As the political and economic climate in Venezuela continues to deteriorate and oil output sinks to new lows, a production vacuum is opening up in the Caribbean. Seeing an opportunity to take up the gauntlet, the Mexican finance and foreign ministries are working hard on a plan to become the region’s new reigning oil producer.
The plan begins in nearby Cuba. Venezuela had been providing Cuba with generously subsidized oil for over a decade, making the region entirely dependent on agreements and alliance with Caracas. Now Mexico is considering replacing these subsidies to Cuba in addition to a few other Caribbean nations, potentially ending the 18-year alliance between Cuba and Venezuela. If the plan comes to pass, it would compound Venezuela’s issues and isolation, making it possible for the U.S. to impose even heavier sanctions and scoring points for Mexico in Washington D.C.
Just this week Venezuelan president Nicolas Maduro called Venezuelan bond holders to a meeting with Economy Minister Ramon Lobo to discuss the consequences of U.S. sanctions. Maduro’s administration has pointedly claimed that the people who will be hurt most by the sanctions aimed at stymieing the nation’s ballooning debt will be shareholders in the U.S. Indeed, there is outcry that the potential banning of oil imports from Venezuela--the 3rd biggest supplier of oil to the U.S. behind Canada and Saudi Arabia--will dramatically drive up gasoline prices and hurt the U.S. job market. Additionally, the sanctions will block Venezuela from refinancing its debt with U.S. investors and prevents U.S. firms from issuing dividend payments to bankrupt nation.
In order to replace the Venezuelan oil subsidies deal, known as Petrocaribe, Mexico would have to supply Cuba with 55,000 barrels per day and another 39,000 barrels per day to other Petrocaribe nations in the Caribbean and Central America. This is actually a tiny amount compared to what Venezuela was doling out before their production went into steep decline. 5 years ago Venezuela was exporting about 100,000 barrels per day to Cuba and another 120,000 barrels daily to Central America and the Caribbean.
If Mexico goes through with the plan, it will be a bold step. The amount of shipments, especially at a subsidized price, would be a big financial burden on Mexico. The move may improve relations with the U.S. and give Mexico better leverage in NAFTA negotiations, but is likely to be politically unpopular in a time when oil domestic production is less than its best and the economy is volatile. Related: Hurricane Harvey Is A Disaster For OPEC
The plan is being pushed ahead by Mexico’s ministries of finance and foreign affairs, who see the possible fall of Venezuela as an opportunity to create more allies in Central America and the Caribbean. On the other hand, the Mexican energy ministry is not nearly as gung-ho, voicing their considerable concerns about Mexico’s low levels of crude production. Although there is hope for a boost in local production after the country opened its oil fields to foreign investors this year, it’s going to be hard to make the kind of turnaround needed after a 13-year production decline.
Thanks to the proposed Venezuelan sanctions, the U.S. will also be much more thirsty for Mexican oil after losing their 3rd biggest supplier. The gas-guzzling giant will likely be looking to import in much larger quantities of heavy oil from Canada, Mexico and Colombia to meet demand, and Mexico would be foolish to say no to an influx of dollars. The question is, will Mexico be able to respond to demand from the United States and replace Petrocaribe at the same time? There’s no way to predict the future, but it’s extremely unlikely, to say the least, at the rate they’re going.
By Haley Zaremba for Oilprice.com
More Top Reads From Oilprice.com:
- Will This Bring Big Oil Back To The Bakken?
- Failed Oil Price Recovery Slams Energy Stocks
- Russia’s Comeback In The LNG Race