- - Monday, February 4, 2019

ANALYSIS/OPINION:

Amid Venezuela’s economic collapse and the controversial election of socialist President Nicolas Maduro, the Trump administration deserves high marks for recognizing reform-minded Juan Guaido as the legitimate president and for working in concert with the international community’s efforts to avert a larger humanitarian crisis.

In imposing sanctions on Venezuela’s state-owned oil company Petroleos de Venezuela (PdVSA), the Trump administration must walk a very fine line. On one hand, the United States must continue to pressure the regime and halt more embezzlement schemes run through PdVSA for which the Maduro regime has been notorious. On the other hand, the administration must take into account the needs of American energy producers and consumers to minimize harm to Americans through higher gas prices and limited energy supplies.

Of immediate concern here at home is the fact that refiners in Texas and Louisiana could be left scrambling to find other supply sources. Almost overnight, American motorists could be in for an unpleasant shock.

Venezuela has the largest proven oil reserves in the world, predominantly comprised of heavy crude. Last year, American refiners imported approximately 500,000 barrels of Venezuelan crude to the United States every day on average. That level is steadily declining because of the continuing mismanagement and unrest in Venezuela. America’s Gulf Coast refineries are specifically set up to process that heavy crude into gasoline, diesel, jet fuel and other petroleum products.

The oil that the United States receives from Venezuela is inexpensive relative to other alternatives. With current sanctions on Iranian oil in place, oil sanctions on Venezuela could potentially squeeze the global supply and increase prices. We can already see it in the market. The oil market is pricing in the risk to Venezuela’s production; U.S. oil prices rose on Jan. 24 as a result of the political upheaval.

Meanwhile, prospects for replacing a daily requirement of a half-million barrels of Venezuelan crude anytime soon look bleak. OPEC has already slashed its output in hopes of coping with surging supply on the world market. The Canadian government has likewise decreased the production of Alberta crude to deal with its glut. Mexico has already ramped up its supply to U.S. refiners, but is struggling with production efficiency issues. And while American energy companies are breaking production records, they’re not producing the right kind of oil. The relatively light crude produced domestically cannot be substituted for the heavy, high-sulfur crude that Gulf Coast refineries absolutely require to produce diesel and other highly specialized petroleum products.

The administration needs to be aware that refining heavy crude is a business that operates on a thin profit margin. That’s important because if the low-cost Venezuelan alternative is eliminated, output may have to be curtailed or a more expensive substitute must be found. In either scenario, economics dictate that the cost of fuel would inevitably increase, and the consequences of a large-scale increase in the price of gasoline and diesel simply cannot be overstated.

Almost immediately, American motorists could expect to pay more at the pump. In 2017, U.S. consumers used 19.96 million barrels of petroleum products per day, on average, with 71 percent of it used for transportation. What happens when large, relatively cheap crude oil supplies are suddenly cut off? Everything from driving to work to picking up the kids from day care becomes more expensive. With the cost of diesel fuel more expensive, transportation costs increase, and then food and everything else we buy right along with it. Higher jet fuel costs might mean a change in vacation plans. It wouldn’t take long for the economic snowball to take its toll.

In addition to the consumer impact on Americans, Venezuelan citizens would obviously be directly impacted by sanctions, considering that 95 of the country’s exports and 25 of its GDP are based on petroleum products. With 75 percent of cash payments for Venezuela’s crude exports coming from the United States, a sudden cut-off of those funds could trigger the final collapse of an already faltering economy and exacerbate a humanitarian crisis. If pro-reform Guaid prevails over socialist President Maduro, American taxpayers would likely find themselves on the hook for restoring order and repairing their badly damaged economy.

Additionally, a crude import ban would risk compromising our foreign policy objectives by harming U.S. companies doing business there which represent a source of stability and constructive engagement. Russian and Chinese oil companies already operating in Venezuela stand ready to fill the void. In fact, oil-hungry China imported more than 386,000 barrels a day from Venezuela in 2017 and stands ready to grab even more. Severing Venezuela’s lifeline of American petrodollars may also give Maduro a political wedge to wield over Mr. Guaido, allowing him to claim that Yankee imperialism is the cause of the people’s suffering.

An encouraging note is that the Treasury Department issued licenses for some American oil companies to continue operations in Venezuela through July 27. Still, it’s unclear what that means to the supply line to Gulf Coast refiners. Meanwhile, the United States (led by the Trump administration) and much of the world have acted appropriately to restore order and democracy while protecting the assets belonging to the Venezuelan people. As its objectives are achieved, the administration should swiftly lift the sanctions to avoid bringing pain to Americans and Venezuelans alike.

• Ken Blackwell serves on the board of the National Taxpayers Union and the Club for Growth. He was formerly the U.S. ambassador to the U.N. Commission on Human Rights.

Copyright © 2019 The Washington Times, LLC. Click here for reprint permission.

The Washington Times Comment Policy

The Washington Times welcomes your comments on Spot.im, our third-party provider. Please read our Comment Policy before commenting.

 

Click to Read More and View Comments

Click to Hide