By Matthew Walter

May 23 (Bloomberg) -- A day's drive west of Venezuela's Orinoco Belt, where the largest liquid deposit of oil in the Western Hemisphere helped deliver $13.9 billion for social programs last year, security guard Efrain Rengifo waits in a queue outside a government-run grocery.

The line spills out of the concrete-block Super Mercal in Barinas, capital of a beef-producing region in the home state of President Hugo Chavez. The avowed socialist is trying to redistribute the country's wealth, blunt U.S. influence and rid capitalism of what he calls its ``anti-values.'' Socialism is Christ; capitalism is Judas, Chavez says.

Rengifo stands with his wife in the April heat while street vendors hawk empanadas and iced cups of juice. He wears the red T-shirt of an education program set up by Chavez, who has defined socialism as ``attending to all of the needs of everyone.''

On this day, the Super Mercal isn't delivering on that promise. In a country blessed with enough crude to make it OPEC's sixth-largest producer, the store has no milk, no chicken, no cooking oil and no flour.

``You have to show up on the right day if you want to find everything you're looking for,'' Rengifo, 43, says.

Rengifo's predicament is a symbol of the warped economics that have taken root in Venezuela. Surging prices have more than doubled the value of oil in the past year. That hasn't put food on the table. Price-controlled staples are often in short supply. Beef production declined last year even as consumer demand surged. Venezuelans are buying new cars as investments. A currency black market is thriving. Inflation hit an annualized 29 percent in April.

New York Prices

And rents in upper-middle-class neighborhoods of Caracas have soared to New York levels -- as much as $4,000 a month for a two-bedroom flat.

Smoked salmon and French wines show up on store shelves, yet Chavez found it necessary to order Petroleos de Venezuela SA, the state-owned oil company, to form a unit to distribute beans and rice.

``Venezuela is a place of paradox right now, the paradox of plenty,'' says Leopoldo Lopez, the 37-year-old, U.S.- educated mayor of the Caracas borough of Chacao and leader of opposition party Un Nuevo Tiempo. ``There's plenty of oil, and plenty of dollars coming in from the oil industry, but we don't have enough food.''

The shortages are cutting into Chavez's once-unassailable public support. His popularity rating, measured by Caracas- based polling firm Datanalisis, fell to 51.8 percent in February from 75.4 percent in June 2006. About 71 percent of Venezuelans said they disapprove of how the president has managed the food supply, up from about 38 percent in October.

`A Dangerous Thing'

Most of Latin America has been spared the anxiety over food stocks seen in such countries as the Philippines. Venezuela is an exception. Should its shortages become acute, an economic and political crisis might ensue, says Edwin Gutierrez, who manages about $5.5 billion in emerging-market debt at Aberdeen Asset Management Plc in London.

``It's a dangerous thing when a mother can't get milk for her children,'' he says.

Sterilized milk started reappearing on shelves more regularly after Chavez eliminated price controls and gave importers priority for the dollars they need. Such moves contribute to inflation, though. In Caracas, the capital, food prices soared 42 percent in April from a year earlier. Chavez removed controls on eggs and raised the regulated price on chicken in April to ease shortages.

Jailed Two Years

A former army paratrooper, the 53-year-old Chavez isn't a cautious politician. He went to prison in 1992 for leading a failed coup attempt against President Carlos Andres Perez. Then a lieutenant colonel, Chavez was jailed for two years but later railed against corruption and vowed to redistribute oil revenue to the poor. He won the 1998 presidential election by 16 percentage points.

PDVSA, as the state oil producer is known, tried to drive Chavez from power in 2002 by crippling the economy with a management-led strike. It failed, and the strikers were fired. Chavez installed a confidante, Rafael Ramirez, as PDVSA president in 2004.

``This was a political strike, because there was concern for democracy in Venezuela,'' says Eddie Ramirez, 67, former head of a PDVSA subsidiary, who participated in weeks of marches against Chavez starting in 2002. He says Chavez tried to pack the PDVSA board with ``revolutionaries'' and that the firings scattered a talented workforce to other countries.

