Economic history dictates that the last leg of any battle against high inflation is the hardest, and so it is proving in the United States.
Consumer price inflation remains sticky, increasing the likelihood that the Federal Reserve will have to engineer a so-called ‘hard landing’ (read recession) to bring inflation back to within its target range.
Persistent high inflation or a recession - or both - are bad news for President Biden as he seeks reelection later this year against a resurgent Donald Trump.
Increasingly bleak geopolitics have compounded the problem; the present level of instability is not good for the oil price and a headache for the Biden administration in turn.
In the context of US-Venezuela relations – Washington’s foremost challenge in the Western hemisphere - that means Biden cannot be as hawkish on the Maduro government as some in the American media would like.
There is certainly a clamor on the Republican right, led by Florida Senator Marco Rubio, for the administration to reimpose sanctions in full on Venezuela’s energy sector.
So far, the US has limited a snap back of sanctions to the South American nation’s gold industry in response to a prominent opposition figure being deemed ineligible from running in an election expected to be held later this year. Related: Trump 2.0 Set To Gut Biden's Energy and Climate Policies
However, no matter the pressure from the right, the reimposition of sanctions in full is unlikely. The political risk for Biden is simply too high.
For one, Marco Rubio’s Florida is no longer a swing state – it will stay Republican in 2024 – so can now be safely discounted by the Democratic President.
Far more pressingly, Biden and his aides will be loathe to risk the further destabilisation of global energy markets in an election year via a full reversal of the current détente.
Venezuela’s strong oil exports have been a rare bright spot in the context of rapid regional de-escalation in the Middle East.
Chevron, the US supermajor, was given special dispensation to restart operations in Venezuela in late 2022, doing so through its joint venture agreement (JVA) with PdVSA, the state oil company.
The initial Chevron-PdVSA JVA has been souped up to incorporate a suite of supplementary contracts that give operational control to Chevron, allowing it to kick production into gear.
The supplementary contracts have the added bonus of indemnifying Chevron against corrupt practices and the threat of more general mismanagement by its domestic partner.
What has become known as the ‘Chevron model’ has produced a turnaround in the sector’s performance over the past year in particular.
By January, Venezuelan oil output rose 22% from the year prior. The repeal of sanctions restarted the train, then, but enhanced joint venture agreements serve as the sturdy tracks transporting ever-greater quantities of Venezuela’s heavy crude back onto global markets.
This is bad news for Republican hawks, but good news for Americans still in recovery from over two years of high gas prices – a political turn-off if ever there was one.
It’s not unreasonable to say that Venezuela’s output can only go up – it has the world’s largest proven oil reserves after all – especially as ties are restored with the international financial system and production facilities are upgraded and repaired by PdVSA’s foreign partners.
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On that note, the Spanish producer Repsol is already supercharging its operations in Venezuela under a Chevron-style enhanced JVA. Eni (Italy), Maurel & Prom (France), and Pertamina (Indonesia) are just three international producers that could easily replicate the same model.
The Biden administration will be aware that the reopening of Venezuela’s energy sector to international players is having a soothing effect on energy markets and could continue to pay a sizeable dividend for consumers into the longer term.
Economics trumps all in an election year – COVID-19 permitting – so expect to see Venezuela staying open for business with a range of international oil companies doubling down under the protective shield of the so-called Chevron model.
By Cyril Widdershoven for Oilprice.com
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