Oil Conflict between the US and Venezuela

Introduction

Although most people assume they are in the hands of the large private transnational oil corporations, the centrally is true. The world’s oil reserves and production are in the hands of national-owned oil companies. The state-owned companies control 77 percent of the world oil reserves, which have no private equity. This percentage of the oil-controlled firms is likely to carry on growing, essentially due to the demographics of oil. As oil deposits continue to be exhausted in the developed, wealthy countries, the oil reserves deposits are now mainly being found in the developing countries, and where oil inevitably belongs to the state.

Another emerging trend is nationalization, a political phenomenon found mainly in the Latin American region of Central and South America. This is being led by the populist presidents of Bolivia and Ecuador, who have the backing of their local populace, who have long bemoaned the lack of benefit from the oil wealth in their countries. Private producers are forced to accept government control of their operations. Firms resisting the control of their operations like Exxon Mobil and Conoco-Phillips, risk the government taking over their holdings or simply being nationalized. Venezuela’s economy is largely centered on oil production. In 2006, the government nationalized oil fields managed by foreign companies. This resulted in an increase of the state share-holding in these firms from 40 percent to 60 percent. Hugo Chavez, the Venezuelan president, has also asserted control of the country’s formerly independent largest oil producer PDVSA (Petróleos de Venezuela, S.A.).

Venezuela

Venezuela is the world’s fifth-largest oil-exporting country, with the largest reserves of conventional oil (light and heavy) in the western hemisphere and the largest reserves of non-conventional oil (extra-heavy crude) in the world. Oil is the country’s major export earner accounting for over 80 percent of the total export revenue. Half of the government’s budget is made from oil exports, and the third of the country’s gross domestic product (GDP) is from the oil industry. The recent surge in world oil prices has been a boon to the country’s economy, and Venezuela president Chavez has expanded his social expenditure programs, strengthened business ties with other countries to shore up his international standing. Venezuela constantly remains at loggerheads with its biggest trading partner, the United States. The country has threatened to cut off oil exports to the U.S. due to a long-running ideological and political conflict.

Despite the fact that Chavez has threatened to discontinue exporting Venezuelan oil and refined fuel products to the United States, its largest oil-trading partner, experts say a considerable temporary transfer in oil dealings involving Venezuela and the United States is improbable. The United States and Venezuela have conventionally been friendly. This has been characterized by a significant trade and asset affiliation and collaboration in fighting the making and transport of illicit drugs. In recent times, there has been strain involving the two countries since the choice of Presidents Hugo Chavez of Venezuela and George W. Bush of the United States. The animosity between the two leaders has been mainly due to the Venezuelan president’s open friendship and considerable trade rapport with U.S. old foe and Cuba’s president, Fidel Castro. Chavez has continuously undermined the U.S. policy of isolating Cuba. He has also incurred the wrath of the United States by using his organization of oil-producing countries (OPEC) membership platform to engage the U.S. Achilles’ heel, i.e., raising the oil price, and as a price hawk advocated for higher prices. Chavez further aggravated the feud by visiting Saddam Hussein when he made a ten-day tour of OPEC countries under the auspices of the OPEC presidency immediately after the Gulf war.

U.S. Oil Imports Dependency

The United States’ hefty appetite and heavy dependency on oil imports, the proximity of Venezuelan oil, and the un-ending Middle East conflicts have made the two countries have uneasy interdependency even in the face of their continuous open antagonism. The United States consumes over 19.6 million barrels of oil per day, or 7.2 billion barrels annually. The most significant use is the production of motor vehicle gasoline, accounting for 45 percent of the petroleum products, the distilled (distillate) fuel oil like diesel accounting for 19 percent, and liquefied petroleum gases (LPG) accounting for ten percent, aviation fuel at eight percent, and a variety of other users with a combined total of eighteen percent. This consumption accounts for more than a quarter of the world’s total consumption. It is predicted that the United States will exhaust its own supply of oil within a maximum of forty years. However, in spite of this gloomy prediction, the demand for oil is continuously rising due to the ever-growing population. The rise in consumption is linked to factors like high population growth, newly discovered use for oil products, and increased demand due to the rise in the population standards of living. The rise in the rate of consumption is pegged at approximately two percent annually (Churchill, 2000).

