What could be the effects of lifting sanctions on Venezuela’s oil industry?

The limited and temporary lifting of some sanctions by the US on Venezuela’s oil, gas and gold sectors will bring positive effects, but insufficient to lift Venezuela’s diminished economy, experts agree. The government of President …

What could be the effects of lifting sanctions on Venezuela's oil industry?

The limited and temporary lifting of some sanctions by the US on Venezuela’s oil, gas and gold sectors will bring positive effects, but insufficient to lift Venezuela’s diminished economy, experts agree.

The government of President Nicolás Maduro and the opposition’s Unitary Platform signed this week in Barbados two agreements, one of them on electoral guarantees In response, the US Treasury Department issued four general licenses that lift some sanctions for six months.

But the US government has also warned that will revoke authorizations if the Maduro government does not comply with the agreements.

Francisco Monaldi, director of the Latin American Energy Program at the Baker Institute of Rice University, in Houston, USA, affirms that the license in oil matters is “very broad”, but, at the same time, points out that the duration and conditions they generate “complexity” and “uncertainty” about the effects.

In his opinion, in the short term Venezuela will obtain a “much higher” return because it will not have to sell crude oil at a discount and with non-transparent mechanisms that characterize the black market. The South American country is an important player in the world oil market.

“You will be able to sell at a price full in the market, for example, to the refineries on the Gulf Coast of the United States, which is a traditional market in Venezuela that, until 2018, sold more than 500,000 barrels per day. “That is an important change,” he says. The Vermilion.

From the point of view of production, Monaldi considers that it is more difficult to determine the effects, since the American Chevron already has a private license extended since November 2022 and that allows it to import oil produced by its companies in Venezuela. This permission has not been mentioned in this week’s agreements.

“That is where the main action that is happening right now is, because they are investing and have increased production to 140,000 barrels per day, and it is expected that it will continue to rise and could reach 250,000 barrels per day in a year and a half. That seems to be independent of this license. What other actors can invest? It is more difficult to know because of the uncertainty of how long this will last,” she explains.

Economist Alejandro Castro adds that the fruits of the measures will be seen in the long term. “Drills must be reactivated, this whole process takes time, it takes money and it is not something overnight,” he says.

Monaldi considers it unlikely that the state-owned Petróleos de Venezuela (PDVSA) will make large investments and manage to increase its production because, he believes, Maduro will try to direct all possible income to the electoral year.

Is it possible that Venezuelan oil production, in the conditions it is in, can bear fruit and that this will begin to be seen in the Venezuelan economy? It’s unlikely, Monaldi agrees.

“The main thing that is going to happen was going to happen without this license, it is Chevron, that was happening and will continue to happen, that is where there may be a more or less relevant increase in six months,” he says.

However, he estimates that what will be seen in the Venezuelan economy will be the public spending that will be generated by the additional income that PDVSA and the Venezuelan government will have.

“The political tradition in Venezuela with Chavismo is that in an election year they spend what they have and don’t have. In this case they cannot go into more debt because they have certain limitations,” he says.

Monaldi insists that, although there would be a temporary improvement in Venezuela, there will not be solid or sustainable growth.

“It is not only the sanctions that hinder economic growth, it is a massive destruction of both the institutions and the capacity of the sector, of the various economic sectors,” he highlights.

For years, the Maduro government has attributed the general crisis that the country is experiencing to the sanctions imposed by the United States and has demanded that “all” be lifted.

Economist Daniel Cadenas agrees that the numbers that Venezuela could add are insufficient to start an economy that has once again entered recession.

“If the economy, in 2024, was going to grow 4%, with this relaxation of sanctions we could see growth that could be between 5% and 6%. “It is an important and significant impact, but it is not as much as we could naively think without drawing numbers,” he says.

Impact on the world oil market

Monaldi, an expert economist in energy matters, sees it as unlikely that the lifting of sanctions on Venezuela will help with the price situation in the world oil market, which, he warns, could rise even more as a consequence of the crisis in the Middle East, which is adding to the crisis in Ukraine, after the invasion of Russia.

“Venezuela, if it adds something in these six months, it is 100,000 barrels, a little more, in a year and a half 200,000 or 300,000 barrels. That’s less than 0.2% of the global oil market, which is more than 100 million barrels if you look at the 200,000 figure. The Saudis’ recent cut alone was one million barrels a day. This is like a drop in the ocean from the perspective of the global market,” he explains.

“Is Venezuela going to be an escape valve from the international crisis that may occur due to the price of oil? The answer is no, because Venezuela adds very few barrels. Redirecting it from China to the United States is not going to change the price of oil worldwide, what could change is if Venezuela added many barrels, but we do not estimate that it will add more than 200,000 barrels before 2025,” he adds in conversation with The Vermilion.

However, he maintains that an advantage will be seen on the US Gulf Coast because the Venezuelan heavy crude oil that they traditionally processed will return and will improve the refiners’ margins.

“Those refineries were designed to process heavy Venezuelan and Mexican crude oil.” But, he reiterates that, in general, the US does not depend on Venezuela energetically.

“That may perhaps marginally affect, for example, the price of diesel in the United States. It is unlikely to affect gasoline, because it normally comes from lighter crude oil that is already being processed in those refineries,” he emphasizes.