In August of 2019, President Trump announced a new set of sanctions against the Venezuelan government and its authoritarian leader, Nicholas Maduro, for rigging an election. The Trump administration expanded on existing sanctions on Petróleos de Venezuela, S.A. (PdVSA), the national oil company, by prohibiting all transactions with the Maduro government. At the time of the sanctions, the price of oil was $60 per barrel.
Just over three years later, the landscape has shifted dramatically. The price of crude oil surpassed $90 and bans on the importation of Russian oil have forced America and Europe to look elsewhere for supplies. OPEC+, an oil group which includes Russia and Saudi Arabia, announced cuts to oil production in early October, pushing the price of oil higher.
The sanctions regime against Venezuela is now under pressure. The Biden administration met with Venezuelan officials in March to discuss rapprochement and The Wall Street Journal recently reported that a deal to allow Chevron to resume oil extraction in Venezuela is under negotiation.
Venezuela To The Rescue?
Venezuela claims to have the world’s largest oil reserves. At its production zenith in 1970, the South American country pumped 3.8 million barrels per day (b/d), enough to satisfy nearly 9% of the 45 million (b/d) global demand. Currently, they produce under 700,000 (b/d).
The industry was crippled by a series of poor management decisions. The nationalization of the oil industry in 1976 precipitated a decline in production and Hugo Chavez’s expropriation of foreign assets in 2007 further repelled international expertise. More recently, a series of American sanctions have targeted PdVSA, freezing out Western assistance.
The departure of foreign companies from Venzuelans—and the rampant corruption and mismanagement left in their wake—have left Venezuelan oil fields woefully underserved. In the short run, Venezuela would be unable to provide relief to global oil markets. One Chevron executive estimates that, should Western companies be allowed to re-enter, it would take two years to raise production to 1.5 million (b/d)-- under 2% of current demand.
Yet the potential for Venezuela to increase their oil-producing capacity over a longer period of time could carry major geopolitical ramifications.
The re-opening of negotiations with Venezuela comes when the West’s relationship with major oil-producing nations is at an all-time low. Iran, the world’s seventh-largest oil producer, is fighting proxy wars with American-ally Saudi Arabia in Yemen and Syria, and the purchase of oil from Russia, the world’s third-largest producer, has been effectively banned by European governments. Following OPEC’s decision to cut oil production, President Biden ominously promised “consequences” for Saudi Arabia, the world’s largest producer, signaling further deterioration in an already shaky relationship.
The Cost of Carbon-Free
American policymakers face a difficult tradeoff between opening Venezuela for much-needed oil reserves and punishing Maduro for his autocratic rule.
One path forward exchanges humanitarian aid for expanded access to Venezuelan oil fields for Chevron. Three years ago, such “oil-for-food” plans were proposed as a means to fend off starvation for Venezuelans. Now, they may be considered to combat economic downturns in emerging market countries and to ease rampant inflation in Europe (The New York Times aptly observes that “higher interest rates will not suddenly increase the supply of oil”).
As policymakers in Europe and the United States plan “windfall taxes” on oil companies and erect restrictions on oil exploration (bans that are hurriedly being reversed), long-term, domestic investment in oil production will suffer. This will give the petrostates of the world a larger role in the global economy and weaken the West’s ability to sanction their authoritarian tendencies.
The position of diplomatic weakness with which the United States re-enters negotiations with Maduro’s regime is bad for Venezuelans, Americans, and the rest of the oil-consuming world. Western policymakers should not forget this as they chart an increasingly aggressive path away from fossil fuels.