On 8 March, US President Joe Biden banned the import of Russian oil and gas as part of a series of Western sanctions on the Russian economy in response to Russia’s invasion of Ukraine. The step came in tandem with potential rapprochement between the United States and Venezuela, with the latter hosting a US delegation to engage in talks on several topics, including energy supplies, after years of estrangement between the two countries.
The visit conveyed direct and indirect messages to the international community on a possible US ease of sanctions on Venezuela, particularly the oil sector, at a time when Washington was looking for alternatives to diminish its dependence on Russian oil.
The oil markets responded promptly to the US move, with Brent and Nymex West Texas Intermediate (WTI) crude oils skyrocketing due to fears of possible disruption of energy supplies, which would exacerbate the limited supply and further disrupt the global energy market. In this vein, Alexander Novak, Deputy Prime Minister of Russia has warned that oil prices may soar up to more than $300 a barrel if the United States and Europe ban crude imports from Moscow. Overall, significant repercussions of the US ban on importing Russian oil can be identified as follows:
• Temporary Rise in Energy Prices: After the US ban decision, Brent futures witnessed an immediate rise by 3.9 percent recording $127.98 a barrel, while US crude futures rose by about 3.6 percent reaching up to $123.7 a barrel. However, these increases in oil prices have quickly been reversed, with the WTI and Brent oils decreasing significantly, recording $96.44 and $97.44 a barrel respectively.
This decline came amid the continued negotiations between Russia and Ukraine, where a Ukrainian official involved in the talks with Russia announced that negotiations with Moscow on a ceasefire and withdrawal of Russian forces from Ukraine are still ongoing which helped calm markets. Perhaps this fall in prices was supported by several press reports that revealed the US is considering lifting some sanctions imposed on oil imports from Venezuela to make up for supply shortages resulting from the war.
In this vein, economic circles have underestimated the impact of the US embargo on Russian oil on global energy markets. Until 2021, Russian oil accounted for less than 10 percent of total US oil imports amounting to about 8.47 million barrels per day. So, Russian oil is considered a limited source of oil for the United States, as shown in the following figure:
Figure 1: Top oil exporters to the US (%)
As is shown in the above figure, Russia is ranked as the third US oil exporter to the United States at about 8 percent of total imports, i.e. 672,000 barrels per day. The United States isn’t also instrumental in Russia’s oil exports’ structure of which European countries and China take over 90 percent.
• Europe’s Move towards Reducing Russia Energy Dependency: On 8 March, following the US ban on Russian oil, the European Union (EU) unveiled its medium-term plan to cut its energy dependency on Russian energy, stressing that it will reduce its purchases of Russian gas by two-thirds before the end of the year, to be independent of Russian fossil fuels before 2030.
The European Commission announced that natural gas and liquefied gas from countries such as the United States and Qatar could replace more than a third of Russian imports, totalling about 155 billion cubic meters and new wind and solar energy projects could replace 20 billion cubic meters of gas demand this year. As such, the EU plan hinges on two pillars, namely 1) diversification of gas supply sources by increasing imports of liquefied natural gas and pipelines from suppliers other than Russia and increasing dependence on renewable gases, including biomethane and hydrogen and 2) accelerating the phase out of fossil fuels in homes, buildings, industry, and energy systems, by promoting energy efficiency and increasing renewable energy sources.
• The US Turn to Russia’s Allies: the US ban on Russian oil contributed to the United States’ turn to some countries that could offer the United States a replacement for Russian energy, including Iran and Venezuela. While such alternatives are looming on the horizon, they face several obstacles. For instance, Russia impeded the nuclear negotiations by demanding guarantees that the sanctions it faces over the Ukraine conflict will not harm its military and trade cooperation with Tehran. When it comes to Venezuela, some restrictions could hinder its ability to fill-in for Russian oil, even if Washington eases the oil sanctions on it.
