OPEC has always moved in mysterious ways, and it certainly caught the markets off guard when it announced an unforeseen production cut this Sunday. The bloc, led by wily Saudi Arabia, has made March’s bulls look heady, to say the least, and the term ‘stagflation’ has returned to the headlines after a brief hiatus. The U.S. government is being looked to for an answer having just staved off a bout of serious financial turmoil in the past two weeks alone.
From where I am standing, the Biden administration has little choice but to revisit last summer’s blueprint, namely turning to past foes to fill the gap where Gulf hydrocarbons would normally be. These plans to reengage major but distrusted suppliers like Venezuela were formed in the weeks after the first Russian tanks rolled onto Ukrainian soil.
Europe’s economy buckled as oil and gas futures skyrocketed and the U.S. (a net energy exporter) had to open its own strategic reserves to prevent a backlash from motorists paying over the odds at the pump. All of a sudden, Biden needed more of the black stuff, and fast.
However, this was made complicated by his strong-worded criticisms of Saudi Crown Prince Mohamed Bin Salman (known colloquially as MBS) on the Presidential campaign trail back in 2020. With Russian oil and gas under sanctions and OPEC not willing to do Biden any favours, the US began to consider new options to reverse the squeeze. As previously mentioned, Nicolas Maduro’s Venezuela was put forward as a controversial but promising potential partner.
There’s little doubt that civil liberties and democratic norms have gone backward under Maduro – not that the provenly corrupt interim government has been an upgrade. Yet hard minds have their eyes on the 304 billion barrels of proven oil reserves beneath Venezuela’s surface, more than Saudi Arabia and with the gas to match. Reviving production, however, means unwinding the regime of sanctions imposed over four years under President Donald Trump.
Enacted to pander to his base, a de facto trade embargo has made life even more desperate for ordinary Venezuelans. Indeed, they continue to suffer from shortages of medicines, food, and other basic goods – a tragic cocktail that has led to exodus and a surge in child mortality. Despite this grim picture, Venezuela simply wasn’t on the U.S.’ radar until energy markets went haywire in 2022.
However, when war broke out, the Biden administration was admittedly quick to recognise two key factors when it came to the resource-rich nation not far to its south. Firstly, that the Maduro administration had the supply to cover for the West’s rejection of Russian hydrocarbons. Secondly, it figured that the restraints on private sector operators needed to be loosened to get Venezuelan oil flowing. As a result, the U.S. took its first bold step, allowing Chevron to resume its longstanding operations in Venezuela last November. This represented an initial crack in the oil embargo, and in turn, Maduro began to overhaul the country’s socialist regulatory system to support private sector involvement in ‘strategic’ sectors like oil. When the first shipment of Venezuelan crude left for Mississippi in January, it seemed a lot more would follow, but in reality, this shipment was nothing more than a light reprieve.
The sanctions waiver isn’t enough to jumpstart Venezuela’s crisis-stricken oil industry. It’s clear that a number of large international oil firms, and not just a sole oil major, will be needed to start investing in a renaissance of the Venezuelan oil industry in order to get export volumes up again. Like Chevron, European producers Eni and Repsol have an established presence in Venezuela and will resume operations if the Biden administration can guarantee that no action will be taken against them.
The current spike in oil prices is making it more and more likely that the President will acquiesce. Drawing down the Strategic Petroleum Reserve (SPR) over the past year in order to suppress crude prices had some effect, but the U.S. can’t play the same trick twice. The SPR needs refilling and Europe is already looking to secure supplies for the next winter as the war on its doorstep plows on. Many on the Republican side of the aisle will balk at the repeal of sanctions to allow greater private-sector involvement in Maduro’s Venezuela.
The question is, who else does the West turn to? OPEC is playing hardball and China’s reopening (though delayed) is beginning to pull supplies in an eastward direction. Venezuela, therefore, looks like an increasingly enticing option for Biden.
Oilprice.com