U.S. Oil Imports at Risk

Venezuela has provided about 11% of U.S. oil imports, roughly 1.2 mb/d. Two trends are putting that supply at risk. The first is Venezuela’s increased commitment to sell its oil to Cuba, to China, and to other non-Japanese Asian countries. This commitment may be partially one of political comradeship, but it also is based on Venezuelan debt to certain Asian countries.

The second is the decline in Venezuelan production that has come from the increasing financial chaos and expropriation activities caused by its virtual dictator, Huge Chavez. I think Chavez and his plan are imploding. Continuing oil production declines of perhaps increasing magnitude can be expected to result from the continuing take-over by Chavez of foreign owned and operated drilling and supply companies. Chavez has neither the capital nor the expertise to operate this industry himself. Here is a recent report from Bloomberg:

Venezuela Oil Shipments to Cuba Rose by 32%, Asia Sales Doubled

By Steven Bodzin

June 9 (Bloomberg) — Venezuela’s shipments of crude oil and refined products to Cuba gained 32 percent last year and sales to Asia doubled under President Hugo Chavez’s strategy of diversifying the country’s oil sales to rely less on the U.S.

Sales to Cuba climbed by 28,000 barrels a day to 115,000 barrels a day, state oil company Petroleos de Venezuela SA, or PDVSA, said in an annual report on its Web site late yesterday. Sales to Asia gained by 223,000 barrels a day to 422,000.

Cuba pays for much of its Venezuelan oil through sending thousands of doctors, sports trainers and other advisers to Venezuela and its allies. Cuba received twice as much crude oil in 2008 as a year earlier as a joint venture with Venezuela restarted a refinery in the Cuban city of Cienfuegos.

Most of PDVSA’s Asian shipments went to China, India and Singapore, with sales to Japan falling to zero, the company said. Venezuela is paying off $8 billion in loans from the China Development Bank and $3.5 billion in loans from Japan’s Mitsui & Co. and Marubeni Corp. with oil and related products.

To contact the reporter on this story: Steven Bodzin in Caracas at sbodzin.

Last Updated: June 9, 2009 09:29 EDT

In addition to decreased supplies from Venezuela, the U.S. should expect continuing declines in imports from Nigeria and Mexico, as I recently discussed. Nigeria is being consumed by an internal war; Mexico can’t drill its way out of continuing decline rates, particularly at Cantarell but also, coming next year, in other fields. Canada is not in a position to increase its exports south of the border given recent cutbacks in production capacity investments. These are four of the top five suppliers to the U.S. That essentially leaves OPEC to make up the difference.

One implication: longer supply lines, and thus more demand for oil shipping capacity. The increased shipping demand should come both from the longer supply lines going into the U.S. and the longer supply lines going into China and other growing Asian economies from Venezuela and elsewhere.

Constrained U.S. imports could help support the WTI price as a declining U.S. dollar keeps the oil price propelled north. Eventually I think this oil rally will have a major correction. I imagine Obama is putting as much pressure as he can on the Saudis to up production and I would expect OPEC to react to higher oil prices by increasing supply at some point not too far from the current $70 price. Also, EOR projects can be expected to come back on stream to increase oil supplies domestically at $70+ prices.

In sum, the current oil price boomlet is not built on a firm foundation of global supply failing to meet global demand - there is plenty of spare oil capacity that can and ultimately will be used to supply the market. In a few years that won’t still be true. But for now OPEC could eliminate supply concerns. Until it does, the squeeze on U.S. supplies seems to be providing some real basis for the rally, adding to pressure from a falling dollar.

Comments

[Amvet:]

You miss a couple of important points. (1)When we supported the military coup against Chavez and painted it as democratic when we thought that it was successful, we shot ourselves in the foot. (2) We are still punishing the Cuban people for revolting against US control. Most Latinos find this brutal bullying of the small by the big loud mouth.

We continue to be popular with the rich far-right thugs in Latin America, but among the majority our past behavior is coming home to haunt us.

Regarding oil prices, there is evidence that global crude production peaked in 2005. As that seeps into the media, the oil futures funds will push the price higher.

Pressing the Saudis to increase production is dumb. During my 5 years in Saudi Arabia, the complaint that I heard most was "Saudi Arabia overproduces our oil and sells it cheap to help the Americans stay rich and the American Government keeps the family in power".

Jun 10 01:03 PM

[ValueInvestor:]

A jump of 28,000 bbl/day to Cuba is insignificant when the US imports close to 10 million bbl/day. The big concern would be China. If Venezuela moved all exports to China instead of the US then there would be a problem.

Saudi Arabia has just started production from its giant Khurais oilfield of 1.5 million bbl/day. Saudi Arabia's spare capacity currently stands at approx 4.5 million bbl/day, last seen in 1998-2000 when prices hit the floor. This is more than enough to make up for any shortfalls by Venezuela, Mexico, etc.

We're in a world of "money talks" so if the price is high enough, Saudi Arabia would have no problem turning the tap on and selling as much as possible to the US.

Jun 10 01:16 PM

[Prudent Man...:]

It is a Free Market, to a degree. If it is "rigged" prove it.

Living in Florida on the beach where my visibility over the oceans is twenty miles on the clearest day, I do not have a problem with drilling off shore. After all, they have been drilling off the coast of Cape Cod for over fifty years without a problem. The only problems is Ted Kennedy and John Kerry, those greats fighters for the public good, fighting against windmills off of Nantucket. So much for objectivity and intellectual honesty. NIBY.

Jun 10 02:48 PM

[Chazwinners:]

As long as FL and CA and Alaska are off limits for drilling expect energy prices to only go one way...up. As Barry discovers green does not really apply to energy production (except for greenbacks) energy prices will only go one way...up. If Barry and the boys are allowed to get away with cap and trade energy prices will not only go up but poor and middle class folks won't be able to afford energy for cars or homes. We're in serious energy trouble folks and a Dem Congress will just make things much, much worse for America.

Jun 10 03:37 PM

[JasonMichael:]

USO - BUY BUY BUY!

There is no sense to this madness! BUY BUY BUY!

Jun 10 07:44 PM

[john s. gordon:]

the venezuelan crude is pretty crappy stuff anyway (sulfur + resid).
> jack

Jun 11 08:59 AM

[iggyDalrymple:]

Hey, less oil imports is what we've been striving for. Celebrate.

Jun 11 10:08 AM

[Ferdinand E...:]

Interesting and important as always, but I disagree on two things. Venezuela either has sufficient capital and technical expertise, or can obtain these things without too much trouble - especially with the oil price at $70/b. I'm also skeptical about the amount of spare capacity available, although this may not be important: I believe that some oil producers would not increase production regardless of the spare capacity they possessed.

Jun 11 10:29 AM

[ValueInvestor:]

What do you think refineries are for?

On Jun 11 08:59 AM john s. gordon wrote:

> the venezuelan crude is pretty crappy stuff anyway (sulfur + resid).

Jun 11 11:19 AM

[Alan von Al...:]

Jim is rightly worried about Pedevesa's incompetence. The workaround is Canadian tar sands at $100 bbl.

Jun 11 02:41 PM

[john boy:]

when you start quoting the oil price there is one thing you should remember. I am in the oil and gas business, i own pieces of actual oil wells. at 72.00 dollars quoted price for light sweet crude the producers only recieve 64 to 65 dollars depending on the refinery. Heaver crude has a greater spread. Saudi oil has a bigger crack spread of probably $9.00 to $10.00 dollars but they might contract to sell large volumes less than that. There isn,t that much light sweet crude produced anymore so most of the oil is not anywhere near the quoted price for producers.

Jun 11 08:21 PM