`Mr. Danger'

Rafael Ramirez has rebuilt the company to be, in his own words, ``red, very red.'' Chavez, too, uses colorful labels to depict the United States as a global threat. He calls it ``the empire'' and refers to President George W. Bush as ``Mr. Danger'' while denouncing the invasion of Iraq as ``imperialist.'' He labeled Bush ``the devil'' in a 2006 speech at the United Nations, and in one televised address at home, he branded the U.S. president a ``donkey,'' ``assassin'' and ``drunk.''

Behind the swaggering rhetoric, Chavez has achieved some of his goals. In foreign affairs, he has forged an anti-U.S. coalition composed of Bolivia, Cuba, Ecuador, Nicaragua and, to some extent, Argentina.

At home, the government is spending oil wealth by the billions, focusing on health care and education. Thousands of Cuban doctors have been flown in. In April, Chavez raised the minimum wage 30 percent to the equivalent of $372 a month, the highest in Latin America. That followed a 20 percent rise in 2007.

Food Stamps

Anyone who makes the minimum probably qualifies as well for food stamps, which will buy about $186 in food each month. The government says the poverty rate -- as measured by a family's ability to purchase a basket of basic needs -- fell to 34 percent in 2007 from 62 percent in 2003.

Rising wages are lifting demand: Retail sales rose an average of 42 percent during 2007 over year-earlier levels.

``He knows he's involved in a capitalist market,'' says Fernando Coronil, a professor at the University of Michigan who wrote a book on Venezuela titled ``The Magical State'' (University of Chicago Press, 1997). ``What he's doing is taking some steps to make the state play a very important role in the economy.''

Some of the intervention has been stifling. Industrial production gained just 1.7 percent in November, fell 2.5 percent in December and rose 2.6 percent in January before rebounding 12.2 percent in February, according to the Central Bank of Venezuela.

Producing `Nothing'

``There's no incentive to invest in new production now in Venezuela,'' says Jose Guerra, the central bank's former director of economic policy. ``There's been a massive increase in demand, but on the other side, there's a problem, because Venezuela is a country that produces almost nothing.''

Nationalization has scared off many investors. Last year, Chavez increased the government's stake in four heavy-crude projects with foreign companies to 60 percent and nationalized a telephone company and power provider. This year, he announced takeovers in steel, cement and coal.

The toll has been steep. In 1998, foreign investment stood at $4.99 billion, according to the central bank. Last year, it plummeted to $646 million.

Even the privately owned Cada supermarket in Barinas is facing shortages similar to those at the crosstown Super Mercal. Two days after Rengifo waited to buy food at the government-run grocery, fresh milk was out of stock at Cada, though the powdered kind was available.

Tapping PDVSA

``There are some products you just can't find,'' insurance broker Diego Ramirez, 30, says. ``Rice, cooking oil, beef -- everything that's a basic necessity.''

Chavez's fix consists of more social spending and a series of pricing changes on regulated goods. He's poured cash into the economy from PDVSA revenue, which has boosted overall economic growth. The oil company's so-called social contribution to the nation was just $34 million in 2001. By 2007, the floodgates were open. The $13.9 billion contribution last year represents a more than 400-fold increase from six years earlier.

One result: Venezuela's $182 billion economy has expanded an average of more than 12 percent in the past four years -- the highest growth rate among Latin America's biggest economies.

Criticizing Ethanol

The government offers subsidies to producers and consumers for some food staples and caps prices on many items, though Chavez has begun loosening controls to spur output. Mercal, run by the Food Ministry, has almost 16,000 stores offering discounted prices, according to the company's Web site. Chavez often criticizes the diversion of cropland to ethanol production, saying the shift is partly to blame for global food-supply imbalances -- and rising prices at home.

``We're the fatherland of corn, which is why it's a crime to use this product to produce ethanol, as the U.S. empire desires,'' he said on April 24 during a farm visit.

Chavez also says speculators and hoarders are contributing to shortages, without providing specifics.

``We have to forget these terrible capitalistic anti- values, in which everyone tries to rob each other,'' he said on his regular Sunday television program, ``Alo, Presidente,'' on Feb. 10.

In December, Chavez moved to end price controls on sterilized milk after he suffered his first electoral defeat. Voters rejected his attempt to allow changes to the constitution via referendum, including a provision to eliminate presidential term limits.

