President Vladimir Putin’s invasion of Europe’s second-largest country Ukraine highlights the threat posed by rising authoritarianism in a post-pandemic world afflicted by supply shocks for critical natural resources, notably crude oil. Rising global instability is not only undermining economic certainty, thereby causing commodity prices to spiral higher, but is strengthening authoritarian regimes which pose a threat to the global liberal democratic order. Unsurprisingly, President Nicolas Maduro of Venezuela emerged as one of the very few supporters of Moscow’s invasion of Ukraine, an event that sparked worldwide condemnation. According to the Kremlin, Venezuela’s authoritarian leader called President Putin to assure him of his strong support following Russia’s invasion of Ukraine and to condemn the destabilizing actions of Washington and NATO. It is easy to understand why Maduro has adopted such a stance. By 2015 Russia, along with China, had emerged as one of Caracas’ key financial supporters as Venezuela descended into a catastrophic economic collapse and humanitarian crisis, which is characterized as the worst to occur outside of war. Strict sanctions against Russia, in response to the invasion of Ukraine, have caused commodity prices to soar placing considerable inflationary pressure on the U.S. and endangering the global post-pandemic economic recovery. Soaring energy prices, with the international Brent benchmark price recently surging to over $130 per barrel, have strengthened the bargaining power of Maduro’s pariah regime. They are also placing considerable pressure on western governments, notably in Europe which is experiencing an energy crisis, to boost oil and natural gas supplies at a critical moment in the global post-pandemic economic recovery.
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The outlook for fuel prices is further complicated by calls to sanction Russian crude oil exports, which if implemented will further constrain supply causing prices to soar because it is the world’s third-largest producer. During 2020 Russia provided 7% of U.S. petroleum imports ranking it third behind Mexico and ahead of Saudi Arabia among the top five countries selling crude oil to the world’s largest consumer. Soaring fuel prices are placing ever greater pressure on the U.S. economic recovery and an embattled Biden administration. This is further complicated by Washington and some European allies considering imposing sanctions on crude oil imports from Russia, which is the world’s third-largest petroleum producer. Such measures if implemented will have a catastrophic impact on Russia’s already ailing economy which is under pressure from recent financial and other sanctions. This is because crude oil in 2019, before the pandemic, was responsible for 60% of Russia’s exports and nearly 40% of federal government fiscal income. If such sanctions are imposed, they will not only wreak havoc on Russia’s oil-dependent economy but global crude oil supplies, sending prices soaring, at a crucial point in the world economic recovery which is already threatened by spiraling inflation.
Russia plays an outsized role in global energy markets with it being the world’s second-largest oil exporter after Saudi Arabia. The U.S. and European countries are looking elsewhere for additional crude oil supply. Washington is considering engaging with Venezuela which before former President Trump’s additional 2019 sanctions, aimed at toppling the Maduro regime, was once one of the world’s top petroleum exporters. At face value, such a move makes sense with many U.S. Gulf Coast refineries specifically configured to process extra-heavy crude oil grades produced by the crisis-riven OPEC member. Late last week U.S. government officials visited Caracas with the goal of opening a dialogue with the pariah Maduro regime after Washington severed diplomatic relations in 2019 and closed the U.S. embassy over allegations of electoral fraud.
Venezuela, which with 304 billion barrels of crude oil possesses the world’s largest reserves, has the potential to significantly lift ailing petroleum production if a substantial investment is made in rebuilding the country’s heavily corroded energy infrastructure. According to PDVSA by the end of 2021, it was pumping an average of one million barrels of crude oil per day, although OPEC data obtained from Venezuela’s national oil company shows it only pumped 755,000 barrels per day during January 2022. There are signs that PDVSA may be embellishing production volumes because that amount is 13% greater than the 668,000 barrels daily which OPEC’s secondary sources show Venezuela producing for that period. It is estimated that it will take potentially a decade and investment of up to $175 billion to restore production to pre-crisis levels. For these reasons, Venezuela is incapable of ramping up oil production to a level that will replace Russian petroleum exports.
Aside from the serious political and reputational risks associated with Washington easing sanctions at a moment where the U.S. needs to boost oil supplies, such low output is unlikely to fill the supply gap left if Russian crude oil is removed from global inventories. Russia exports on average nearly 5 million barrels of crude oil per day of which, based on U.S. EIA 2021 data, around 671,000 barrels or 13% are received by the U.S. and the remainder by Europe and Asia. Any attempt by the Biden administration to ease sanctions against Venezuela and the dictatorial Maduro regime to boost U.S. oil supply, thereby easing domestic gasoline prices, will be construed as a cynical self-serving policy. That will spark further anti-U.S. sentiment in Latin America, where significant segments of the population view Washington’s policy and actions with cynicism and unease.
If Washington eases sanctions against Venezuela at this time, it will further strengthen Maduro’s position domestically while sending a signal to Iran and Russia that the U.S.’s global geopolitical power is fading and its traditional hegemony in Latin America is waning. Easing sanctions at this time will not see Venezuela decouple from Russia, China or Iran because all three authoritarian states have for nearly a decade propped up a near-bankrupt and failing Venezuelan state. Weak autocratic regimes like Maduro’s historically have been shown to rely on the patronage of strong authoritarian regimes such as Russia and China. The geopolitical fallout from such a move by Washington will far exceed the temporary and minor relief, notably for U.S. domestic gasoline prices, that softening sanctions against Venezuela will provide. This move is particularly fraught with risk because Caracas is incapable of rapidly boosting oil production to levels that can compensate for lost Russian petroleum exports.
By Matthew Smith for Oilprice.com
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