The Trump administration is hoping for the swift departure of Nicolas Maduro after taking steps to push the Venezuelan leader toward the exit. But recent attempts at regime change show the transition may not be so simple.
The recognition of National Assembly President Juan Guaido as the country’s new president, combined with harsh sanctions on Venezuela’s national oil company, PDVSA, do ratchet up pressure on Maduro. But it’s wishful thinking to expect Maduro to hop on a plane tomorrow — or even in the next few weeks or months — seeking asylum in Cuba, Russia, China, or whatever country will have him.
With the military still on Maduro’s side, the potential for Venezuela to turn into a lasting stalemate is real. Strongmen rarely go down without a fight — look at Libya, Iraq, and Syria.
Sanctions are also not a surefire way to bring about change. And they can have economic consequences that extend beyond the targeted nation. The United States has now sanctioned the oil exports of two OPEC-member countries, Iran being the other country under severe sanctions.
The difference in the case of Venezuela is that U.S. refiners on the Gulf Coast rely on imports of Venezuela’s heavier grade of oil to produce gasoline, diesel, and other products. Oil markets have so far brushed off the Venezuela sanctions, the geopolitical risk already being baked into the price. But that could change.
Benchmark oil prices also don’t tell the whole story. Both the global benchmark, Brent, and the U.S. marker, West Texas Intermediate, are light-sweet crudes — low-sulfur blends that are good for making gasoline. Venezuela’s output is a heavy-sour crude preferred by refiners for production of diesel and marine fuel.
Brent and WTI have been slow to react to the Venezuela news, with the former barely budging from a price of $60 a barrel and the latter from just over $50 a barrel. But price dislocations have been more extreme in “spot” or physical markets for heavier grades of crude oil.
With the flow of Venezuelan oil set to dry up by early February, prices for heavy sour crudes in the United States have hit five-year highs, trading at a roughly $6 premium. Refiners are scrambling to replace the approximately 500,000 barrels they import from Venezuela daily.
The challenge for refiners is that the market for heavy crude is already tight. A supply cut deal between OPEC and non-OPEC producers, combined with sanctions on Iran, had already taken more than 2 million barrels a day of sour crude off the market. Natural declines in output in Mexico and cutbacks in Canadian oil exports are compounding the problem.
Venezuela’s oil exports of around 1.2 million barrels a day won’t suddenly drop to zero because it has been cut off from the U.S. market. Maduro will look for buyers elsewhere, particularly India and China, which together already purchase about 550,000 barrels a day of Venezuelan crude.
Sanctions will reduce Maduro’s access to hard currency, but the White House estimate of annual export losses of $11 billion is overly optimistic, given the number of countries willing to ignore the restrictions and purchase Venezuelan crude at a steep discount. Maduro only needs to keep enough cash flowing into the country to keep the military on his side. Those most affected by sanctions will be the people of Venezuela.
Crude oil and gasoline prices appear under control for now, but a lasting standoff in Venezuela would add to existing supply concerns over new international regulations on maritime low-sulfur fuel that many analysts fear will cause a shortage of diesel, affecting both the U.S. trucking industry and the northeast home heating market.
America’s booming shale sector can’t help balance the market since it produces the light, sweet variety of crude oil. Refiners have few choices for replacing Venezuelan supplies, and they will ultimately pay a premium that will inevitably show up at the pump.
Trump officials are already mulling releasing oil from the Strategic Petroleum Reserve and have inquired on Canada’s willingness to open the spigots in Alberta. Both options have their downsides.
Oil from the rainy-day supply is mostly of the light- and medium-grade variety, so Gulf Coast refiners would still need to find heavy barrels elsewhere.
Alberta is holding back as much as 325,000 barrels a day of heavy crude production due to steep regional discounts caused by transportation bottlenecks. Canadian officials could be persuaded to re-open the taps if it helps push Maduro toward the exit, but pipeline constraints remain a problem.
Trump could ask the Saudis — the second-largest source of imported oil to the United States — to increase production of sour crude, but the kingdom appears committed to rebalancing a global market that went haywire at the end of last year, in part due to mixed signals from the White House on sanctions on Iran’s oil exports.
Any leverage President Trump may have gained with Saudi Crown Prince Mohammed bin Salman from the United States’ muted response to the killing of journalist Jamal Khashoggi is probably gone as well.
The net effect of all of this is that the White House may have little choice but to let gasoline prices rise if it’s committed to removing Maduro. The other option is military intervention, which would come at a far higher cost than a few extra pennies at the pump.
Dan K. Eberhart is CEO of Canary, LLC, one of the largest independent oilfield services company in the United States.
