Venezuela’s oil production figures have become something of an obsession for U.S. policymakers. This is because Washington’s guiding assumption is that the loyalty of Venezuela’s military and top regime officials will evaporate in the face of domestic and international pressure once Nicolás Maduro’s coffers can no longer support the steep cost of their allegiance.
Yet the Trump administration risks diminishing returns if it does not shift the focus of U.S. sanctions to the real throttle on Venezuela’s oil output — specifically, away from oil producing companies and toward the shipping industry, stranding Maduro’s oil onshore and forcing Venezuela to shut in wells for lack of oil storage facilities.
The Trump administration must recognize that the “maximum pressure” strategy on oil companies has now run its course. Under socialist rule, Venezuela’s crude oil production has declined precipitously from a high of more than 3 million barrels per day. Targeted sanctions have piled on, causing an already decimated oil sector to produce a paltry 650,000 barrels of oil per day last month. Today, the U.S. sanctions policy has become a victim of its own success.
Declining oil revenue means that Maduro is increasingly reliant on foreign powers like Russia and Cuba. In the last two months, Russia’s state-owned oil company, Rosneft, has become instrumental in helping Venezuela evade U.S. sanctions by shipping approximately 70% of its oil. The Russian company’s ability to offload Venezuelan crude makes sanctions on oil-producing companies largely irrelevant to the efforts to dislodge Maduro.
Meanwhile, Maduro and his cronies have adapted to the collapsing economy. Venezuelans have fled the country en masse, reducing import and consumption needs, while the remittances they send home relieve pressure on the government to deliver basic goods and services. Failing to adjust the current strategy risks deepening these undesirable dynamics without achieving the desired political transition.
On Oct. 20, the Treasury Department renewed U.S. oil giant Chevron’s license to operate in Venezuela through Jan. 22, 2020. While some in the Trump administration favored allowing Chevron’s waiver to expire in hopes that it would deliver a knockout blow to Venezuela’s oil production, the move would have backfired because Russian and Chinese companies stand ready to fill the void and oil production levels could even have increased.
Instead, the Trump administration should focus on the next frontier: the battle to ship Maduro’s oil on the high seas. Cutting off buyers, denying export, and sanctioning noncompliant tankers and cargo insurance companies are more effective tools for reducing Venezuela’s output than sanctioning individual oil companies. To a limited extent, this is already happening. Recently, the U.S. sanctioned one Cyprus-based and three Panama-based shipping companies for delivering Venezuelan oil to Cuba. The United States should replicate these sanctions not only on companies that deliver to Cuba but on those doing business with the Maduro regime anywhere in the world.
Limited sanctions on tanker companies have already decreased Venezuela’s production numbers. Global freight rates for crude have been rising, and major oil producers like Exxon have announced they will not utilize vessels that have shipped Venezuelan oil in the last year. Partly as a result, Venezuela’s crude exports fell to a 70-year low in the month of September.
In addition, several companies have halted refining operations because Venezuela’s decrepit storage facilities are full. Sanctions-related bottlenecks have forced Maduro to suspend the potential production of 120,000 barrels per day. With a storage capacity of roughly 65 million barrels of oil and a current inventory of about 35 million barrels, targeted sanctions on tankers could help overrun Venezuela’s storage capacity.
A major target of U.S. sanctions should be Rosneft. While sanctioning Russia’s state-owned oil company would be a significant escalation that must be considered in a wider geopolitical context, it is clearly one Moscow hopes to avoid. Rosneft has stated its willingness to negotiate if faced with the threat of U.S. sanctions, and the more Russia must engage in illicit activity to support Maduro’s criminal regime, the higher the price it will pay once these activities are exposed.
Interestingly, despite their initial success, targeted sanctions on oil companies in Venezuela in the last several months have not forced a major drop in production. With its decision regarding Chevron, the Trump administration was right to recognize that the presence of foreign players has altered the dynamics of Maduro’s staying power. These types of moves against oil producers are no longer the kill shot policymakers once envisaged.
A greater focus on Maduro’s ability to export rather than produce oil could quickly swell his inventories and force him to cut back operations. Paradoxically, then, U.S. sanctions should pivot from denying Maduro what little oil Venezuela currently produces to drowning him in crude he cannot export.
Ryan Berg is a research fellow in Latin America studies at the American Enterprise Institute.
