An excerpt of a new report from the US General Accounting Office to the Chairman of the U.S. Senate Committee on Foreign Relations.
VENEZUELAN OIL production has fallen since 2001, but exports of crude oil and refined petroleum products to the United States have been relatively stable except during the strike.
EIA data show that total Venezuelan crude oil production in 2001 (the last full year before the Venezuelan strike) averaged about 3.1 million barrels per day, but by 2005 had fallen to about 2.6 million barrels per day — a 16 percent reduction. Venezuelan government officials dispute these figures, and provided data that indicates production has almost fully recovered to prestrike levels, but most available data indicate that the Venezuelan government data are overstated. Following the 63-day strike, Venezuela’s President ordered the firing of up to 40 percent of PDVSA’s employees, including many of the company’s management and technical staff. Experts told us that this loss of managerial and technical expertise, along with Venezuela’s underinvestment in oil field maintenance since the early 1990s, contributed to the decline in PDVSA’s oil production. While overall production has fallen, shortly after the strike Venezuela’s exports of crude oil and refined petroleum products to the United States returned (and have remained) close to prestrike levels of about 1.5 million barrels per day. Most of these exports go to CITGO or other refineries on the U.S. Gulf Coast that are owned wholly or partly by PDVSA. In 2005, PDVSA announced plans to expand its oil production significantly by 2012, but oil company officials and industry experts expressed doubt about PDVSA’s ability to implement the plan, in part because, to date, the company has not negotiated any of the numerous deals with foreign oil companies that are called for in the plan. The absence of such deals increases the likelihood that Venezuelan oil production will continue to fall because, given that PDVSA’s own production is in decline, Venezuela needs willing foreign oil company partners to maintain the country’s current level of oil production.
A sudden and severe reduction in Venezuelan oil exports would have worldwide impacts, while the impacts of a Venezuelan oil embargo against the United States or closure of Venezuela’s U.S. refineries would be primarily concentrated in the United States and Venezuela.
• A sudden loss of all or most Venezuelan oil from the world market under the current tight global supply and demand balance would raise world oil prices. For example, a model developed for DOE estimates that a disruption of crude oil with a temporary loss of up to 2.2 million barrels per day—about the size of the loss during the Venezuelan strike—would, all else remaining equal, result in a crude oil price spike of up to $11 per barrel in the early stages of the disruption. Such an increase would raise the price of petroleum products and, because petroleum products are important to the functioning of the economy, would likely slow the rate of economic growth in the United States and other countries until replacement oil could be obtained. The model also predicted that U.S. GDP would decrease by about $23 billion. Because a severe drop in oil production would also cause large losses for Venezuela in export revenues and jobs, Venezuela would likely try to restore oil production as quickly as possible.
• A Venezuelan oil embargo against the United States would increase consumer prices for gasoline and other petroleum products in the short term because U.S. oil refiners would experience higher costs getting oil supplies from sources farther away than Venezuela. Also, some U.S. refineries that are designed to handle Venezuelan heavy sour crude oil would lose some of their effective capacity if they had to use the lighter replacement crude oil that most likely would be available. In this scenario, because Venezuelan oil would not be taken off the market entirely, the impact on world oil prices would be minimal in the long term. The impact of a U.S.-specific embargo would also be smaller on Venezuela than if its total oil production fell.
• If Venezuela shut down its wholly-owned U.S. refineries there would be a reduction in the supply of gasoline and other petroleum products—and a corresponding increase in prices of these products—until the closed refineries were reopened or new sources of refined petroleum products were brought on line. The impacts would be obviously most severe in the United States and Venezuela, although greater demand by U.S. oil companies to buy petroleum products from other countries could cause price increases in those countries. Venezuela would suffer direct losses of revenues from its U.S. refineries and, if closing the refineries was deemed a threat to U.S. national security, Venezuela could potentially face sanctions by the U.S. government.
The U.S. government’s programs and activities to ensure a reliable long-term supply of oil from Venezuela have been discontinued, but the U.S. government has options to mitigate short-term oil supply disruptions. DOE has had a bilateral technology and information exchange agreement with Venezuela since 1980 to enhance oil production in—and secure reliable and affordable sources of oil from—that country, but these activities ceased in 2003. According to DOE officials, the activities stopped in part as a result of diplomatic decisions and in part because Venezuela no longer had counterparts to DOE technical staff who could continue the cooperative exchanges. In addition, the United States, co-led by the Department of State and the Office of the U.S. Trade Representative, attempted to negotiate a bilateral investment treaty that would have provided rules on investment protection, binding international arbitration of investment disputes, and repatriation of profits, and assisted U.S. oil and other companies doing business in Venezuela, but negotiations broke down in 1999 because of significant differences between the two countries. Officials in many oil companies told us that poor relations between the United States and Venezuela had made it difficult to compete on new investment opportunities in Venezuela and that a bilateral investment treaty would have helped protect their investments in Venezuela when the Venezuelan government unilaterally changed the way it deals with foreign companies.
The U.S. government has options to mitigate short-term supply disruptions. It has relied on diplomacy in the past to persuade oil-producing countries to increase production, and it could use oil from the U.S. Strategic Petroleum Reserve. During the Venezuela strike, for example, the U.S. government used diplomacy to persuade oil-producing countries in the Middle East and other areas to bring spare oil production capacity online and make up for the lost oil. However, such diplomacy may be less effective today because there is currently very little spare production capacity. In addition, during the strike, DOE allowed oil companies that were to deliver oil to the U.S. Strategic Petroleum Reserve to delay those deliveries, which increased the available oil supply in the United States. Officials in the Departments of State and Commerce, DOE, and the Office of the U.S. Trade Representative told us that they do not have Venezuelan-specific contingency plans for a potential loss of oil; rather, they believe diplomacy to persuade oil-producing countries to increase production and using oil in the U.S. Strategic Petroleum Reserve are adequate actions to deal with an oil-supply disruption. Although the U.S. government has options to mitigate impacts of short-term oil disruptions on crude oil and petroleum products prices, these mitigating actions are not designed to address a long-term loss of Venezuelan oil from the world market. If Venezuela fails to maintain or expand its current level of production, the world oil market may become even tighter than it is now, putting further pressure on both the level and volatility of energy prices. In this context, the United States faces challenges in the coming years that may require hard choices regarding energy sources, foreign relations and energy-related diplomacy, and the amount of energy Americans use.
Originally published June 27, 2006