Sanctions on Iran and Venezuela May Empower U.S. Rivals
Posted May 17, 2018 7:01 p.m. EDT
HOUSTON — President Donald Trump faces a difficult juggling act as he tries to persuade China, India and other countries to join in oil sanctions against Iran while also pressuring Venezuela.
Since the two oil-producing giants compete for the same markets, squeezing one may end up helping the other. Squeezing both may send oil prices soaring.
A Venezuelan election is scheduled on Sunday that President Nicolás Maduro is almost certain to win because the main opposition is boycotting the vote, calling it a sham. To protest election abuses and human rights violations, Trump administration officials have warned that Venezuela could face tighter financial sanctions, including measures making it harder to export oil.
The administration is also working to reduce Iran’s oil exports now that it has removed the United States from the nuclear deal negotiated by the Obama administration. Unless Iran and the other countries that signed the 2015 nuclear pact can reach a compromise, Washington plans in the coming months to press a number of punishing measures, like sanctions on banks in countries that do not reduce Iranian oil imports.
Simultaneous moves against the Iranian and Venezuelan governments would amount to a complicated geopolitical game, with energy-hungry countries likely to look for ways to dodge sanctions and adversaries likely to seek ways to take advantage.
“There’s a lot of pinball action,” said Amy Myers Jaffe, an energy expert at the Council on Foreign Relations. “It’s difficult for the United States to employ two sets of sanctions at once and not disturb the oil markets when they are as tight as they are.”
China and India are the biggest buyers of Iranian crude, but they also provide markets for 40 percent of Venezuelan exports, which have been plummeting under the weight of mismanagement, debt and U.S. financial sanctions.
The two Asian countries and other importing nations will have no choice but to replace lost barrels with sales from Saudi Arabia or a few other members of the Organization of the Petroleum Exporting Countries with the capacity to sell more oil — or from Russia, a major exporter.
Asian oil customers were facing a squeeze even without the prospect of tougher sanctions on Venezuela. ConocoPhillips seized Venezuelan oil export terminals around the Caribbean recently as payback for a nationalization of its investments, and more than a dozen Venezuelan tankers were forced to retreat to port. Much of the oil left stranded was destined for India and China.
Bill Richardson, the former U.S. energy secretary and ambassador to the United Nations, foresees a scramble for supplies that will rearrange global energy markets, probably to the disadvantage of the United States.
“It means that OPEC oil becomes that much more necessary,” he said. “Russia also becomes a source, and if Russia can upset the U.S., they will do it.”
Iran and Venezuela, both OPEC members, remain critical suppliers on world markets, together providing roughly 1 of every 20 barrels. The predicaments they face are big reasons that oil prices have climbed nearly 20 percent in recent months — with Brent crude, the international benchmark, at almost $80 a barrel — threatening global economic growth.
Over the last three years, the two countries have been a seesaw of production. Although Iranian oil exports have recovered from Western sanctions that preceded the deal to restrict its nuclear development, exports from Venezuela have plummeted. Now, they could plunge together.
Venezuelan output is the lowest in three decades, falling by more than 200,000 barrels a day since late last year alone. Now, up to a third of its remaining 1 million barrels a day in exports are at risk because of the near-collapse of the state oil company, sanctions and the new confrontation with ConocoPhillips.
ConocoPhillips has seized cargoes at a refinery it leases in Curaçao and various storage facilities in Aruba, Bonaire and St. Eustatius to enforce a $2 billion arbitration ruling against the state oil company, Petróleos de Venezuela, known as PDVSA.
The facilities were used to blend Venezuelan heavy crude with lighter oils, and the port in Curaçao was able to dock the largest tankers that typically send crude and other fuels across the Pacific.
“This will clearly limit Venezuela’s ability to export profitably to Asia,” said Francisco J. Monaldi, a Venezuelan oil expert at Rice University. “And if the supplies from Venezuela cannot arrive in Asia, China and India are less likely to go along with sanctions against Iran.”
Venezuela may hope for a reversal of the liens, either by international courts or by island governments concerned about protecting local jobs and fuel supplies. But with the country increasingly behind in its debt payments since last year, mining and oil companies are likely to make further attempts to seize PDVSA assets in the coming months. That would limit Asian imports of Venezuelan oil even more.
More trouble may be coming for Venezuela in the next few days.
Trump administration officials have warned that they may impose additional sanctions on Venezuelan oil after the election Sunday. Washington could restrict insurance on Venezuelan oil shipments or ban American sales of light oil used to blend with Venezuela’s heavy oil to prepare it for export. A ban on imports of Venezuelan oil altogether is less likely, although possible.
Any of those measures could take more oil off international markets, prompting China and India to dodge the U.S. sanctions on Iran to protect their energy needs.
“When the administration considers Venezuela policy, they have to be careful not to create a policy that interferes with the goals of their Iran policy,” said Jaffe of the Council on Foreign Relations. Oil markets are elastic, with supplies and markets shifting to cope with interruptions. But in the case of Iran and Venezuela, any replacement of markets could bring political complications.
If U.S. sanctions take hold, experts foresee a reduction in Iranian exports of at least 200,000 and possibly up to 1 million barrels a day by next year.
Chinese and Russian traders could furtively buy some Iranian crude in local currencies or cryptocurrencies at steep discounts and swap or sell those shipments on global markets.
Russia might also benefit from any rise in oil prices that comes from reduced global supplies resulting from the sanctions on Iran and Venezuela.
With European companies unlikely to pursue investments to revive aging Iranian oil fields for fear of facing financial sanctions from the United States, opportunities will be open for Russian and Chinese companies already operating in the Middle East.
“It’s a huge opportunity for China and Russia to cement relationships with Iran,” said Philip K. Verleger, an energy economist who has worked in Republican and Democratic administrations.
Shortly after Trump announced that the United States was leaving the nuclear deal, China announced a new commercial railroad connection with Iran. Russia immediately said it would continue to abide by the deal, and moved diplomatically to ease tensions between Iran and Israel.
But in this complex maneuvering, the United States is not the only country that faces risks. Russia and China are also in tricky positions in both Venezuela and Iran.
In the case of Iran, China would be tangling with Washington by opposing new sanctions when it is trying to help cool tensions over trade and on the Korean Peninsula. Russia might hurt its warming relationship with Iran’s bitter enemy Saudi Arabia just as it is working with the Saudis to limit global oil output and firm up prices.
In Venezuela, Beijing in recent years has tried to gain a stable energy source with more than $50 billion in loans in exchange for oil shipments, but lately has shied away from deepening its relationship. More recently, Russia has poured money into the tottering government and helped it create a cryptocurrency as it picks up oil fields on the cheap.
A collapse of the Venezuelan government might jeopardize payment of money owed to China and the future of oil-field acquisitions by Rosneft, the Russian oil company.
“If Maduro survives, Russia can pick up additional acreage in Venezuela, but Russia has to walk a fine line,” said Helima Croft, chief commodities strategist at RBC Capital Markets. “If you give support to the Venezuelan military and it destroys PDVSA, you run the risk that if Maduro falls, the new guys may not be happy with Rosneft.”