Last December Venezuela scored another diplomatic coup, joining Argentina, Brazil, Uruguay and Paraguay as a full member in Mercosur. When Mercosur was founded in 1991, it was to be little more than a tool to groom individual countries for eventual absorption into the US market. But reformers in recent years have worked to transform it into a real alternative to Washington's FTAA. The entrance of Venezuela, South America's third-largest economy, comes just at the moment when Lula's troubles are threatening to derail this project. Serious obstacles to trade and tariff standardization remain, yet at the same meeting where it approved Venezuela's petition for admission, Mercosur established a Parliament modeled on the European Union, agreeing to cooperate on a range of issues, including multilateral trade agreements with countries like China. Caracas has promised billions of dollars to develop northern South America's transportation and commercial infrastructure and has even floated the idea of a "Bank of the South," along with a common Latin American currency, which would provide an alternative to US-controlled financial institutions like the IMF and dollar-denominated financial and commodity transactions. Venezuela has already become an important regional creditor, purchasing more than $1 billion of Argentine debt last year, which allowed Buenos Aires to pay off its IMF tab in full.

Venezuela is making cheap oil available to a majority of its neighbors, including a quid pro quo with Paraguay for support of its bid to join Mercosur. But oil does more than grease Chávez's diplomatic wheels: Energy integration, he insists, will lay the foundation of Latin American unity. Kirchner, Chávez and Lula have announced plans to build a 5,000-mile pipeline that will transport Venezuelan natural gas through Brazil to Argentina; Buenos Aires and Brasilia just signed a deal whereby Argentina will ship 1.5 million cubic meters of gas to Brazil in the summer and Brazil will provide Argentina with 700 megawatts of electricity in the winter. In March the government-owned Petróleos de Venezuela (PDVSA) announced that it would spend $3 billion to buy thirty-six oil tankers from a Brazilian shipbuilder. The deal, which is the largest foreign order of Brazilian vessels to date, is expected not only to create 10,000 new jobs but, as a prime example of Chávez's realpolitik, to help Lula's re-election prospects. In addition, over the last year Venezuela and Brazil have signed a number of energy deals and have begun the construction of a joint oil refinery in the Brazilian state of Pernambuco. And while US pundits have dismissed Chávez's provision of cheap oil to poor urban neighborhoods in New England and Chicago as a public relations stunt, this innovative form of diplomacy lets him bypass unsympathetic national governments and build alliances directly with local political movements. In March he reached an agreement with a group of FMLN mayors in El Salvador, including the mayor of San Salvador, to supply them with petroleum under preferential terms, allowing Chávez to strike into a region firmly under US control and giving the leftist mayors access to an important resource independent of the national government, which is headed by the FMLN's main rival, the ultraconservative ARENA Party.

Much of this activity is taking place under the umbrella of three Chávez-brokered oil alliances--PetroAndina, PetroCaribe and PetroSur--through which Venezuela is not only offering a reliable stream of petroleum at a set price but cheap credit, processing capabilities and financing to expand gas and oil production in the respective regions. Caracas has allowed fifteen Caribbean countries to pay part of their oil bills up front, spreading the balance out over twenty-five years at low interest rates, and has even let some nations pay their debt in kind, with bananas, sugar or, in the case of Cuba, doctors. This past September, twelve Latin American energy ministers met in Venezuela and voted to pursue the unification of the three oil alliances into one PetroAmerica, which if it comes into being would allow petroleum exporting countries to negotiate collectively with the United States, generate price competition through the creation of new regional markets, and help buffer economies from energy price spikes.

