Strategic considerations: The debate over whether the US should sanction Venezuelan oil and refined products is shifting as the country’s humanitarian disaster deepens.

REDD

23 April 2018 07:36 PM

The US doesn’t want to be blamed for worsening conditions in the country, especially if the sanctions don’t have the desired impact of restoring democracy. An analysis by an oil industry research firm concludes that sanctions could cause unpredictable political change, increase refugee flows, and push Venezuela closer to China. The thinking in Washington may be moving away from sanctions — at least in the short term.

  • US leaders said to be less interested in sanctions as concerns about refugees grow
  • Impact in Venezuela would dwarf Iran sanctions, driving refugee flows
  • Expanded sanctions on Venezuela would mostly help China, report warns
  • US oil market impact limited as refiners have options
  • Sanctions might need multilateral support to impact PDVSA

The US is facing new questions about possible sanctions on oil shipments from and to the Bolivarian Republic of Venezuela as a growing refugee crisis and concerns about efficacy compete with enthusiasm to raise the pressure on the country, three analysts said.

Among the problems with oil sanctions are that they could fail to help US interests, would push the country closer to China, and would worsen the humanitarian situation there, IPD Latin America said in a report released 20 April. IPD has covered the Venezuelan oil industry since 1998.

Such concerns push back on those who see oil sanctions as a possible solution to the intransigence of President Nicolas Maduro and his allies in Caracas. Luis Almagro, general secretary of the Organization of American States, reportedly said in February that oil sanctions were “necessary” in order to cut off the flow of cash to the government and state oil company PDVSA. Almagro and the OAS didn’t respond to questions today as to whether his thinking had changed.

However, US officials may be moving away from oil sanctions, said Richard Nephew, a senior research scholar at the Center on Global Energy Policy at Columbia University.

“If you had asked me a week ago I would have said the likelihood was high” of oil sanctions being imposed, Nephew said today in a phone interview. But two factors have reduced the chance of that, he said. First, sanctions are probably having far less impact on Venezuela than the country’s own mismanagement is having. Second, the growing refugee crisis hitting Venezuela’s neighbors add a risk that the US would be “unfairly blamed” for a humanitarian disaster.

The humanitarian issue has been an argument against oil sanctions since they were first proposed months ago. One oil trader said “there’s only one source of money. You kill the cash cow and you’ll have human misery and catastrophe on a level even worse than now.”

IPD echoed these sentiments in its report. An embargo on Venezuelan crude “would have a much greater impact than the Iranian oil embargo ever could,” as Venezuela is further from China (the buyer of last resort) and is more dependent on oil exports for cash. Additionally, if the US were to halt sales of oil products to Venezuela, that would “basically create a collapse in the transport and power sectors, further aggravating the current economic and humanitarian crisis,” IPD said.

Colombia says 796,000 Venezuelans entered the country last year with passports, and perhaps half of those remained. Brazil’s northern Roraima state is trying to close the border, as reported. The Brazilian state filed for an injunction in the Supreme Court arguing its economy cannot support further Venezuelans, according to press reports.

In the near term, both IPD and Nephew said US markets would likely be only modestly affected by the loss of Venezuelan crude. An embargo may “pose minimal impact on global crude markets,” IPD said.

But “the overall effect may not be what the US or Venezuela’s neighbors in the region seek,” author Joel Guedes wrote. An embargo would sever Venezuela-US trade links, creating “important challenges for the financial sustainability of a new political regime in the country.” Another effect could be that Venezuelan would end up more dependent on China, giving the Asian country enough leverage that it could force Venezuela to hand over oil assets to pay debt, IPD said.

The US could effectively halt shipping of fuels from or to state oil company PDVSA by forbidding transport or insurance of such fuel, IPD said. That would cause fuel to accumulate at domestic terminals and quickly force the company to shut in production, costing the company at least USD 2.3bn, IPD said.

However, Nephew said that if European states didn’t join the sanctions efforts, any insurance issues could be worked out. European insurers would cover the client unless the US imposed secondary sanctions, as it did with Iran. “Oil still would get to market,” he said.

To be sure, another risk analyst said the US could yet be inclined to toughen sanctions. “We’re inching towards an election,” said James Bosworth, founder of political risk analyst Hxagon. “The US and others will want to demonstrate some effort if it’s stolen.”

Venezuelans are scheduled to vote in a presidential election 20 May. Maduro is facing a challenge from Henri Falcon, a former Chavista running without support from most of the major opposition political parties. Financial pressure is also rising. PDVSA’s only secured bond, an 8.5% note due 2020, has a coupon due at the end of this week. Its grace period ends a week after the election, and if the coupon hasn’t been paid, holders will be free at that time to move on the collateral — a majority of shares of US refiner Citgo Holding.

by Steven Bodzin, New York