-owned cement makers and the Venezuelan owners of the steel giant Sidor, have not been compensated. A Spanish-owned bank, also taken last year, is still awaiting payment.

A dollar shortage also may explain the "temporary" seizure of a Cargill pasta plant in May, with the strict instructions that it will only be returned if it produces 100% price-controlled products.

The fundamental problem is that Venezuela imports a large portion of what it consumes. Importers are supposed to get the needed dollars at the official rate from the government's foreign-currency administrator, known as Cadivi. But in April, Cadivi openly began advising importers to go to the black market to get dollars. Cadivi's "suggestion" is another indication that the government is short on foreign exchange. It seems to have improvised an extra-legal alternative to an embarrassing official devaluation.

Devaluation would unleash an inflationary rampage. The alternative, monetary contraction, risks an economic slump. Either would be a political disaster for Mr. Chávez. This explains the brushback pitch against Cargill, sending a message to all domestic producers that price controls are the law. State terror and intimidation against the private sector are Mr. Chávez's best hope for survival while he waits to see if Uncle Ben (Bernanke) comes through with renewed dollar inflation.

Write to O'Grady@wsj.com

looks like Chavez is caught between a rock and a hard place