Oil Reserves

The United States initially produced sufficient oil to meet its own requirements up to 1970. Henceforth the country was forced to begin importing additional oil to cater to the diminished supply lines. By the year 2000, the oil production was averaging at 5.8 million barrels per day. The prospects of fresh major oil discoveries are dismal. The ban on offshore drilling has increased the demand for foreign imports, and the prospects of offshore sea drilling are further tapered by the high costs involved due to the very deep waters involved. These deposits are concentrated along the Gulf Coast onshore and offshore, extending inland through Texas, Oklahoma, and eastern Kansas. In Alaska, fields prospect along the central North Slope.

The International Energy Agency (IEA) recorded only twenty-one billion barrels of proved oil reserves by 2000 in the United States. However, the United States consumes approximately 6.6 billion barrels annually. This means that the reserves can only last for a maximum of three and half years in lieu of any imports from other countries. The major reserves, constituting 84 percent, are mainly found in four states. These are Texas with twenty-five percent having both onshore and offshore, Alaska with twenty-four percent, California with twenty-one percent, and Louisiana with fourteen percent of the reserves. The reserves have been steadily declining since 1990, i.e., by about twenty percent. Fresh discoveries have been concentrated almost exclusively along the Gulf of Mexico and Alaska (i.e., 321 million barrels). Any other discoveries were mostly on the existing oil fields, extensions of the old fields, or new reservoirs discovered alongside (i.e., 404 million barrels). The United States has huge areas with oil shale deposits sometimes mistaken for normal oil reserves. The oil shale deposits are, however, not the same as the conventional oil fields. The various methods used for the extraction of crude oil from the oil shale are ineffective. Another type of oil deposit, oilsands, are found in Canada, containing over 1.7 trillion barrels of oil. However, this type cannot be recovered by the conventional standards of good drilling and has to be strip-mined. The oil is extracted by a water flotation process after it is dug up from the ground. Then the sand waste has to be properly disposed of. This tedious process means that it takes two barrels of oil to produce one barrel, or the cost of production doubles in the process. The other problem associated with oilsands is it’s usually too deep to be reached by the workable method of strip-mining. However, new methods of extracting the deeper deposits are experimented with, though costly. Therefore, Canada’s oilsands are not feasible for commercial production purposes until the world’s supply of conventional oil is nearly depleted.

U.S Oil Imports Dependency

The United States oil imports are at their highest now, accounting for approximately 57 percent of the country’s domestic expenditure. U.S. imports over twelve million barrels daily, now costing over sixty dollars a barrel. Researchers using scientific approaches have defined programs to curb oil dependence in the U.S. This stratagem is passed to the Department of Energy on suitable volumes for the Strategic Petroleum Reserve and contributed to National Academy of Sciences studies on the potential to enhance gasoline fuel economy while producing broad estimates of the expenditure for oil consumption. The United States of America’s growing reliance on overseas oil represents an interconnected amalgamation of factors that collectively produce financial, political, and security tribulations of the utmost sort. Oil supply is progressively more influenced by a diminutive number of countries that exercise a near cartel over global production. An unquenchable demand, determined in part by the vigorous expansion of Asian economies, makes United States business and consumers even more susceptible to the latest distress due to higher oil prices. Whether the U.S. can eliminate this susceptibility will depend on significantly reducing the quantity of oil imported and consumed, an ambitious objective attached directly to making obtainable, reasonably priced, and realistic oil substitutes.

The United States oil dependency is, therefore, at a critical stage. When the U.S. presidential candidates, Sen. John McCain and Sen. Barack Obama, debated on their planned energy policies on the live presidential debates, they both agreed on the need for the United States to do away with dependence on Venezuelan and Iran. Although it’s unlikely that the goal can be immediately met, the idea will likely be met with skepticism by the concerned parties. They gave a maximum target of ten years to achieve this objective. This highlights the tight grip the United States is held by the oil imports and how critical energy issues are.