Barnyard Epithet

The outcome stung. After results were announced in the early morning hours of Dec. 3, Chavez said he'd accept the defeat ``for now,'' echoing words he used after his failed 1992 coup. Within days, he was attacking the opposition, calling the vote a ``shit victory'' on TV. Later, he increased the regulated price of beans and some cheeses.

In another step to boost supply, Chavez launched a new subsidiary of PDVSA this year. Called PDVAL, it distributes hard-to-find items, including milk, beans, rice and beef. The food is sold off pallets and under tents.

Chavez has also been expropriating private agricultural land he says is underused and turning it over to peasants.

``If you don't produce on your land, then don't complain when we come and take it away,'' he said on April 24 on state television. He says 2 million hectares (4.9 million acres) of ``idle'' land have been taken. Together, that would make up an area larger than the state of Connecticut.

`Flight of Investment'

Food producers say the seizures by the National Land Institute have made shortages worse.

``There's a flight of investment from food production,'' says Rogelio Pena, a former cattle rancher in Barinas state whose land was confiscated in 2003. ``Many of the ranches they've taken over produced milk and beef.''

Pena, 49, says the land institute accused him of leaving too much of his 3,600-hectare ranch idle and of not having proper paperwork to prove he owned it. He says his documents were in order and that he was raising 2,300 cows. Institute representatives accompanied by soldiers showed up one day and ordered him out, without compensation, he says. Pena now works at his family's hardware store in downtown Barinas.

Juan Carlos Loyo, director of the institute, didn't respond to calls seeking comment.

Beef Output Falls

Whether through idle land or lack of investment, milk and beef output have suffered. Though milk production has risen 8 percent in each of the past three years, it's still down from a decade ago. Output peaked at 1.72 billion liters (454 million gallons) in 1988 and last year stood at 1.5 billion liters, according to the National Cattle Ranchers Federation of Venezuela. The group says beef production fell 22 percent to 343,798 metric tons in 2007 from a year earlier.

The government divides expropriated land into small units for individual farmers, while larger communal areas are devoted to cooperative projects. The farmers don't own the plots. While grateful for the land, many co-op farmers express frustration at delays in obtaining promised government funding and training.

``We've had to fight,'' says Marisol Ramirez, president of a 1,000-hectare cooperative of 42 families in Barinas state. ``There's a lot of negligence at the state entities that are supposed to help farmers.''

Only nine co-op families have electricity, and most live in wooden shacks without plumbing. Since expropriating the property in 2004, the government has built a school and given the farmers a 340,000 bolivar ($158,000) loan to build a corral and prepare part of the land for cattle grazing. Promised loans and grants for a clinic, a plant nursery, housing and electrification projects are stalled in the bureaucracy, Ramirez, 41, says.

Imports Surge

The farmers, many of them former laborers, grow fruits and vegetables, taking to market only what's left over after feeding their families, Ramirez says. Together, they raise 160 head of cattle on communal land.

With domestic production lagging behind demand, companies and the government have turned to imports. Purchases of goods from abroad surged 40 percent last year to $48.6 billion, according to the central bank. Exports rose 6.1 percent to $69.2 billion.

Buying abroad isn't easy. Importers need dollars, and the biggest bottleneck is the government's Foreign Exchange Administration Commission, known as Cadivi, which decides how to allocate the currency. Red tape can stretch the process to months, merchants say.

Cars as Investments

Empresas Polar SA, which makes everything from margarine to frozen hamburgers as the country's biggest food processor, is having trouble lifting output because of the exchange controls, Chief Executive Officer Lorenzo Mendoza says.

``Supply chains in many areas are breaking because the bureaucracy involved in accessing those dollars is not working effectively,'' he said in an April interview with Bloomberg Television.

With inflation taking an increasing toll on Venezuelans' savings, durable goods such as automobiles have become popular products in which to sink cash. The Mazda3 and Ford Fiesta are among the hottest imports. Car sales last year rose 43 percent to 491,899, with imports alone jumping 81 percent. Sales of cars assembled at Venezuelan plants fell 1.3 percent.

Defying economic norms, some vehicles increase in value after purchase. Among the reasons: Venezuela is a nation of car lovers, and driving is cheap. Subsidies keep a gallon of gasoline at about 17 U.S. cents compared with the U.S. average of $3.69 as of May 9. In addition, first-time buyers can get a tax rebate on certain small models.