Chávez's oil diplomacy extends beyond Latin America. Perhaps his most consequential initiative upon taking office in early 1999 was to end Venezuela's role as a rate-busting OPEC member and to work with Iran and other petroleum-exporting countries to enforce production quotas, which, well before Bush's invasion of Iraq and the current troubles in the Middle East, began a steady rise in world oil prices. Last year, taking advantage of increased global demand, Chávez forced seventeen foreign companies to increase royalty payments and convert their operating contracts into joint ventures with PDVSA, which not only means that the state now owns at least 51 percent of all oil production but that the multinationals will be picking up the bill for modernizing the country's drilling and refining capacities. When ExxonMobil balked at Chávez's New Year's deadline to become PDVSA's junior partner, Spain's Repsol-YPF stepped in and bought out its holdings under Venezuela's terms. A similar diversification of demand may help Morales renegotiate Bolivia's existing contracts with foreign natural gas companies, if not to nationalize production then perhaps to set up something similar to Venezuela's joint ventures. With Malaysian, Indian and Chinese gas companies eager to get in, firms already operating in Bolivia, including Repsol, will have to consider seriously whatever offer Morales puts on the table. Just recently, Russia's Gazprom struck a preliminary deal with the Morales government to invest in joint exploration, production and refining operations--which would give one of the world's largest energy companies its first significant toehold in Latin America--while Brazil's state-owned Petrobras has signaled its willingness to renegotiate existing contracts, backed up by an announcement that it would help jumpstart Bolivia's moribund state energy company.

the Bush Administration may well face the following scenario by the end of the year, starting closest to home and working downward: A likely López Obrador win in Mexico in July, possibly supplemented by a Sandinista victory in Nicaragua, would bring Latin America's left renaissance to the United States's doorstep. Since signing NAFTA, Mexico has been one of Washington's few sure regional allies, countering Chávez's oil diplomacy by spearheading its own effort to integrate Mesoamerican and Colombian energy production and consumption. Markets are betting that López Obrador will speak like Chávez but govern like Lula. Yet Lula has demonstrated that being "fiscally responsible" in the eyes of the global financial community no longer means complete submission to Washington's will. López Obrador has not yet taken a stand on PetroAmerica, but he has invoked Mexico's long tradition of petro-nationalism, pledging not to privatize the state-owned industry and to reduce foreign influence in its operations. He has also promised to renegotiate NAFTA--particularly a provision scheduled to go into effect in 2008 that completely opens the Mexican market to US corn--and allying with Venezuela could strengthen his hand at the bargaining table. And while few welcome the possible return of the now corrupt Daniel Ortega, there are still worthy grassroots social movements within the Sandinista coalition, and a victory might begin to thaw Washington's icy grip on Central America.

Further south, with Morales in Bolivia and Chávez-style candidates on the march in Peru and Ecuador, the United States could confront a mobilized Andean rim, which could put access to cheap natural resources in danger and leave Colombia, its one trusted lieutenant in the region, isolated. Chávez's re-election, which seems assured, would give him at least another six years to consolidate Venezuela's position as a strategic hub, connecting the Andes, the Caribbean and southern South America to Spain and the EU, Russia, the Middle East, India and China. And PT militants in Brazil may look to the success of Chávez's Fifth Republic Movement to renovate their party. But Latin American solidarity historically has been honored more in the breach than in the observance. Entrenched political and economic rivalries will probably slow, if not stall, Mercosur and PetroAmerica integration. If the dollar declines and shrinks demand for imports, if global interest rates go up and swell Latin American debt, or if China slumps, leading to a fall in commodity prices and Asian investment, the economic growth that has underwritten regional cooperation over the past few years could end abruptly. Yet even if a pro-FTAA candidate wins in Brazil in October, and Peru and Ecuador remain firmly in Washington's camp, the United States would still confront opposition from Argentina, open defiance from Venezuela and, most likely, skepticism from Mexico--three of Latin America's four largest economies and critical to any successful free-trade deal.

As its political and economic influence in the region wanes, Washington has given up trying to convince Latin America to join the "war on terror," while its trade envoys are now reduced to signing bilateral deals with negligible economies like Paraguay and Ecuador to dilute opposition to the FTAA. The White House, under the sway of neocon ultras, has further backed itself into a corner by encouraging Chávez's adversaries to go for broke. Rather than patiently broadening a base of opposition and accumulating grievances, they have pursued an increasingly desperate series of actions--a coup attempt, an oil strike, the recall and, most recently, a boycott of legislative elections--that have left their nemesis strengthened and themselves discredited. Washington may be laying the groundwork for the same all-or-nothing strategy against Morales, having just announced that it is cutting off 96 percent of its military aid to Bolivia, a move that seems calculated to provoke the armed forces to act. The Bush Administration now promises to wage a battle for the "future of Latin America," but with few options left--except, of course, the military one--it is unclear if it will have any more success in what used to be the United States's backyard than it is having now in the Middle East.

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