Venezuela Oil Export Dependency

Venezuela is also very dependent on oil production for its gross domestic income. The oil industry has influenced every aspect of the country, from its history to economics, politics, and culture. The economic prospects for Venezuela remain exceedingly reliant on high oil prices and petroleum oil exports. The country’s oil production is still dominated by foreign investors in the hydrocarbon sector, encouraging multi-billion funds in heavy oil production, reopening of oil fields, and investment in various petrochemical joint ventures. There are over sixty foreign companies from fourteen different countries in the country’s various oil sectors. The country’s national oil corporation Petroleos de Venezuela, S.A. (PDVSA), and overseas oil companies have signed thirty-three to commission contracts for secondary fields. There are new laws concerning natural gas and petrochemicals that are additionally opening up the oil sector.

Petroleos de Venezuela, S.A. (PDVSA)

Venezuela’s nationalized oil corporation, Petroleos de Venezuela, S.A. (PDVSA), is now a fully-fledged social and political body. The company oversees oil exploration, oil production, and export, as well as the exploration and production of natural gas. It is the world’s third-largest oil company, after Saudi Arabia’s Aramco and U.S. Exxon Mobil. PDVSA is like a ‘state within a state’ devolving from government and functioning largely as its own entity controlling the country’s major resources. It has acquired various affiliated subsidiary firms all over the world, including CITGO, a leading world and U.S.-based oil refinery. Under the Chavez government, PDVSA HAS expanded its mandate to include Chavez government social or community priorities under the Chavez Bolivarian Revolution. It’s required to spend a minimum of ten percent of its annual investment budget on these programs. The funds are channeled through the National Development Fund (Fonden), a subsidiary investment fund set up to facilitate the social programs. The government control of PDVSA has enabled Chavez to practice his political and economic agenda (Stephanie Hanson, 2008).

The oil trade is predominantly essential to Venezuela for the reason that a huge quantity of the country’s productivity comes directly from it. By 1992, the oil trade was accounting for a fifth of Venezuela’s gross national product (GNP), two-thirds of the central government revenues, and four-fifths of their external trade earnings. The balance of income from the foreign revenues amounted to over twelve billion dollars. Venezuela’s oil trade output amounted to an average of 2.334 million barrels daily in crude oil and over thirty-seven thousand barrels daily of condensates annually. This amounted to a total of oil product exports of approximately 2.1 million barrels daily in Venezuela by 1992. Other reports indicate that the oil trade generates half of the country’s high economic growth, which now stands at eight percent in 2008.

U.S. Market for Venezuelan Oil

The United States is the principal purchaser of Venezuelan oil, accounting for at least a minimum of 65 percent of all Venezuelan oil exports. Venezuela was leading Saudi Arabia as the principal exporter of oil into the U.S. market during the first period of 1995. This appreciation of the Unittates’ dependency on the Venezuelan oil imports was fueled by apprehension regarding oil price hikes in Mexico and Middle Ea, stern countries. The U.S. however, has passed regulations in reformulation, which have been resisted by Venezuela to ensure the imports are standardized to conform to the U.S. company standaa rds. Venezuela has filed petition with the General Agreement on Trade and Tarithe ffs (GATT), arguing that United States was just using environmental regulations to gain an unwarranted and prejudiced trade advantages. The state corporation Petroleos de Venezuela (PDVSA) projemightd that the regulation may have an outlay on Venezuela of $150 million lost revenue to U.S. The Venezuela’s petroleum exports to the United States are on the decline as the latter tries to untangle the country from its heavy dependency on the Venezuelans. The United States has now been gradually turning to its neighbors in the north and south of the border, i.e., Canada and Mexico respectively, for its energy products imports (Cattaneo, Venezuelas Loss, Canada’s Gain, 2007).

