Understanding U.S. Oil Sanctions Against Venezuela

Yesterday Donald Trump issued an executive order imposing sanctions on PDVSA, the Venezuelan state oil company. Since oil is state-owned in Venezuela, PDVSA is the only vehicle through which the state imports and exports oil. CITGO (which most Americans are familiar with) is a wholly-owned subsidiary of PDVSA. The proceeds of any U.S. transactions with those companies will be held in escrow until some other government takes power in Venezuela.

Here is my effort to start understanding what's happening and what impact we might see. I am open to any corrections. A lot of this remains speculative.

On its face, this is the equivalent of oil sanctions, which have been long discussed but never implemented (in other words, sales can go on but the revenue cannot reach Nicolás Maduro, who logically therefore would stop selling). The main political risk for a U.S. president is that losing the 500,000 barrels-per-day will push domestic gas prices up. Treasury Secretary Steven Mnuchin claims the shortfall will be made up by allies, especially Saudi Arabia (which owes the Trump administration). I do not know if that is true, though my impression is that threats to oil supplies tend to make prices go up until events play out.

In Venezuela, the impact will be serious, with revenue shortfall and worsening humanitarian crisis. Venezuelan crude is difficult to refine so it is not simple to switch away from the United States. Further, Venezuela cannot just look to Russia and China because right now it sends them oil as debt payments. It does not get revenue from that unless you think of it as collateral for future loans.

But it's even more complicated because of exceptions. For example, some U.S. companies, including Chevron and the infamous Halliburton, have an exception that lasts through July 27, 2019. And the exception includes some exceptions.

So not all revenue will be cut off, at least for six more months. But I don't know how much of current transactions go through those excepted companies. John Bolton claimed Venezuela will lose $11 billion over the next year, but who knows how he arrived at that number.

On the other hand, there are broader implications. Trump's executive order makes PDVSA a Specially Designated National. That is the same category as the already existing individual sanctions dating back to the Obama Administration. From the Treasury Department:

505. If an official of the Government of Venezuela is designated as a Specially Designated National (SDN), does that mean that the Government of Venezuela is blocked? What are the prohibitions on U.S. persons dealing with a designated government official? 

No. The designation of an official of the Government of Venezuela does not mean that the government itself is also blocked. The prohibitions apply to transactions or dealings only with the individuals and entities whose property and interests in property are blocked. However, U.S. persons should be cautious in dealings with the government to ensure that they are not engaged in transactions or dealings, directly or indirectly, with an SDN, for example by entering into contracts that are signed by an SDN, entering into negotiations with an SDN, or by processing transactions, directly or indirectly, on behalf of the SDN, absent authorization or an applicable exemption. [07-19-2018]

What this does is place a high alert globally. U.S. citizens cannot even indirectly engage in transactions, which means foreign businesses need to be very careful, or even stop altogether to avoid potential problems. That ripple effect will likely hurt.

Meanwhile, Juan Guaidó said he is ordering the National Assembly to name new members to PDVSA, who would then take control if Maduro is ousted. Maduro gave a live televised speech last night in response. I watched a bit but it lacked any substance and I felt like it was no different than a bunch of his tweets strung together. He is on his heels.

All of this, all of it, is about the Venezuelan military. U.S. officials are openly saying so. Guaidó is also publicly wooing them with promises of amnesty. I wonder what they think of such blatant calls (and of course there is no unified "they" anyway). It would likely be easier to respond to Guaidó than to the U.S. because of nationalism. But there is so much we don't know.