Cutting Off Oil to Spite Your Face

By Brad Zigler

The U.S. and Venezuela are fighting in the schoolyard again, though the latest tiff is actually being duked out by oil companies as government proxies.

Late last week, oil giant ExxonMobil(XOM) won temporary court orders to freeze up to $12 billion of state-owned Petróleos de Venezuela (PDVSA) assets in a dispute over compensation for a 42% stake in an Orinoco exploration project.

Venezuelan president Hugo Chavez took to the airwaves in his weekly television program to characterize the ruling - handed down by courts in the U.K., the Netherlands and the Dutch Antilles - as a manifestation of a U.S. government-backed "economic war" against his country.

Worse still, Chavez threatened that Venezuela will suspend oil shipments to U.S. if the injunctions are not overturned.

"If you freeze us, if you really manage to freeze us, if you damage us, then we will hurt you," Chavez warned. "Do you know how? We are not going to send oil to the United States."

Chavez went on to make an oil price prediction:

"Take note, Mr. Bush, Mr. Danger. If the economic war continues against Venezuela, the price of oil will reach $200. Venezuela will take up the economic war and more than one country is inclined to join us."

Venezuelan imports represent 13% of the crude oil supplied by top-tier shippers to the United States. Venezuela sends 1.23 million barrels of crude to the U.S. daily, making it our fourth-largest supplier behind, Canada, Saudi Arabia and Mexico. The U.S. relies upon Canada, Saudi Arabia and Mexico for more than half its import load of crude.

So, who does Chavez think he can enlist in his threatened embargo? Aside from Nigeria, whose oil shipments to the U.S. rival those of Venezuela, most of the other players are single-digit producers accounting for 5% or less of daily imports. Nigeria has enough problems of its own without taking on Chavez's fight.

Not that losing Venezuelan imports wouldn't hurt. It would. But $200 oil?

Chavez rather regularly threatens to choke off supplies to the U.S. So far, these have been empty protestations. Cutting off supplies may, in fact, hurt Venezuela instead of offering salve.

The only way to cut off deliveries to the U.S. is to curtail shipments altogether. Along with ExxonMobil in the Orinoco deal are U.S.-based ConocoPhillips(COP)and Chevron Corp.(CVX), together with France's Total, Britain's BP plc, and Norway's Statoil. Venezuela has to ship oil into a global market. No actual imbalance will be created unless the country stops shipping altogether.

There's little spare capacity in the oil world now, so the loss of Venezuelan supplies likely wouldn't be covered by other sources. But still, Chavez and his people would have to suffer a significant loss of revenues by cutting oil shipments.

A loss of political clout, though, is a bigger downside for Chavez. PDVSA accounts for 90% of Venezuela's foreign exchange and half of its federal tax revenue. Oil revenues, in fact, fund much of Venezuela's hugely popular social programs. Lose that and you lose your most ardent support, Mr. Chavez.

We'll soon see how this plays out; the Orinoco injunctions are being appealed by the Venezuelan government in hearings in New York and London on February 13 and 22, respectively.

Comments

[insideoil]

You miss a big point - in that while Chavez needs the money, he has bigger political needs to find an excuse for non-performance to his own voters. Politically EM is handing him a "perfect enemy", and providing just the cover he needs to hide the increasing dysfunction resulting from kicking out both in-house as well as ex-pat expertise. Army people are not trained to run plant- and it shows in reduced output.
As for encouraging the rest to follow - there are many looking for a good excuse not to put money into added production. It costs investment money just to maintain production, never mind meet the needs of a growing world economy - and others outside of the USA are clamouring for that supply.
If the oil price goes up due to reduced supply - there is not a lot to drive oil based economies to invest in more supply right now. The downside of reduced demand simply has not happened - and has been so far an empty caution. Project costs are overpriced right now - and every oil economy has been looking for ways to avoid immediate investment on added oil discovery or even downstream processing. Chavez will not find voluble support - more like just provide a convenient excuse for supporting countries to quietly overide or obfuscate past committments made on a political level.
The issues are not nearly as linear as you perceive them. I can readily believe $200/bbl - just as I believed $100/bbl when we were at $30/bbl just a few years back.