Possible implications of an oil embargo against Venezuela


February 6, 2018 – Fort Russ News – Paul Antonopoulos – Translated from Mision Verdad.

CARACAS, Venezuela – The protagonists speak

In November of that same year, Argentine President Mauricio Macri told the Financial Times in New York that the US “should go to the bottom with an oil embargo,” because according to the president that measure would help to increase pressure against the Venezuelan government.

As part of his tour of several Latin American countries to intensify the siege against Venezuela, US Secretary of State Rex Tillerson at a joint press conference with Argentine Foreign Minister Jorge Faurie, put the issue back afloat.

According to Tillerson, the measure is being considered because one can not “allow the destruction of Venezuela without doing anything”, making reference between the lines to the imminence of the presidential elections that could give as winner to President Nicolás Maduro.

Rapid definition of a political tool

In politics and international law the figure of the embargo implies a prohibition to trade, be it total or partial, in economic, military, financial or oil lines, decreed by a government, a group of them or by multilateral organizations against a certain country. In the case of Venezuela, the relevance of oil for the functioning of its economy places it as the sector that would be subject to an embargo because of the negative effects it would produce.

When it is an embargo linked to strategic sectors of the economy, it is fundamentally a political measure that seeks the destabilization and undermining of a nation qualified as “hostile”. Other forms of embargo, such as the military or financial, on the other hand, seek to negatively affect the defensive capabilities of the country and the room for maneuver of its international finances.

The United States, using the UN or the European Union as a battering ram, has applied oil embargoes to countries such as Iraq, Iran and Syria in recent years, as an extreme measure to restrict their income and make economic debacles, since they also boycotted the supplies of weapons and international trade.

Possible implications: background, what kind of embargo, hard figures and prospects

In July 2017, the Association of Fuel and Petrochemical Manufacturers (AFPM), representative of 95% of the US refining sector, sent a letter to President Donald Trump, warning of the negative effects that an oil embargo against Venezuela about its operations.

Qualifying the country as a major supplier of heavy crude, in addition to the technological adaptation of at least 20 refineries on the US Gulf Coast to process this type of oil in specific, the AFPM said that the measure would force them to seek less optimal supplies that would negatively impact the production of different derivatives and increase costs. They emphasize that the transportation difficulties with Canada and the characteristics of the crude oil from Mexico and Colombia, would impede the substitution of the Venezuelan supply with ease, leading the rise in costs towards the final consumer. The main refining companies affected would be Phillips 66, Valero Energy and Chevron.

The letter ends by alerting the White House about the negative effects that the oil embargo would have on US refiners and consumers, a measure that according to their criteria “would not solve the real problems of Venezuela.”

To overcome the alcabala of this powerful lobby and carry out the embargo on Venezuelan oil, the next question to ask has to do with its scope. In October 2017, the PBF Energy refinery, under pressure from the Treasury Department, suspended purchases of Venezuelan oil, a precedent that describes the relative capacity of the White House to pass over certain interests.

There are at least two possible scenarios that are outlined as possible. 1) That the US prohibit the importation of Venezuelan crude by US refineries, as well as the export of certain diluents to Venezuela. 2) That the US prohibits Venezuelan oil activity in the US.

On the first scenario, according to an investigation of the oil specialist portal Oil Price, PDVSA currently sells about 200 thousand barrels a day to refineries in the US, product of the financial blockade applied by the banking and the Treasury Department to limit the delivery of credit notes. as a payment method to PDVSA.

In the event that the US prohibits the purchase of crude oil, the country would suffer a significant loss of its income: an annual net loss, at current prices of the Venezuelan basket, of 4 thousand 380 million dollars, subject to relocation factors. PDVSA would surely have to relocate those 200 thousand barrels in the Asian market (China and India), which would imply an increase in costs and therefore a decrease in the net benefits of PDVSA in the immediate future.

Regarding the import of refined products from the US, AFPM itself is concerned that PDVSA could jump the embargo with the purchase of similar products in the Atlantic Basin, meaning a significant reduction in its profits.

On the second scenario, the objective would go directly against Citgo, a US subsidiary of PDVSA. If a total embargo were applied to oil, the subsidiary would be prohibited from using Mexico or Canada to keep its refineries operating, affecting its operations, market value and the repatriation of important dividends to Venezuela. An opportunity for vulture funds and debt holders to strain the rope of American justice to force a confiscation of the sixth most important refinery in the US, accusing the losses of their investments.

The negative repercussions to consumers are also a key aspect. This measure could bring about the interruption of the refining circuit of Citgo and consequently of 6 thousand service stations that it supplies daily throughout the US, which would drive a rise in fuel prices. Very surely the Trump Administration does not want to deal with this factor, since it represents a point of inflammation of internal politics that directly affects the popularity of the presidential figure.

Conclusions in process

Beyond the technical aspects of a possible embargo, the context puts on the board a set of variables that outline the measure, and above all the scope and political objectives pursued.

Currently the center of the economic situation passes through the blockade of international financing and imports, the administration of restricted income for the purchase of food and medicines and the restructuring of PDVSA. Precisely the oil embargo, in any of the two variants in which it could be presented, seeks to intensify the decline of national revenues, reduce the supply of medicines and products vital for the population and boycott the recovery plans of PDVSA. The embargo is also a renewed bet on Venezuela’s default in the medium term.

With a measure as extreme as the oil embargo, the US seeks to close a cycle of financial aggressions to immediately impede the economic measures plan – ranging from the expansion of the CLAP and Carnet de la Patria, to the launch of the Petro and the new Dicom- to recover an important margin of economic governance. Politically, the embargo seems to be a political sanction against a possible presidential outcome in Venezuela that is adverse to their interests. In this sense, the meta-message is clear and forceful: punish the population for the preservation of peace and political stability within the framework of the Constitution.

Before an officialization of the oil embargo, Venezuela could relocate in 90 days the 200 thousand barrels in the Asian market to gradually amortize the losses receiving payments in currencies other than the dollar; from the Caribbean, Asia and other countries the importation of certain inputs necessary for the domestic market could be regularized; The expansion of energy relations in joint ventures with Russian and Chinese partners may mean that plans to increase production, although boycotted, are still underway.

These variables make it possible to visualize that the measure of the embargo will not come close to the expected political objective -exercise the Venezuelan social and economic framework to overexploit the showcase effect of the “humanitarian crisis” – if it does not acquire a multilateral character. Perhaps for that reason Rex Tillerson will end his appointment in Jamaica, maybe he hopes that certain Caribbean countries will accompany that measure in order to limit the purchases of Venezuelan crude oil and the work of the refining circuit, while trying to show as a reliable energy partner for the region. As dictated by the Caribbean Energy Security Initiative designed to put an end to Petrocaribe.

The US needs to make Venezuela a multilateral conflict, for that reason the embargo is raised in Argentina (the venue for the G-20 meeting in 2018) and not in Washington. It is key to drag out possible markets where the barrels would be placed to extend the ban.

More than 40% of Venezuelan oil is sold in the Asian region, so a follow-up to the European Union embargo would have little effect on Venezuelan sales. It is also unlikely that it will have an accompaniment from the UN Security Council, in case they decide to scale up there with the impulse of Nikki Haley, due to the political and energy links of Russia and China with Venezuela.

In terms of time and resources, the application of an embargo implies the elevation of political costs, since the response of Chavismo and the Government will tend to the cohesion against the US and in favor of the economic responses that are activated in the middle of the passing.

Even many opponents and economists who work to give a solid narrative framework to sanctions warn that affecting the population with extreme measures will only have a negative impact on their plans for regime change.

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