United States: How do Venezuela’s new sanctions work?

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The recent and harsh sanctions against PDVSA by the Donald Trump government will have a negative impact on the currency earnings of Maduro's government

Venezuela’s political crisis seems to have reached a definitive crossroad. Juan Guido’s recognition as Venezuela’s interim president by the US and many other countries of the region have provoked strong tensions between Mauro’s government and the opposition grouped in the National Assembly.

Leer en español: ¿Cómo funcionan las nuevas sanciones de Estados Unidos a Venezuela?

This time, international pressure to sharpen internal crises and achieve the weakening of the government and an eventual breakdown, has given a strong blow to the backbone of the country's economy: oil.

The US Treasury Department has issued an executive order that will sanction American companies that trade with PDVSA, which will result in the suspension of oil purchases from the US to PDVSA, the freezing of assets in that country and the prohibition of exports of petroleum products from the US to Venezuela.

For several years the economic crisis has been wreaking havoc on the entire population, mainly due to the combination of the decline in oil production and the barrel’s price drop, greatly reducing the income of the state which caused a severe cut in imports of all kinds of goods. Hyperinflation and shortage, on the other hand, as symptoms of severe illness and whose causes we must locate around the atrophied and scarce development of the non-oil industrial apparatus and its dependence on the foreign currency derived from oil revenues. That is to say when the rent is contracted, the country enters in crisis, and worse, if the income tends to zero the situation will be extremely serious. This is the most likely scenario that Venezuela will go through.

Read also: Venezuela vs United States: the consequences for the economy

How much does PDVSA export to the US?

Because of its proximity to Mexico’s Gulf Coast, the US was always the natural market for Venezuelan crude oil. For the year 2009, close to 1.5 million barrels per day were exported, of which approximately 20% went to the CITGO refineries, a PDVSA subsidiary. With the emergence of Asian giants like China and India, the oil scene begins to change not only for Venezuela but for many oil exporting countries satisfying that specific market.

That is why exports to the US begin to decline; it can also be said, as a result of the decline in PDVSA production. By October 2018, total crude oil exports were 506 thousand barrels per day, of which 37% were destined for CITGO refineries, 20% for Chevron refineries, 15% for Valero and 13% for Premcor. That is, in a decade, exports to North America were reduced by one million barrels per day.

How will these sanctions impact the country?

The sanctions prohibit any purchase-sale operation of oil by any US company with PDVSA, although there is a term of 3 months. Mauro’s government will have to redirect its exports to large consumers such as China and India, since relocating 500 thousand barrels per day (MBD) in the market will not be an easy task. For this, they must offer discounts and consider losing a fraction for each barrel due to higher freight costs. Another option would be to sell the crude through Mexico, chaired by López Obrador, has a favorable stance towards dialogue and has not recognized Guaidó.

Another serious problem is that Venezuela must buy diluents for gasoline that the country does not produce, such as MTBE. They have to buy it in other more distant markets and therefore more expensive. Companies such as Chevron and Schlumberger that currently carry out activities in the country have a period of 6 months to continue operating. CITGO, for its part, will only be able to continue importing PDVSA crude for a period of 3 months and must cut its ties with its parent company. In short, Venezuela's outlook is quite critical of not resolving the serious political, economic and social crisis it is going through since these sanctions will exacerbate the decline of oil production and further reduce foreign exchange earnings.

LatinAmerican Post | Luis Alberto Lozada

Translated from: '¿Cómo funcionan las nuevas sanciones de Estados Unidos a Venezuela?'