Why does Bush fear Venezuela?

It has a democratic president, a moderate social reform programme . . . and rather a lot of oil

Venezuela has become a haven for Islamic terrorist groups, if you believe General James Hill, head of US Southern Command - the US military's command centre responsible for keeping Latin America in line. His claim that Margarita Island, off the Venezuelan coast, is a hotbed of Arab "money laundering, drug trafficking, or arms deals" appeared in US News & World Report in October.

Earlier in the year, the neoconservative Weekly Standard magazine called for the US Congress and the Organisation of American States to impose sanctions on Venezuela. It reported that a Venezuelan pilot who had "defected" to the US was claiming that President Hugo Chavez had links with al-Qaeda. In one transaction, Chavez was alleged to have paid Osama Bin Laden $1m (although why the near-bankrupt Venezuela would subsidise the billionaire Bin Laden was not clear).

?Que pasa? Such stories, with their unnamed government officials, inventions, supposed defectors and links to international terror groups, pop up more and more frequently in the US press. They are so reminiscent of an earlier era of government-sanctioned propaganda - disclosed by the Iran-Contra investigation - that they raise the question: "Who's now advising George Bush on Latin America?"

The answer is Otto Reich, special envoy to the western hemisphere. It was Reich who, in the 1980s, as head of the US State Department's Office of Public Diplomacy, planted disinformation in the US press about Nicaragua's left-wing San-dinista government. One of his fabrications - reported in some credulous newspapers - was that tiny Nicaragua had bought MiG fighter jets to attack the US. As the Iran-Contra scandal unravelled, the US comptroller-general concluded that Reich's office had "engaged in prohibited, covert propaganda activity". Now, despite protests from the Senate, he's in from the political wilderness, concentrating on Venezuela and Chavez.

Elected in 1999, Chavez has introduced a series of moderate social reforms (free education, healthcare for the poor, land reform - but no grand nationalisations or seriously redistributive taxes). Though these may have irritated local and US elites, what has put Chavez on a collision course with America's manifest destiny is its oil - what a Venezuelan minister in the 1970s called "the devil's excrement".

Venezuela is one of the top three suppliers of foreign oil to the US (Canada and Saudi Arabia are the other two). Under its presidency of Opec, the price of a barrel of oil rose from $10 to $20 - a great gain for the funding of social programmes in Venezuela but not to America's liking.

In November, Chavez announced an initiative, PetroSur, at the Congress of Andean Parliaments, which would combine Venezuela's oil assets with those of Ecuador, Brazil and Trinidad, integrating the continent's oil resources.

Chavez is a survivor. In 2002, he was kidnapped in a bungled, 48-hour, US-backed coup but was returned to power after the poorer barrios of Caracas emptied out on to the streets in protest, and sections of the army mutinied against the coup plotters. Earlier this year, he outlasted a two-month "general strike" against his rule, actually a strike by oil company managers.

But last month, in a move that could push the country down the road to civil war, the right-wing opposition launched the "reafirmazo", a four-day petition drive demanding Chavez's recall. Results will not be known until next month, but according to the country's constitution, if the petitioners manage to get the signatures of at least 20 per cent of the population, or 2.4 million, a recall referendum must be held within four months.

Those at the bottom of Venezuelan society may adore Chavez, who is negro y indio (black and Native American) like them, but the country's middle and upper classes are furious at their loss of privileges. In the wealthier districts of Caracas, people queued around the block to sign the petitions. In the barrios, the petition stations were virtually empty.

The petition drive closed on 1 December and the opposition has claimed victory, putting the number of signatures between 2.8 and four million. Chavistas believe they have only 1.95 million signatures and allege large-scale fraud, a claim backed by international observers and the independent trade union federation. Local managers of Pepsi-Cola, Coca-Cola and other multinationals are suspected of having forced employees to sign the petition. The National Electoral Council will issue a decision on the validity of the signatures in the second week of January.

"This complete conviction on the part of both Chavistas and anti-Chavistas of having beaten the other bodes very badly for Venezuela's near future," says Gregory Wilpert, a Caracas-based journalist. "If the opposition does not have the recall referendum it so desperately wants, it will cry foul and its more radical elements will launch into yet another campaign of destabilisation."

Already an opposition paramilitary group has formed. If the electoral council reports that the opposition has lost, extremist elements - Bloque Democratico and a grouping of senior army officers, Militares Democraticos - are likely to accuse the government of sabotaging the petition. Their tactics could include violence, fomenting unrest, even bombings.

And how would Washington respond? "Bush's policy is somewhat contradictory on the issue," says Wilpert. "On the one hand, he has important advisers who steer him to keep a steady and peaceful relationship with Venezuela, and, on the other hand, he has advisers who are pushing in the direction of regime change."

Advisers such as Otto Reich.