The potential US-Venezuela rapprochement could bring gains to both countries. For the US, the improvement in the US-Venezuela relations could be construed as being a success of Biden’s administration in reducing the Russian influence in Latin America and isolating Moscow from its traditional partners. Additionally, such a step could encourage other countries to follow the example of the United States to find alternative sources to Russian energy. Finally, improved relations with Venezuela could help in the release of US prisoners in Venezuela, after the Venezuelan government’s decision to release two detained Americans in its prison.
For Venezuela, lifting or easing the US sanctions is likely to break the international isolation imposed on the country which could revive the Venezuelan economy (contracted by about 30 percent in 2020) and mitigate the brunt of the severe economic crisis the Venezuelan economy has been experiencing, with the annual inflation rate reaching about 686.4 percent in 2021, the number of families living below the poverty line exceeding 90 percent since 2017, and the families living in extreme poverty amounting to 64 percent in 2020.
Despite the mutual benefit that could be gained by the United States and Venezuela, there exist some restrictions that can prevent or reduce these gains, including:
• Collapse of the Venezuelan Oil Sector: Caracas has the largest oil reserves in the world, estimated at more than 303 billion barrels, representing about 18 percent of the global reserves. That is why the state relied on the oil sector in many economic activities, with oil accounting for 95 percent of its export revenues. This absolute dependence on oil caused the Venezuelan economy to be severely affected by the drop in oil prices between 2014 and 2016, which severely affected Venezuela’s foreign exchange reserves and led to an increase in inflation rates and local currency depreciations. Despite the relative recovery of oil prices after 2016, this did not contribute to addressing the economic imbalance in the country, due to the mismanagement of the local oil industry, the widespread corruption, lack of investment, deficient cash flow, dilapidated infrastructure, lack of maintenance, weak refining capacity, the immigration of technical staff to other countries, and the economic sanctions that hit the sector, which resulted in a drop in production, as shown in figure 2.
Figure 2: Changes in Venezuela’s oil production (million barrels /day)
As is shown in figure 2, Venezuela’s oil production declined in 2020 by 80.98 percent compared to 2010, recording about 540,000 barrels per day, down from 2.84 million barrels per day. A major part of this decline could be attributed to the US sanctions and the mismanagement of the oil sector.
Therefore, Venezuela cannot overnight increase its production capacity and help the United States fill-in for Russian oil, as the US imports from Russian oil amounted to 672,000 barrels per day, i.e. greater than the total annual oil production of Venezuela estimated at 540,000 barrels a day. Increasing Venezuela’s oil production requires huge investments in order to repair dilapidated oil refineries and develop export ports, power stations, and pipelines that have experienced deterioration for years.
• Solid Russian-Venezuelan Relations: Caracas’ close relationship with Moscow extends back more than two decades, when Hugo Chavez was elected a president. Russia was also one of the first countries that recognized President Maduro’s victory for a second presidential term and condemned the US intervention in Venezuela and the US sanctions imposed on the country. As such, Venezuela has become an important market for Russian energy companies. The Kremlin has helped Venezuela ease the oil sanctions by allowing it to continue exporting oil with state oil company Rosneft handling shipping and marketing for most of Venezuela’s oil exports to buyers in China and India. So, it is unlikely that Venezuela will abandon Russia, its main ally that has backed it for years, and this would impair the ability of the United States to contain Russian influence in the Western Hemisphere.
• Internal US Opposition: The US endeavors to regain access to Venezuelan oil is being met with significant opposition in the United States due to fears of supporting an authoritarian regime that is a close ally of Russia. Several US Congress legislators criticized President Joe Biden for initiating such a step, stressing that this rapprochement provides direct support to the Maduro regime, which is facing international accusations of violating human rights.
In short, Venezuela seems to be a limited alternative to the United States to fill in for Russian oil, given the collapse of the oil sector, its inability to increase production capacity, and the growing internal US opposition to US-Venezuelan rapprochement.