The Valve Closes On Venezuela’s Oil

It’s been a tumultuous few years for Venezuela, with the country gripped by political crises, hyperinflation and an imploding economy. This has sent scores of economic refugees over the country’s borders and sent its cash cow of crude exports to record lows, but leader Nicolas Maduro is still holding on.

Perhaps not much longer, if the USA has anything to do with it. With Venezuela’s National Assembly leader Juan Guaido leading an uprising, the country’s power structure remains in place as the military isn’t yielding to Guaido’s surge. Despite American sanctions, Maduro is still holding on. The USA and several other countries including the EU, have already begun to recognise Guaido as Venezuela’s rightful president, and now pressure comes in the form of new oil sanctions from a White House unafraid to swing its bat around.

Under the new sanctions, Venezuela can only sell crude to the USA or using US dollars through offshore companies until April 28, 2019. After that, the valve closes. The US is the main demand centre for Venezuela’s heavy crudes; despite investment from Russia and China, the loss of American demand will be a major blow to PDVSA. Americans working with PDSVA – both in the US and Venezuela – will be banned from such employment from March 29. Citgo, PDVSA’s American refining subsidiary, will be allowed to operate but will not be allowed to transfer money to the Maduro regime, with proceeds to be held in blocked US accounts. The sanctions are currently limited to Venezuelan crude – fuel products such as gasoline and jet fuel can still be traded, offering some respite but also a target for future sanctions. It presents a conundrum for Citgo, whose refineries along the US Gulf Coast depend almost entirely on Venezuelan crude as a processing fuel. Replacing the heavy, sour grades will not be easy; abundant US shale oil is no exact substitute.

It isn’t just a problem for Citgo. Venezuelan crude is also the source for two of America’s major refiners. Valero accounted for 37% of all Venezuelan crude imports into the US in 2018, with Chevron slightly further back in 17.6%. Venezuelan crude imports themselves have grown by double digits into the US over 2018, with the surge coming from attractive prices. Turning off this spigot could prove problematic for these refiners since suitable alternatives are not easy to find.

It will be a problem, but it won’t be as big as the one facing Maduro. Though he has decried the asset freeze and sanctions as a ‘robbery’ on Venezuelan state television, and threatened legal action, Maduro has no major cards left to play. Dependence on Russia and China to shore up his regime – and India to import more crude – will not be able to outweigh the intended crippling effect of the sanctions. The US expects the impasse period to be brief, expressing hope that Guaido may take over soon. For ordinary Venezuelans – who are facing a humanitarian crisis – and its former state crown jewel PDVSA, one hopes that that prognosis will be correct.

The Venezuelan Crisis, A Timeline

• March 2013: President Hugo Chavez passes away. Vice President Nicolas Maduro succeeds.
• April 2013: Maduro narrowly wins a new 6-year term
• December 2015: Opposition Democratic Unity coalition wins control of the National Assembly
• July 2017: A Constituent Assembly is formed, seen as a Maduro power grab
• May 2018: Maduro wins re-election amid widespread claims of fraud
• January 2019: Maduro is inaugurated, amid major protests

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