Avoiding Banks

And there's an incentive to take out a car loan. The average interest rate on car loans in late April was about 27 percent, a couple of points below inflation.

``With cars, you never lose,'' says Eduardo Pacheco, a pilot who says he bought a 2007 Toyota pickup truck in December 2006 that he sold this year for a 67 percent gain. ``I wouldn't leave any of my money in the bank.''

The government imposed new import restrictions on cars this year, limiting the types of vehicles that can be brought into the country so that food importers can be given priority for dollars. That's created even bigger shortages of popular models, says Silvestre Tovar, vice president of Iveco Venezuela, a unit of Fiat SpA's truck-making division.

Choke Points

Iveco's plant in Aragua state, west of Caracas, operated at half capacity in the first quarter because of bureaucratic delays in importing parts and kits, Tovar says.

``The problem isn't demand; it's that we can't get the parts to build trucks,'' he says. The choke points are foreign exchange agency Cadivi and customs, which can cause up to three-month delays, Tovar says.

Chavez's policies have weighed heavily on PDVSA, which accounts for 90 percent of the value of the nation's exports. As he taps the company's petrodollar revenue to pay for social programs, less is spent on exploration, production and refining.

Both production and revenue are falling, even as world oil prices soar beyond $125 a barrel. As of April, Venezuela's oil output had declined to 2.32 million barrels a day from 2.77 million barrels in February 2005, according to Bloomberg estimates. Last year, PDVSA's revenue dropped 3 percent to $96.2 billion.

`Egregious'

PDVSA shows signs of being cash starved. As of April, the company was demanding payment by customers within eight days, down from its normal 30 days.

``The extent to which PDVSA is being used now is egregious,'' Aberdeen's Gutierrez says. ``It's the golden goose that's paying for everything.''

Amid the growing imbalances, Venezuelans are finding ways to take advantage of the government's elaborate system of controls. Black markets are burgeoning. One ploy involves exploiting the gap between the parallel, unofficial exchange rate and the official rate of 2.15 bolivars to the dollar.

As the parallel rate plunged to as low as 6.6 bolivars per dollar last year, crafty Venezuelans started exploiting a regulation that allows them to spend $5,000 a year each on their credit cards while abroad. They fly to Curacao, about 75 kilometers (47 miles) off the coast of Venezuela in the Netherlands Antilles. There, they can use a credit card to buy $5,000 in casino chips billed at the official exchange rate, cash in the chips for dollars and return home to sell the dollars on the parallel market.

Political Erosion

The rate gap has eased. In mid-May, the parallel rate stood at about 3.5 bolivars to the dollar, still 63 percent more than the official rate.

The economic distortions, coupled with doubts raised after Chavez's failed campaign for referendum changes, may be providing an opening for political opponents. In November, gubernatorial and mayoral elections will be held in 22 states and in Caracas.

``They act as if this revolution was a franchise that they own,'' National Assembly member Wilmer Azuaje says of the Chavez family. Over Chavez's objections, Azuaje, 31, a member of the ruling coalition, launched a campaign earlier this year for governor of Barinas state, where Chavez's father, Hugo de los Reyes Chavez, is the departing governor.

The opposition's eight main parties are trying to organize themselves to take control of statehouses and city halls. In January, they signed an agreement to back a single candidate in each race.

`Chavismo' Crisis

``This is an internal crisis within Chavismo,'' says Milos Alcalay, Venezuela's ambassador to the UN from 2001 to 2004, using an often-heard label for Chavez's ideology.

For now, many Chavez supporters remain grateful to the president for helping pull them out of poverty. Marisol Ramirez, the co-op president, says she still believes in Chavez even if government agencies are inefficient and corrupt.

``We don't blame the president for all that,'' she says. ``It's just that he doesn't know. I know he's going to come do an `Alo, Presidente' here one day, and he'll see all that we're doing.''

Should it ever return to power, the opposition won't abandon the poor, Nuevo Tiempo's Lopez says.

``The government will always have to invest greatly in social programs,'' he says. ``There was a lot of frustration with previous governments. Venezuela has to manage this paradox. We're a rich country with poor people.''

Petrodollar billions can buy a lot of things. As Chavez has found, well-stocked grocery shelves aren't always among them.

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net