Will Biden lift sanctions on Venezuelan oil?
The severe energy crisis that erupted after Russian President Vladimir Putin’s decision to invade Ukraine is driving up energy prices. It couldn’t have come at a worse time for a global economy struggling to recover from a devastating pandemic and now facing the threat of soaring inflation. A marked decrease in hydrocarbon supplies has pushed the international price of Brent oil up 42% since the start of 2022 to sell at more than $93 a barrel, while natural gas has gained 39% or $5.20 per barrel. million British thermal units (MMBtu) . Acute global supply constraints driving up prices and headwinds posed by spiraling inflation threaten the post-pandemic global economic recovery. As a result, many countries, especially the United States and those in Western Europe, are urgently seeking additional supplies of oil and natural gas. This leads them to see Venezuela, which was once Latin America’s largest oil producer, as a major potential source of supply.
Venezuela’s vast oil reserves, estimated at 303.5 billion barrels, are the largest in the world. The founding member of OPEC also has proven reserves of natural gas totaling 196 trillion cubic feet. Key to accessing Venezuela’s considerable proven hydrocarbon reserves, easing Washington’s tough sanctions against the country and the autocratic regime of President Nicolas Maduro. These measures, which were reinforced by former President Donald Trump as part of a policy of maximum pressure, were intended to foment regime change by preventing Caracas from accessing global financial and energy markets. When implemented, these sanctions were responsible for the collapse of Venezuela’s oil production. Before Trump’s measures, Venezuela pumped an average of more than 1.5 million barrels per day, but production volumes plunged to less than 1 million barrels per day when those measures took full effect. For 2020, Venezuela produced only an average of 512,000 barrels per day, nearly one-seventh of the 3.5 million barrels per day reported for 1998, when oil production peaked.
The disintegration of Venezuela’s oil industry has triggered what is being called the most dramatic economic collapse to occur outside of the war. The destruction of the OPEC member’s economic backbone, its oil industry, led to a precipitous drop in gross domestic product, especially as cash flow from state oil company PDVSA dried up, preventing the maintenance and overhaul of vital infrastructure. IMF data shows Venezuela’s economy fell 28% in 2019 and another 30% in 2020 as the sharp drop in oil prices and the pandemic weighed heavily on the OPEC member’s economy. This has hit the lives of ordinary Venezuelans hard, as an estimated 91% of households live in poverty, with 68% living in extreme poverty. After the end of a devastating period of hyperinflation, prices are rising again. Inflation has recently soared, according to Reuters, to an annualized rate of 114%, the highest in Latin America, further amplifying the difficulties faced by ordinary Venezuelans with the risk of destabilizing the economy. Shortages of gasoline, diesel and even natural gas further compound the hardships Venezuelans face.
Venezuela’s economic disaster has seen more than 6 million people flee their homeland, according to estimates by the International Organization for Migration. Despite plummeting oil production, economic collapse, the exodus of economic refugees and near-bankrupt public finances, Maduro has cemented his grip on power. In December 2020, Venezuela’s autocratic ruler and his allies took control of Venezuela’s National Assembly, the only opposition-controlled government body. US-backed opposition leader Juan Guaido, a former speaker of the National Assembly, lost his seat and parliamentary immunity, significantly undermining his standing nationally and internationally. This significant development has seen much international support for Guaido wane, with the European Union announcing in January 2021 that it no longer recognizes the opposition figure as Venezuela’s legitimate interim president. These events culminated when Venezuelan opposition parties declared in October 2022 that they would withdraw their support for Guaido’s Washington-backed 2023 interim government. This effectively hampers Guaido’s role as an opposition leader capable of organizing a nationally recognized government. It couldn’t come at a worse time for a fractured opposition that has struggled consistently since Chavez came to power to establish cohesive resistance to the autocratic socialist government.
These are not the only factors strengthening Maduro’s grip on power. There are signs that Venezuela’s economic crisis has finally bottomed out. Estimates vary, but the petrostate’s gross domestic product is thought to have grown by 0.5% to 4% in 2021, a notable contrast to the previous year’s 30% contraction. This development alone underscores that US sanctions have failed. In fact, these moves have forced Maduro to forge close ties with other countries opposed to Washington’s foreign policy goals, including Russia, China and Iran. This now gives these pariah states a solid presence in Latin America and the ability to challenge US hegemony in the region while backing a handy ally.
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While there is considerable opposition to Biden removing or significantly easing existing sanctions, recent developments indicate that a recalibration is urgently needed. There are signs that Washington is considering allowing US oil supermajor Chevron, the last major global energy company with operations in Venezuela, to resume production in the country. To consider reducing sanctions, the Biden administration is demanding that Maduro reconnect with the Venezuelan opposition after suspending talks in Mexico last year. Washington is also demanding a commitment from the Venezuelan president to allow free and fair presidential elections, which are scheduled for 2024, so that Maduro makes a strong commitment to restoring democracy. To date, there is no evidence that Maduro is willing to accept such measures. Biden’s appeasement gesture, where Venezuela was allowed to resume limited oil exports to Western Europe, with the proceeds used to meet debt payments, was rejected by Maduro.
On the contrary, the trough of Venezuela’s economic collapse, as well as a global energy crisis forcing the United States to find alternative sources of oil and natural gas, have strengthened Maduro’s position. Combined with support from Russia, China and Iran, there is no rush for Maduro to agree to Washington’s terms. For these reasons, any attempt by the Biden administration to recalibrate sanctions to allow foreign energy companies to drill in Venezuela, in addition to meeting considerable domestic opposition, will not achieve the desired results. It is therefore likely that Venezuela will not return to being a major oil producer and exporter for some time to come.
By Matthew Smith for Oilprice.com
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