Former Petroleos de Venezuela (PDVSA) Finance Coordinator Oliver L Campbell writes: President Chávez has, on more than one occasion, threatened to cut off oil supplies to the USA if the latter threatened military action on Venezuelan territory. This is a highly unlikely scenario, but the fact Venezuela could cut off exports at any time has made the USA feel vulnerable. As a consequence, both John McCain and Barack Obama said, in a presidential debate, that the USA must reduce its dependence on Venezuelan oil.
It is really unfortunate the situation has reached this stage because reducing, or cutting off, exports to the USA is in neither country's interest.
Venezuela knows the USA provides an excellent outlet for its heavy crudes and proof of it is that, when it sold its share in the Houston refinery, a condition was it should continue to sell 230,000 b/d to Lyondell Chemical for the refinery. Similarly, when it recently sold the Paulsboro and Savannah asphalt refineries, it agreed with NuStar to continue selling 75,000 b/d for those refineries. However, of the 1,500,000 b/d of crude and products Venezuela exports to the USA , only some 1,000,000 b/d of crude are needed to load the various refineries. In fact, while CITGO continues to purchase some 400,000 b/d of crude from third parties, PDVSA need only supply about 600,000 b/d. This leaves scope for Venezuela to reduce sales to other clients in the future, which fits in with Venezuela 's goal of diversifying its customer base by selling to other countries. There is already a commitment to sell more oil to China and India at the expense of the USA .
Similarly, the USA know Venezuela 's heavy crudes are ideally suited for the refineries of CITGO, Lyondell, Conoco and NuStar and realise those volumes are not really at risk. Though volumes to other clients might be reduced, the USA could compensate by buying more oil from Canada , at the expense of Venezuela , as soon as Canada increases production from the Athabasca Oil Sands as it has plans to do. However, imports from Mexico may fall unless the Gulf of Mexico discoveries can be quickly developed.
A point some commentators have missed is that it is corporations that purchase oil from PDVSA and not the USA government. In a free democracy, it is most unlikely the government would instruct these corporations not to buy oil from Venezuela , and it is equally unlikely the government would prohibit CITGO, a company incorporated in the USA , from importing oil from Venezuela . It is also most improbable that the government would force Venezuela to sell CITGO'S refineries in the USA . Multiply these three improbables together and you get a very low probability that exports to the USA will be affected by any punitive action of that country.
Many assume oil is a fungible substance and that if you don't buy it from one country you buy it from another. But this is only true if the crudes have similar qualities such as gravities, or grades of API, sulphur levels and acidity, etc. Crude oils can vary from being light, and close to gasoline quality, to being extra-heavy like a thick, black tar. Refineries are designed to take different types of oil and CITGO'S refineries were specially modified years ago to process Venezuela 's heavy oil with a high sulphur and acid content. In fact, there are few refineries in the world which can so efficiently process heavy crudes as CITGO'S.
From an economic viewpoint, buying oil from Canada , Mexico and Venezuela keeps freight costs down. Though Venezuela could sell its heavy oil to China and India , and the USA could buy lighter oil from the Middle East , it would make no sense to incur those freight costs. Neither would it make sense to buy lighter, more costly crudes to run in CITGO'S refineries for which they were not designed.
Both candidates state the USA need to reduce their dependence on Venezuelan and Middle East crude oils, but if they don't buy oil from Venezuela and the Middle East , particularly the latter, finding countries to make up the shortfall will not be easy. The best ways to become less dependent on oil imports from those sources are to a) reduce oil consumption, b) promote increased oil production from Canada and Mexico , and c) open up exploration offshore and in Alaska . Longer term, imports from Brazil may become available, and the USA could produce more natural gas to reduce the demand for heating oil.
Mr Boone Pickens has come up with an idea which substitutes wind energy for electricity generation which in turn frees up natural gas to be used, compressed, in road vehicles. Then there is the possibility of building more huge solar plants like the one in the Mojave Desert . However, such renewables will only have a very small impact on oil consumption for many years to come. The fact is that, if Venezuela and the Middle East were taken out of the equation, the USA would have to take some drastic measures which would hurt its economy. Surely a much better option would be for Venezuela and the USA to mend fences and desist from threatening one another. In international trade, you do not need to love each other nor have the same political system to do business. If that were so, the USA and the West would not be buying electrical goods, clothing and toys from China .
To summarise, PDVSA could reduce or cut off supplies to the USA , but it would then have to sell its oil elsewhere. But there is no ready market for such a large volume of these heavy crudes, and the most likely outcome is that Venezuela would have to cut back its production. In the best case scenario, that China and India would buy all the crude available, the netback to Venezuela would be less than that from the USA . Similarly, the USA could reduce or eliminate imports from Venezuela , but it would then have to buy the oil elsewhere which would be more costly both in terms of the oil price and the freight cost. Neither makes economic sense nor is likely to happen suddenly. However, it is possible that, over time, both countries will decide, for different reasons, to run down the volumes traded.
Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931
where his father worked in the gold mining industry. He spent the WWII years in
England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV),
later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he
returned to the UK with his family and retired early in 2002. Petroleumworld
does not necessarily share these views.
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