President Hugo Chavez has painted Venezuela into a corner.

In the face of lower crude oil prices and free spending to support his Bolivarian Revolution at home and abroad, the country's cupboard is bare. Potential foreign investment into Venezuela has been constrained by several rounds of expropriations, in oil, steel, cement and other "strategic" sectors. The potential of removing Chavez from power through democratic means has been muted by his rigging of the constitution, political system and media.

Unless crude oil prices continue to rebound and stay relatively high, we should expect substantially lower oil output from Venezuela in the coming years because of a lack of investment and possibly political instability.

A 55% drop in oil prices since July 2008 has caused a cash crunch in Venezuela. Oil accounts for about half of the government's revenues and more than 90% of the country's export receipts. According to The Economist, Venezuela's fiscal deficit may reach 7.8% of GDP this year, while price inflation is running at about 30%. The country imports 75% of its food and charges just 4 U.S. cents per litre for gasoline. Venezuela is looking more and more like an "oil republic."

However, Chavez claims Venezuela is well-equipped to weather the global recession. As of the end of 2008, his government had supposedly squirreled away US$100-billion. The Central Bank had about US$38-billion in foreign reserves, while tens of billions had been siphoned off into the National Development Fund (Fonden) and other off-budget places.

But actions speak louder than words. It has been reported that Fonden held as little as US$6-billion at the end of 2008, despite receiving more than US$57-billion in recent years. Chavez directly controls the fund, which he has used to bankroll some of his pet socialist programs, without accounting or legislative oversight. In January, the government ordered the Central Bank to transfer US$12-billion in foreign reserves to Fonden.

After serving as Venezuela's cash cow in recent years, the state-owned oil company PDVSA has had to slash its 2009 investment budget to US$14-billion from US$24-billion.

In addition, troops were mobilized over the weekend of May 9 and 10 to assist PDVSA in seizing the assets of some 60 foreign and local oil service companies, including at least a dozen rigs, more than 30 oil terminals and some 300 boats in the Lake Maracaibo area, the heartland of Venezuela's oil production.

Chavez made the move against the oil service companies in response to their threat to suspend operations until PDVSA paid as much as US$1-billion in accumulated arrears since last August. The law supporting the latest expropriations, passed by the National Assembly on May 7, allows PDVSA to pay book value for the assets and hand over bonds in lieu of cash for compensation.

The terms of this latest round of expropriations could dim interest in a major auction to develop the Carabobo block in the Orinoco oil belt, the first investment opportunity open to foreign oil companies in the past decade. Upon completion, the Carabobo projects are supposed to produce over 800,000 barrels per day in total.

After increasing royalties and taxes on the four existing Orinoco extra-heavy oil projects this decade, the Chavez government forced the international oil companies (IOCs) involved in those ventures to grant PDVSA majority control in 2007. Two of the companies, ConocoPhilips and ExxonMobil, walked away from their extra-heavy oil investments in the Orinoco belt rather than agree to Chavez's terms. Litigation is pending.

What oil companies would risk not just expropriation, but payment in Hugo's funny money rather than cold hard cash when the hammer comes down next time? Some national oil companies (NOCs) come to mind, especially China's, given Chavez's close relationship with the autocratic Chinese government. But IOCs are less likely to risk their shareholder's money. The Chavez government has denied a request by some companies for the inclusion of an international arbitration clause in the oil exploration agreements for the Carabobo block.

Despite Chavez winning the Feb. 15 referendum to amend the constitution to end term limits for the presidency (and other elected positions), Venezuelan politics is becoming increasingly polarized.

Chavez tends to be a hero among poorer Venezuelans, partly due to his government's generous social programs. On the other hand, he is viewed as corrupt and autocratic among the rich and an increasing number of the middle class. Chavez won the presidential election in December 2006 by a margin of 25 percentage points. His margin of victory in the February referendum and state and municipal elections last November was only nine points.

Upon winning the presidency in a landslide victory in 1998, Chavez consolidated his power over the other branches of government through constitutional changes and other means. The 1999 Bolivarian Constitution allowed for consecutive two-term presidencies and made the Electoral College and National Assembly subordinate to the executive. In May 2004, Chavez increased the number of Supreme Court judges from 20 to 32, allowing him to stack the court with handpicked loyalists.

In addition, the failed coup d'état in April 2002 and general strike in December 2002/January 2003 allowed Chavez to gain control over the military and PDVSA, the two institutions that had the potential to topple him from power.

In recent years, laws have been passed to mute criticism of Chavez and his government. For example, the December 2004 Social Responsibility Law imposes "administrative restrictions" on radio and television broadcasts. It also is a criminal offense to show disrespect for the president and other government authorities in the media.

Since winning the February referendum, Chavez has been mounting an ever-more aggressive campaign against his political opponents, especially opposition governors and mayors elected last November. For example, Manuel Rosales, the mayor of Maracaibo (Venezuela's second-largest city) sought, and was granted, political asylum in Peru in April following alleged harassment by Chavez's intelligence services. The National Assembly has restricted the spending powers of Antonio Ledezma, the mayor of Caracas. Other governors and mayors have been arrested or are in hiding.

Chavez has had a free ride from the United States over the past decade, despite his anti-American rhetoric, support for FARC rebels in neighboring Colombia, promotion of socialist policies at home and throughout Latin America, and cozying up to autocratic governments around the world. If opposition to Chavez continues to build in Venezuela, and his government becomes increasingly repressive, we may see the rise of right-wing guerilla groups in Venezuela, possibly with support of the United States via Colombia.

During Chavez's relatively tranquil reign to date, Venezuela's crude oil capacity has dropped to 2.4 million bpd from 3.2, despite about 600,000 bpd of Orinoco extra-heavy crude oil capacity being brought on line by IOC led projects. If crude oil prices are relatively low in the future, this downward trend is likely to accelerate, especially if guerilla groups opposing the Chavez regime were to target Venezuela's oil industry.

Vincent Lauerman is president of the Calgary-based consultancy Geopolitics Central, and the former editor of the journal Geopolitics of Energy. He has been analyzing and commenting on geopolitical issues and the world oil market for more than 20 years.