The recent shock OPEC+ production cut of nearly 1.2 million barrels per day caught the world by surprise and caused the price of oil to spiral higher, with Brent soaring 7% over the last two weeks to $85 per barrel. The cartel made this substantial production cut despite the considerable displeasure voiced by U.S. President Joe Biden and the potential it has of sparking a global recession at a time when inflation is rampant. The decision confirms Saudi Arabia’s return to being a global geopolitical powerbroker and the Biden White House’s inability to influence a key Middle Eastern ally. This forced the White House to consider other means of boosting domestic oil supply as the summer driving season looms and pressure grows to refill the Strategic Petroleum Reserve. It is the pariah state of Venezuela, the world’s second-largest oil exporter in 1998, which Washington views as a potential solution.
Strict U.S. sanctions, along with decades of mismanagement, malfeasance and corruption, have crippled Venezuela’s economic backbone, the country’s once monumental petroleum industry. From a peak of pumping over three million barrels per day in 1998, production has collapsed since Hugo Chavez took office in February 1999 to be only 716,000 barrels per day during 2022. Crippling U.S. sanctions, particularly those imposed by President Donald Trump in January 2019, coupled with endemic corruption and a dearth of skilled labor as well as an investment are responsible for the swift implosion of Venezuela’s oil industry.
Since taking office in January 2021, President Biden has progressively loosened sanctions against Venezuela as part of a strategy to ease the humanitarian crisis engulfing the country, which has been described as the worst to occur outside of war. The push to ease sanctions accelerated after Moscow invaded Ukraine and Washington, along with European allies, imposed restrictions on Russia’s oil exports, causing energy prices to soar. The international Brent benchmark surged to over $130 per barrel, which along with spiraling natural gas prices because of Russia cutting crucial gas supplies to Western Europe, caused inflation to surge and precipitated an energy crisis. This added to the sense of urgency for Washington and its allies to find alternative sources of oil and natural gas.
By March 2022, the White House had sent an envoy to Caracas to initiate discussions with the autocratic Maduro regime, the first diplomatic contact since Trump ratcheted up sanctions in early January 2019. In June 2022, the Biden administration authorized Italy’s Eni and Spain’s Repsol to ship Venezuelan crude oil to Europe in exchange for reducing debt owed by PDVSA, although Maduro eventually blocked those shipments. In a somewhat surprising move, Biden further eased sanctions in November 2022 after Maduro agreed to recommence negotiations with Venezuela’s opposition. The U.S. Treasury authorized Chevron to recommence lifting petroleum in Venezuela on the condition that PDVSA doesn’t profit from the petroleum extracted and all oil produced is only exported to the U.S.
While this is a significant political event, it has done little if anything to provide material relief from the constraints impacting U.S. oil supply. The four joint projects in which Chevron participates with PDVSA are pumping an estimated 90,000 barrels per day. Shipping documents show that Chevron was shipping the equivalent of around 100,000 barrels per day of Venezuelan crude oil to the U.S. during February 2023. Those volumes are significantly less than the 209,000 barrels per day of crude and 500,000 barrels daily of derivative petroleum products imported from Russia by the U.S. during 2021, prior to White House restrictions. Those numbers pale in comparison to the 12 million barrels per day pumped by the U.S. oil industry during 2022 and the 20 million barrels per day consumed last year.
When it is considered that Venezuelan production growth has stalled, with the embattled OPEC member only pumping 700,000 barrels per day for February 2023, it is difficult to see how lifting sanctions will materially boost the global oil supply. This is further emphasized by the fact that it will take a massive amount of capital estimated to be between $110 billion and $250 billion, invested over a decade to materially boost production. Venezuela’s petroleum industry infrastructure is so heavily corroded from decades of under-investment in critical maintenance, malfeasance and a lack of crucial parts as well as skilled labor it will take a decade or longer to restore output to over two million barrels per day.
It is only Western energy companies such as Chevron which possess the deep pockets, skilled labor and technical know-how required to rebuild Venezuela’s shattered oil industry. International energy companies will not commence making the required investment until they can operate in Venezuela profitability without impediment from either strict U.S. sanctions or the authoritarian Maduro regime. For these reasons that it makes little sense for the Biden White House to ease sanctions solely in response to global petroleum supply constraints. More so, when it is considered that Venezuela is a member of OPEC and even if capable of significantly bolstering production, the country will be bound by the production quotes and restrictions imposed by the OPEC+ consortium.
Nevertheless, the humanitarian situation in Venezuela is dire. A combination of endemic long-standing corruption, gross economic mismanagement, the collectivization of the means of production and harsh U.S. sanctions caused Venezuela’s economy to collapse, especially after the oil industry crumbled. This triggered an immense economic implosion, described as the worst to ever occur during modern times outside of war,
which has left at least 77% of Venezuelans living in extreme poverty. The crisis is so severe that an estimated seven million Venezuelans have fled their country since 2015. It is for these reasons that Fernando Blasi, the latest Venezuelan opposition representative to the U.S., recently urged Biden to relax harsh U.S. sanctions against the pariah state. Blasi went on to state that if sanctions aren’t relaxed, Washington risks becoming a scapegoat for Venezuela’s economic and humanitarian hardships, which will only strengthen the position of Maduro’s dictatorial regime.
This is in stark contrast to the previous hardline approach taken by Venezuela’s opposition, where many members were in favor of the maximum pressure approach taken by the Trump administration. That pivot has occurred because there is unmistakable evidence that the policy of maximum pressure has failed. Despite the Trump White House’s attempts to unseat Maduro, the socialist autocrat’s power has strengthened, and he has solidified his control of the levers of power while eliminating most of his opponents along the way. This includes the White House’s handpicked interim Venezuelan President Juan Guaido, who lost his seat as president of the National Assembly, which destroyed his legitimacy. For that reason, Guaido not only lost the backing of many governments internationally, such as the European Union, but the former lawmaker was ousted from his role within the opposition.
Despite strict U.S. sanctions blocking sales of Venezuelan crude oil, which is the petrostate’s primary export, the crisis-riven country’s economy returned to growth during 2021, with gross domestic product growing 0.5% and then by another 8% in 2022. That somewhat surprising development has further cemented Maduro’s grip on power and is providing handy anti-U.S. and anti-opposition propaganda for the authoritarian socialist regime. For these reasons, AP quoted Blasi as stating: “If we continue down this path, Venezuela is destined to be another Cuba,”. While Venezuela, despite possessing the world's largest reserves of 304 billion barrels, is incapable of materially boosting global oil supplies, and there are pressing geopolitical and humanitarian reasons for the Biden White House to substantially relax sanctions. For those reasons, the White House must act urgently if another brewing Latin American political crisis is to be averted.
By Matthew Smith for Oilprice.com
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