The situation in Venezuela is back in the headlines. Last week, the U.S. Treasury announced new sanctions on Venezuela’s state-owned oil company Petróleos de Venezuela S.A. (PDVSA), as an attempt to divert its revenues from the Nicolás Maduro regime in order to accelerate a transfer of power to a more democratic government.
Recently, the country has been the stage of large anti-government demonstrations demanding the resignation of Maduro, who had won a re-election for another six-year term last year. However, the vote was widely viewed as fraudulent by the international community. Domestically, the legislature considered his rule illegitimate, leading its head, Juan Guaidó, to invoke a constitutional amendment and declare himself the interim president.
Beyond the huge humanitarian implications, the impact for global investors is not through equity or fixed income indices, but rather indirectly through oil prices. Venezuela is not part of major equity indices like the MSCI Emerging Markets and its weighting is only 1% in Emerging Market U.S. dollar debt indices. However, it is the country with the largest proven oil reserves in the world. It was the only non-Middle Eastern country to join OPEC when it was signed in 1960, showing how relevant it was among oil producing countries. Despite its large reserves, its actual oil production has declined rapidly over the past few years due to years of mismanagement. As a result, it went from being the 5th producer in the world in 1997 to the 11th producer in 2017. This suggests that beyond the knee-jerk increase in global oil prices last week, the lasting impact on global oil prices should be fairly muted at the moment.
For the U.S. specifically, the ties to this evolving situation occurs through its imports of Venezuela’s heavy crude for refinement and consumption in the U.S. The good news is that the U.S. has become less dependent on Venezuela over the past few years, with Venezuelan oil going from 18% of all U.S. imports to only 6% last year. The impact on U.S. gasoline prices will depend on the ability to replace Venezuelan crude with heavy crude from other countries, like other Latin American countries or Canada. If these imports are not readily replaced, it might make oil more expensive for U.S. consumers in the near term.
Thinking longer term, if the sanctions help Venezuela to transition to a more open government, they could result in an increase in its oil production levels, which could actually result in lower global oil prices. However, years of lack of investments, corruption and mismanagement in Venezuela’s oil industry means that this turnaround will not happen overnight, but it is certainly a development that is catching the eye of oil traders and investors.
U.S. imports of crude oil and petroleum products from Venezuela have been falling
% of total imports, 6-month rolling average
Source: Energy Information Administration, J.P. Morgan Asset Management. Data are as of February 1, 2019.