What impact would a US oil embargo have on Venezuela?


Caracas (AFP)

Venezuela would suffer a devastating economic blow if the United States saw through threats to impose an embargo on its oil exports, but such a move would not guarantee any change of leadership in Caracas, analysts say.

Such an embargo was suggested by US Secretary of State Rex Tillerson during a February 4 visit to Buenos Aires.

"Obviously sanctioning oil or prohibiting the oil to be sold in the United States ... is something we continue to consider," Tillerson said.

Washington already has imposed sanctions against Venezuelan President Nicolas Maduro and his officials, and prohibits US entities from buying any more debt from the Venezuelan state or its oil company PDVSA.

The US is Venezuela's biggest oil customer. The South American nation gets 96 percent of its export revenue from the black stuff. Yet its oil sector is in decline, with production dropping and financial woes piling up.

According to the US Energy Information Administration, the United States received 600,000 barrels of oil a day from Venezuela in 2017 -- a third of its production.

That represents 75 percent of Venezuela's cash flow, said an economist, Cesar Aristumuno, adding that a US embargo would be "the worst" scenario.

He explained that while another third of Venezuela's crude production -- 1.6 million barrels a day, according to OPEC figures -- went to China and Russia, that was to pay off debts. And a small amount also went to Caribbean nations.

- Declining production -

Some of the oil pumped is for domestic consumption, for a population that can buy gasoline at giveaway prices. The equivalent of a dollar (at the widely used black market rate) buys 214,000 liters (56,500 gallons).

Venezuela also currently imports 160,000 barrels of oil a day from the US. That's because it needs to mix its dense, tar-like crude with imports of lighter oil for refining.

An oil expert, Orlando Ochoa, said Venezuela could conceivably source the lighter oil from Algeria or Nigeria, but at a far higher cost.

Venezuela's oil industry is in a sad state.

The latest PDVSA data show production at its lowest ebb in three decades, excluding a three-month strike in 2002-2003. The company is pumping half of what it was a decade ago.

Cash flow keeps deteriorating, and the threat of new sanctions weighs heavily, the consulting firm Eurasia Group said.

Global oil prices have recovered since a collapse in 2014-2015, and a barrel of Venezuelan crude now sells for around $60. But both the government and PDVSA are in partial default because of late debt payments.

The country, in deep recession since 2014, has external debt of around $150 billion, of which 30 percent is issued by PDVSA.

The Ecoanalitica firm estimates that oil income will bring in $25 billion this year, with $8 billion going to service the debt.

- US gas prices -

While the US is a major customer for Venezuela, Venezuelan crude represents just eight percent of the oil the US imports.

Any sanctions by US President Donald Trump's government could go in two directions: limiting purchases, or restricting the amount of light oil exported to Venezuela, said James Williams, with the WRTG Economics consulting firm.

To cover its needs, Washington could increase imports from Mexico and Canada, Williams said.

But cutting oil imports from Venezuela would affect certain refineries in the US, including one owned by PDVSA subsidiary CITGO. And that "would mean increases in gas prices" in America, Williams pointed out.

Ochoa noted that refinery technical specifications means Venezuelan oil "can't be replaced so easily."

The US Treasury Department is the point agency for setting oil sanctions, with congressional approval, and for putting pressure on buyers of Venezuelan crude.

Yet even nations critical of Maduro oppose an embargo.

"Mexico is not going to impose oil sanctions," Mexico's energy secretary, Pedro Joaquin Coldwell, said. His country was worried about "the repercussions that could follow" for Venezuela and for Caribbean nations.

Ordinary Venezuelans are already struggling with hyperinflation that the IMF projects will climb to 13,000 percent this year and chronic shortages of basic foods and medicine.

The dire conditions have sparked an exodus. Already 500,000 people have left Venezuela for neighboring Colombia and another 40,000 have gone to Brazil.

- Maduro 'indifferent' -

The political impact of oil sanctions is uncertain.

"There is confusion among those who believe that isolation and sanctions will affect only the government," tweeted Luis Vicente Leon, from the Venezuelan polling firm Datanalisis.

"The expected impact would be devastating for the economy. We would all feel that ... without any guarantee of political change," he said.

Maduro, who looks likely to emerge from a May election with a new mandate against a weak field lacking principal opposition rivals, says he is prepared to face any further sanctions.

He is unpopular, with 75 percent of Venezuelans disapproving of his governance, according to Datanalisis. But 90 percent of the country also reject an embargo.

"The sanctions should push the government into talks. But would they yield? They have so far shown themselves absolutely indifferent to the rapid socio-economic deterioration," Ochoa said.