Canadian Oil Alternative

The rising value of heavy oil has been a boon to the Canadian heavy, which is usually sold at a discount to light oil due to the lack of appropriate refineries capable of processing it. The proximity of the refineries at the Gulf Coast in the United States makes it inaccessible to major consumers. However, the generous discount which ranges from forty to fifty percent has gradually gone down as the demand rises to a minimum of twenty-five percent in 2005. This has mainly been influenced by Venezuelans erratic oil trade policies, hence boosting the demand for reliable Canadian provisions, the formation of pipelines, and new refinery plants investments in the U.S. These moves are being viewed as permanent to ensure that the supply volatility is reduced in the future. The heightened prices for the heavy oil products has led to less pressure to build upgraders for the oil sands projects, as government regulations concerning environmental issues like greenhouse emissions, projected higher taxes and royalties, and the soaring costs of building Canadian plants (Cattaneo, 2007).

Venezuelans are to blame for the continued loss to Canadian heavy oil of their biggest market due to president Chavez’s harrying of the mainly U.S and Western oil companies. Offering his country’s oil to other countries has also made Venezuela vulnerable as they rely on the specialized United States oil refineries. The country’s heavy oil production is also declining by approximately half a million barrels per day during the last three to four years or since 2000, according to Enrique Sira, the leader of Cambridge Energy Research Associate’s Andean Energy Advisory Service. This is attributed to the nationalization policy adopted by the Chavez government, resulting in losses of expertise and technology, mainly from the departing U.S. companies. This declining trend is projected to continue (Cattaneo, Venezuelas Loss, Canada’s Gain, 2007).

Venezuela Alternative Trade Partners

Venezuela has, however, diverted its oil exports to Asia, in India and China markets. The decline in production from the largest oilfield in Mexico, Cantarell, and the erratic production cuts by the OPEC countries has, however, continue to ensure the United States oil industry is vulnerable while keeping the Venezuelan oil import crucial to the U.S. market. Chavez is therefore viewed as a threat to national security and the U.S. and world oil production. According to James Williams, an energy analyst at WTRG Economics, Venezuela’s track record of violating contracts prior to the expiry could jeopardize oil production by alienating companies intending to invest in multi-billion dollar heavy oil projects. The recent nationalization of private and corporate ventures fuelled by the Chavez government has made the firms susceptible to threats. This is driving investments from Venezuela to other investor-friendly countries (Dave Cohen, 2006).

Chavez’s open anti-Western policies have led Venezuela to actively pursue new markets. After disputing with the U.S. Exxon Mobil, Canada’s PetroCanada, and Holland’s ConocoPhillips, Venezuela has welcomed investing companies from the major emerging markets of China, India, Brazil, and also Russia. The firms willing to explore investment in Venezuela’s Orinoco region include Russia’s Lukoil, China’s CNPC, India’s ONGC, and Brazil’s oil giant Petrobras. The latter, Petrobras, announced a joint venture with PDVSA in the development of the Carabobo block in Orinoco heavy oil belt, a two billion dollar investment injection. (Cohen, 2006)

Hugo Chavez, who is no democrat, has concentrated the authority of the government in his own administration, expropriating budgets from urban councils, strengthening the police force, and stuffing the Supreme Court with associates. He is trying to establish a coalition of countries who are opposed to the United States with leftist authoritarianism governments. This confederation is sustained by petroleum and integrated by a makeshift nationalistic philosophy. This professes a future of conflict fueled by these nations. The Latin American countries allied to Chavez are also rich in resources and similarly endowed with high poverty levels. These make them easy prey for their populist leaders (Wilpert, 2003).

