In 1998, a year before Chavez entered office, Venezuela was producing an estimated 3.2 million barrels a day, according to figures from the Organization of Petroleum Exporting Countries. Ten years later the output of South America's largest oil producer has dropped to 2.4 million bpd, according to the oil cartel.

Much of the drop-off in production has been blamed on the Venezuelan government's negligence of the sector in favor of spending petroleum profits on social programs at home and deeply discounted oil sales to regional neighbors like Cuba and Nicaragua.

And with oil prices dropping on the global market, it appears Venezuela's government could begin to feel the pinch of its exorbitant spending and falling production rates.

According to a recent study by the Washington, D.C.-based consulting firm PFC Energy, Venezuela is particularly susceptible to the global economy's downturn and reduced crude demand, as Caracas depends on high oil prices to meet its budget goals.

To meet budget requirements for 2008 in Venezuela, oil must be selling for $97 per barrel. With average oil prices per barrel at about $15 less than the ideal price by Venezuelan standards, Caracas faces a potential budgetary shortfall in the coming months, El Universal newspaper reported this week.

The recent decline in oil prices, after more than two years of steady increases, was not, however, the first harbinger of bad times for Venezuela's oil sector.

Earlier this year the U.S. Energy Information Administration reported that Venezuelan oil exports to the United States were declining at a record rate.

Exports of both crude and other petroleum products from South America's largest oil producer reached a five-year low, falling by 11.7 percent in the first four months of 2008 compared with the same period last year.

In 2007 Venezuela exported 1.28 million barrels per day of oil and other petroleum products to the United States from January through April. During the same period this year, export levels dropped to 1.13 million bpd, the EIA reported.

While Chavez has made clear Venezuela's intention to reduce exports to the United States, while at the same time searching for alternative customers such as oil-hungry nations like China, his policy of diversifying the country's oil clientele has proven costly, as the United States is one of Venezuela's only customers that pays full price for oil.

Some consider the trend toward decreasing shipment sizes to the United States a sign that Caracas hopes to one day forgo U.S. oil sales altogether.

Earlier this year, during a heated multibillion-dollar row between Venezuela's state-run petroleum company PDVSA and U.S. oil giant ExxonMobil over Venezuela's seizure of the oil company's project during its nationalization of the sector, Venezuela threatened to end oil exports to the United States altogether.

While the war of words sparked fears in the U.S. oil sector and helped drive up prices domestically, most analysts concluded that Venezuela's bluster over the ExxonMobil case and threat of cutting off supplies were more posturing than a real possibility.

As the fourth-largest exporter to the United States, Venezuela can hardly afford to shut off supplies to the United States, even for a short while, said Patrick Esteruelas, a Latin America analyst for the New York-based think tank Eurasia Group.

"The Venezuelan government has become more and more dependent on oil, and oil exports to the U.S. in particular, making it highly unlikely that Venezuela will cut off oil supplies to the U.S., despite the latest threats," Esteruelas said following the ExxonMobil standoff.

Venezuela had already decreased its exports to the United States in recent years, a result of production shortfalls, according to some PDVSA officials.

Luis Vierma, exploration and production vice president at PDVSA, said in 2007 that Venezuelan oil faces a "significant operational emergency" if Venezuela does not increase the number of rigs operating in the country and that the state firm fell short of its 2007 goal of getting 191 rigs online in 2007 and producing some 3.3 million bpd.

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