The White House is looking at slapping sanctions on a Venezuelan oil services company while also restricting insurance for oil shipments from the South American country, among other possible measures, according to Reuters.
The moves come as the Venezuelan President Nicolas Maduro is planning elections for April, which few expect to be free or fair. Unlike prior elections, the upcoming race will likely be met with global condemnation, and many countries could refuse to recognize the results altogether.
The election would be the latest move by President Maduro to tighten his grip on the nation, having already neutered much of the country’s democratic institutions. But because of the high-profile nature of an essentially rigged presidential election, Washington is planning more sanctions.
How or when such measures are implemented is still unclear. A U.S. official told Reuters that the moves could come in waves, with some sanctions coming before the election and others after. Either way, the more aggressive the action, the more it will take a bite out of Venezuela’s oil sector, while also likely spreading misery among the Venezuelan population.
A few options have been on the table. More minor steps would consist of sanctions on individuals within the Maduro government, although that has already been tried a bit, with little effect. A more serious option would be to prohibit the export of U.S. light oil and diluents to Venezuela, fuels that are used to blend in which Venezuela’s heavy oil. This shipments have already been down because of a lack of cash at state-owned PDVSA.
Another option would be to ban Venezuelan oil into the U.S. These flows have also already declined, although that has more to do with the overall decline in Venezuelan production. Still, a ban would have wide-reaching and dire implications. Venezuela could reroute shipments to India or China, but those sales would likely only occur at a hefty discount.
“Oil sanctions are not taken lightly,” the U.S. official told Reuters. “This would be a fairly strong escalation for U.S. policy, whether it’s a complete oil sanction or salami slices of different graduated steps.”
Last year, the U.S. banned American banks from issuing or restructuring debt with the Venezuelan government or PDVSA. The measures have made it difficult for Venezuela to deal with its mountain of debt, and many analysts say the financial screws have contributed to the steep declines in oil production.
Yet another option would be to target the insurance of oil tankers carrying Venezuelan crude, a tactic used against Iran several years ago and widely cited as a major reason why Iranian oil exports fell. This too would probably severely curtail oil exports.
The effect on the oil market would be significant. “I think (it would cause) a fairly strong shock to the oil market in the short term,” the U.S. official said. Venezuela’s oil production is already expected to continue to decline – Barclays expects output to average 1.43 million barrels per day this year, down from 2.18 mb/d in 2017.
However, measures from the U.S. could make that pretty awful forecast look optimistic. Oil sanctions, in one form or another, would likely lead to severe production losses. U.S. Secretary of State Rex Tillerson suggested that sales of oil from the U.S. SPR could offset the disruption.
The nail in the coffin would be some form of withdrawal by Venezuela’s joint venture partners. A new report from Columbia University, which summarizes a December panel event, noted that Venezuela’s production is in a “death spiral,” and that production declines have spread from PDVSA-run operations to those of the joint ventures, which have held up until now.
“Foreign operators lost confidence after PdVSA, which for years had failed to meet its full budgetary requirements, reportedly stopped making all payments into the JVs’ budgets,” the report concluded. “Having reduced capex, foreign operators are effectively limiting their exposure and cutting back on operations. Production looks set to plummet further in 2018.”