U.S. President Barack Obama hit state-oil company PDVSA with sanctions for sending Iran two tankers of an oil-blending component in defiance of U.S. sanctions.
The measures were largely symbolic and it is in both countries' interests not to seriously interrupt oil supplies.Even so, there is a risk of escalation of the conflict.
If Chavez decides to keep sending the occasional tanker to Iran, or PDVSA carries out a plan to invest in an Iranian natural gas project, Obama could come under pressure to take substantive action, possibly excluding PDVSA from the U.S. financial system which would affect debt, or in the worst-case scenario, limiting imports from Venezuela.
Meanwhile, Chavez is due to reveal what action, if any, Venezuela will take in retaliation possibly symbolically sanctioning a U.S. company or limiting oil sales to some clients. So far, the sanctions have been something of a political gift for Chavez as he looks for re-election next year, since anger at U.S. meddling unites many Venezuelans, even those who are wary of the president.
Chavez is likely to step up public spending further while pressuring the opposition ahead of the election.In the past, his government has used allegations of corruption to block some opponents from running for office.
Growing income from high global oil prices, a brighter economic outlook and buoyant popularity after a tough couple of years mean the socialist leader is increasingly confident of winning another six-year term.
Chavez secured an advantage at recent parliamentary and regional votes by gerrymandering and other electoral tricks, but the voting system itself is widely seen as fair.
Opponents say popular and military pressure mean the president will have no choice but to accept defeat if he were to lose.
For now Chavez is favourite to win, but serious problems with electricity shortages, violent crime and doubts about the economy are all factors that mean the opposition has its best chance in years to win the presidency.
Opposition parties are jostling to choose a unity candidate in primary elections next February.
Chavez survived massive protest marches in 2002 that led to a short-lived coup and the opposition is almost totally focused on beating him at the ballot box. Middle East-style protests are unlikely without major new economic woes.
PDVSA remains one of the world's largest oil companies but exports and output are falling partly because of the heavy load put on it as the main economic motor of Chavez's revolution
PDVSA is required to hand over so much revenue to the state it has neglected investment in older fields.
Nationalizations in 2009 hit output with PDVSA struggling to take on wells and drilling services previously handled by private companies.
Output fell around 200,000 barrels per day (bpd) in 2010. Just 50,000 bpd of new output is likely to come online in the Orinoco heavy crude region by the end of 2011.
Exports fell 6 percent to 2.32 million bpd in 2010, and output dropped even faster to 2.78 million bpd.
But with global oil prices rallying above $100, the industry is putting money in Chavez's election war chest and his government has decided to increase its take.
Officials say new higher windfall tax rates could bring in as much $16 billion this year if oil prices stay high. But analysts caution the move could trim private sector investment and put pressure on PDVSA's ability to fund more production.
Analysts are now looking to see concrete steps toward tapping the Orinoco extra heavy crude belt, which is one of the biggest mostly-untapped hydrocarbon reserves in the world.
A ruling could come as soon as May in an arbitration case between Venezuela and Exxon Mobil Corp. related to the nationalization of oil projects in 2007.
After two years of shrinking GDP, Venezuela moved out of recession with 0.6 percent growth in the last quarter of 2010.
The recovery picked up pace with 4.5 percent growth from high public spending of healthier oil income in the first quarter. Many economists were surprised by the number and some adjusted their growth outlooks for the year
But problems remain, such as the oil industry's shrinking contribution to GDP in recent years. Inflation is above 20 percent, although it has come down in recent months.
Falling crude production and a growing public sector mean Venezuela needs higher oil prices than in the past to balance its books a situation that several Wall Street analysts believe could result in cash-flow problems in the medium term.
Risk indicators such as Morgan Stanley's and CDI spreads consistently rate Venezuelan debt as the highest default risk in the world, so Wall Street will remain focused on whether Chavez can keep paying.
Only the most pessimistic predict a serious cash-crunch any time soon and concerns about Venezuela's finances have diminished in line with rallying oil prices.
While some analysts feel Venezuela is issuing too much debt too quickly, its overall debt burden is relatively low and its repayment schedule is manageable.
The government devalued the bolivar currency on Jan. 1 and economists say another could follow, perhaps a weakening of the central bank's SITME exchange rate.
With Brent crude contracts currently above $110 per barrel, Chavez's officials may hold off for now.
COPYRIGHT REUTERS, 2011