Threats by Venezuelan President Hugo Chavez to stop oil sales to the US amount to empty blather. How clarifying it would be, however, if he tried to act on them!
The Venezuelan economy and government depend on oil revenue. Chavez needs Petroleos de Venezuela SA to produce and sell as much oil as it can at prices as high as possible. He adds to the pressure by wooing Venezuela’s neighbors with cut-rate oil deals, placating Venezuelans with oil and food subsidies, and channeling PDVSA’s revenue into social programs instead of investments it should be making.
The US is Venezuela’s biggest oil customer, absorbing in 2006 about 1.4 million b/d of its crude and product exports of 2.2 million b/d, according to the US Energy Information Administration. High-conversion refineries on the US Gulf Coast can run Venezuela’s mostly heavy and sour crude. Selling the oil in less hospitable and more-distant markets would require steep price discounts. And halting crude sales to the US would divert heavy feed from Citgo, which PDVSA owns and which has a total of 756,000 b/cd of deep-conversion capacity in three wholly owned US refineries—597,000 b/d of it on the Gulf Coast.
Moderating the threat
So Chavez, unless he has lost all judgment, will not make PDVSA quit selling oil in the US. In fact, he quickly moderated the threat, which came when a British court froze as much as $12 billion in PDVSA assets in a case brought by ExxonMobil. The US company seeks reparation for Venezuelan properties nationalized by the Chavez government. “If you end up freezing and it harms us, we’re going to harm you,” Chavez blustered initially. “We aren’t going to send oil to the United States (OGJ Online, Feb. 12, 2008).” Later, he talked only of suspending oil sales to ExxonMobil.
Oil serves Chavez better as a charade than as a weapon in international affairs, which can only backfire. His bluster, though, typifies the geopolitical mischief that US politicians seem to have in mind when they hold up “energy independence” as a policy goal. Promoters of energy independence seek either to eliminate importation of oil, which is impossible, or to slash the import rate by replacing oil with other energy forms, which is expensive. They forget that in an interdependent world independence comes not from zeroing out specified imports but from economic strength. Spending large amounts of money on noncommercial energy sources in pursuit of impossible goals, while refusing to produce as much commercial energy as possible domestically, is no way to stay economically strong.
Oil-exporting antagonists like Hugo Chavez are poor reasons to throw money at energy independence. The threat doesn’t warrant the sacrifice.
If Chavez did lose his senses and halt sales of Venezuelan oil in the US, crude prices might jump in a trading panic but would quickly resettle as US refiners found new sellers—probably the traders moving in to buy from PDVSA. The move would hurt Citgo more than other US refiners and consumers hardly at all. Supply from outside Venezuela quickly would fill whatever logistical voids appeared. And the adjustment would remind worried Americans that exporters need to sell oil as much as importers need to buy it and thus give the independence issue perspective it now lacks.
The SPR option
A crazy move by Chavez also would provide an excuse—though not a justification—for the US to tap the Strategic Petroleum Reserve. The US could withdraw enough oil from the SPR to cover lost Venezuelan supply for longer than the Venezuelan economy could endure reduced PDVSA sales volumes and—more importantly—crude prices. The Chavez government wouldn’t last.
US retaliation of that type would of course alarm other oil exporters, although some of them might consider a softened oil market a price worth paying to silence a reckless mouth that brings undue discredit to them and the commodity they sell. The windy Venezuelan president, though, isn’t worth the trouble. Eventually, the market will crush the economy he is draining of vitality and his regime along with it.