August 10, 2017    5 minute read

The US and Venezuela: How Oil Holds the Cards

Love-Hate Relationship    August 10, 2017    5 minute read

The US and Venezuela: How Oil Holds the Cards

Much was made of the US imposing sanctions on Nicolas Maduro and 13 of his government colleagues. Some saw it as another example of US attempts at imperialist regime change, others as a necessary curb on the increasingly dictatorial and authoritarian rule of Chavez’s successor. As polemic as the issue is, the real statement will come with what the US does next. With threats of imposing sanctions including trade embargos restricting the flow of oil between the two states, don’t be fooled into thinking this is about democracy. This is about oil and America’s relationship with it.

America’s Obsession with Oil

Conservative opinion for years has bemoaned the USA’s dependency on foreign oil. President George W Bush summed it up in his 2006 State of the Union Address:

“America is addicted to oil, which is often imported from unstable parts of the world”.

It has been at the mercy of OPEC and has led to diplomacy with oil as an ever present bargaining chip on the opposition’s side of the table. According to this criticism, whilst this continues to occur the US will be weaker both economically and in terms of security.

President Trump has been no different. One of his first acts as President was the White House’s “America First Energy Plan” specifically aiming to eliminate the US dependence on the OPEC Cartel:

“Imagine a world in which our foes and the oil cartels can no longer use energy as a weapon. Wouldn’t that be nice?”

For Trump and his Republican backers, the US is to be oil independent, and for as long as it is not, it is a national security risk.

Changing Shift

Recent years have been a story of an American fightback in oil production. A combination of increased offshore drilling in the Gulf of Mexico and a ramp up in Shale projects onshore have meant a 57% rise in production between 2011 and 2016, with exports increasing tenfold in the same period. All this has meant that net imports have fallen from 65.8% as a percentage of consumption in July 2008 to 25% in 2016. Analysts at Raymond James has gone as far as predicting this figure to drop to 11% by 2020.

Whilst progress has been made, the US is still far short of independence for now, with the continued trajectory dependent on a rebound in the oil price and a sustained rise in domestic production. Despite the decline in imports, the US still imports over 2.8 billion barrels of crude oil from overseas. Indeed, despite Venezuela’s much-highlighted troubles, almost 1/10th (271 million) of this still come from the South American state. As much as the rhetoric says otherwise, the much-despised OPEC “cartel” still plays a crucial role in America’s energy security.

Making a Statement

In installing an oil embargo, Trump must weigh a brash political statement against the practicalities of America’s energy requirements. The reason such an announcement is so tempting for the President is that it portrays him in a position of strength both to the rest of the world and to his critics at home.

To those powers abroad, it displays the clear message; America will not tolerate authoritarian rule and will intervene if necessary (or the agenda suits). To those within America, it sends a commanding statement; America does not need Venezuela and it will no longer be held to ransom by OPEC countries such as it. What makes the message all the more powerful is the historic status Venezuela have had as the symbolic subject of such scorn, the socialist state the antipathy of the US’s free trade economics.

Not So Bold A Statement

The headline numbers paint a picture that such a move would be a bold and reckless gambit, but don’t be surprised if it happens.

First of all whilst Venezuela still represents a large amount of US Crude Oil imports, the majority of this oil is what is termed as “sour (heavy) oil”, simply put oil that must be further refined for practical use, often in the US itself. The US exported 6.8 million barrels of distillate to Venezuela in 2016 to enable this process to happen within the country. Currently, the majority of Gulf of Mexico refineries are geared towards dealing with sour oil but there are signs that the approach is shifting.

Trump’s abandonment of the Paris Climate Accord took the headlines, but what perhaps went under the radar was what he did next. Overturning Obama’s decision to reject the Keystone XL pipeline, he set about the next phase of development in transporting sweet (light) crude oil into the north of the country from Canada approving, in addition, the Dakota Access pipeline.

Whilst America’s imports have declined in general, from Canada they actually rose by over 46% from 2011 to 2016. America is still to be dependent on foreign oil but for the Trump administration, and indeed Obama’s before, Canada provides a more acceptable seller.

Political Opportunity

An embargo placed on Venezuela would provide an undeniable propaganda coup for a Trump administration war-weary over the defeat of Obamacare reversals. With climate change considerations seemingly off the table and an increasing focus on Canada, the risks associated with such action do to an extent diminish. Nevertheless, oil independence is, for now, an aspiration and not a reality.

If Trump decides against oil sanctions, one should not see it as an acceptance of an authoritarian state, but instead as an acceptance of economic pragmatism over political opportunity.

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