From Chokehold To Boom: US Move To Ease Venezuela Sanctions Reshapes Global Oil Landscape — Plus Lesson For India

A curious bit of news escaped the headlines this week: Oil companies are gearing up to substantially increase crude oil production from Venezuela, after America eased the sanctions it had placed on the Latin American country for many years.

A brief backgrounder is required to fully understand the significance, implications, and timing of this move.

Venezuela had been a major oil exporter for over a century, with a good portion of its crude oil going to America.

But relations between the two nations soured after Hugo Chávez was elected president of Venezuela in 1998 — he chose to curtail the power of the oil companies.

There were persistent geopolitical efforts to restrict Venezuelan oil production, which Chávez manfully resisted.

But once Chávez died in 2013, sanctions were applied more forcefully.

As a result, oil production in Venezuela dropped drastically from over 2 million barrels a day to just around half a million barrels a day in 2020, when all energy trade was disrupted after demand slumped following the onset of the Covid-19 pandemic.

Something else happened in this period: Russia joined the Organization of the Petroleum Exporting Countries (OPEC) and usurped America’s traditional ability to set the global oil price.

However, once the conflict between Russia and Ukraine broke out in early 2022, and consequently, the West started placing sanctions on energy from Russia, America embraced the onus of becoming the principal supplier of oil and gas to Europe.

That gamble flopped because American oil companies were chary of increasing drilling activity in the midst of an oil glut; they definitely didn’t want to be left holding the baby if demand didn’t pick up, and oil prices cooled to, or even below, the $70-80 band.

Simply put, it was too high a risk to take, because shale oil is expensive to extract, unlike conventional oil, and needs high prices and a firm market to succeed.

Worse, major importers like India completely circumvented this ungodly mess by the simple stratagem of buying huge volumes of oil from Russia on a welcome discount.

And, above all, OPEC chose to cut production to prevent prices from dropping too much.

That plus self-imposed sanctions on Russia resulted in an artificial shortage. So, now, the Americans were stuck in a situation where they could neither rapidly boost domestic oil output adequately nor meet Europe’s oil needs (who, obediently, reduced oil offtakes from Russia without a care).

It is a piquant situation: while demand is still in a slump, major importers like Europe still need to source reasonably priced crude from somewhere.

This is where the resumption of exports in large volumes from Venezuela comes in. How might this work out?

One, bearing in mind that many American refineries were originally designed to treat and refine Venezuelan-type crude (heavier, with more sulphur content), their margins would increase and make refining operations more profitable.

Three, this move allows America to counter OPEC obstinacy (primarily, the Middle East and Russia, because ironically, and lest we forget, Venezuela is a founding member of OPEC).

America accesses a major source of oil, but the rest of OPEC are forced to maintain their production cuts, because if they don’t, the oil price would tumble. In the process, America can also get a larger share of the European oil market.

Nonetheless, this move will not resolve the America-OPEC impasse, and will probably last only until large importers in Asia (and possibly even in Europe, if the political mood changes) say "to hell with it" and cut sizeable bilateral crude offtake deals with major exporters in the Middle East, just like India did with Russia.

This is not as outlandish as some may think because it is already happening in the gas sector. Both India and China are signing long-term deals for the purchase of gas (liquified natural gas, or LNG, shipped on tankers).

China is laying a new pipeline across Central Asia to transport more gas in larger volumes from Turkmenistan, and India just signed a 14-year deal with Abu Dhabi for double the LNG than we already buy from them.

Yet, finally, what stands out most is the callous whimsicality of this policy shift.

For years, the Venezuelan oil sector was choked to facilitate a phenomenal growth of the shale oil sector. It didn’t matter that the Venezuelan economy was ground to dust in the process, resulting in hyperinflation and socio-economic devastation.

But when the need for fresh sources of oil arose, that carefully concocted regime of sanctions was promptly junked and Venezuela grandly permitted to produce more oil again.

This is an important lesson for India as it struggles to establish its rightful place at the world table: our government should be cautious in its diplomatic engagements and ensure that we do not suffer from the use-and-throw approach to which Venezuela was dreadfully subjected.