Measures to Encourage Change in Venezuela

For the United States to avert unnecessary conflicts as well as a potential fuel crisis, it ought to help direct Venezuela back in the direction of the democratic system, widen alternative sources of fuel, and take on Latin America more effectively to assist partners in reinforcing elected institutions and market economies. To achieve this, the United States should do the following:

Encourage a free and fair electoral process in the Latin American countries: the U.S. should support the independent groups and agencies advocating for democratic change in the region. This includes the regional umbrella South American organization, the Organization of American States (OAS), European Commission observers, the United Nations, the Carter Center, and a range of observers from many other countries and wide-reaching organizations which are known to be compassionate to Chavez. The United States should support the observer duties while encouraging all these electoral observers to encourage proper electoral standards while supporting the Organization of American States (OAS) since it’s the most influential agency in the Latin American region. Discourage any type of electoral fraud by the Chavez government. Encourage pressure from both the OAS and World Bank over repercussions of defective elections.

United States Initiatives to Curb Oil Dependency

Other methods aimed at encouraging democratic forms include:

  1. Discouraging the Chavez governments from refusing to vacate office in case of electoral defeat: the United States should apply sustained pressure on the government whether they win the election or not to ensure democratic processes are followed.
  2. The Venezuelan government should be encouraged by the U.S. to initiate economic and political reforms.

The other measure the United States government should also initiate:

  1. Increased fuel tax to discourage overconsumption. Although politically inexpedient, a modest fuel tax of up to five dollars can be a deterrent to overconsumption and an incentive for the development of energy-saving technologies. The longtime implications of a gasoline tax (combining federal and state taxes) would have far positive social costs than currently experienced. These include local and global air pollution, traffic congestion, reduction in road accidents, etc. The reduction in consumption and oil dependency on the country would be substantial in the long term.
  2. Another measure by the U.S. government aimed at energy conservation should be to promote elevated fuel-saving standards on new commuter vehicles. The present standards are at 27.5 miles gallons for cars and 20.7 miles per gallon for light-heavy trucks (includes; minivans, SUVs, and pick-ups). Tight control standards can persuade manufacturers to technologically adjust the vehicle designs in a multiplicity of ways hence improving fuel efficiency. The disadvantage of this measure, as opposed to higher taxation, is that it encourages people to utilize fuel more.
  3. Another measure is to give subsidies for the development of unconventional energy technologies (including hydrogen and electric vehicles and hybrid gasoline-electric vehicles). This can be done through government or private initiatives. The fuel-efficient methods can drastically reduce oil import dependency as they mostly source from natural resources.
  4. The other measure should be the more vigorous use of the U.S. Strategic Petroleum Reserves (SPR) when there are relentless oil markets disruptions and upheavals, as has been much the case in 2008. These actions can be coordinated with the other large oil-importing countries. Oil corporations should be mandated to budget for the unexpected supply disruptions risks in their inventory and other strategies. The U.S. Strategic Petroleum Reserve (SPR) can be the way to cool and soothe oil markets in the course of judicious, executive focussed releases of the emergency crude oil stocks. The number of reserves in the SPRs by 2003 amounted to approximately six-hundred million barrels of oil. This was an approximate fifty-two day’s quantity in lieu of imports. The consumption levels have appreciated sharply vis-à-vis the available SPRs, as the strategic planned ‘coverage’ of 115 days was surpassed by 1985. The country has the capacity to reserve seven hundred million barrels. However, legislation passed in 2003 raised the capacity to one billion barrels. (Darmstadter, December 2003).

Alternative Sources of Energy

Alternative sources of energy have been touted as the best future course for energy consumption solutions. Other sources include solar energy, where the use of abundant solar energy is an economical way, wind energy is widely used in Europe to counter reliance on fossil oil. The other controversial method is nuclear energy, which is vehemently opposed by the global conservation groups. Although it has the potential of solving all the world energy problems, atomic energy is wrought with negative byproducts, mostly through radiation, and it still lacks fail-safe technologies as it is regarded as being in an embryonic stage incapable of guaranteeing unanticipated hazardous repercussions.

The United States has failed to implement its market power (i.e., monopsony power), as its petroleum expenditure is a substantial fraction of the total world oil spending. Any slight demand fluctuation in the United States has a systematic effect on the world oil markets. Similarly, price increments (both marginal and inframarginal) tend to raise U.S. domestic petroleum prices. The cost in the U.S. economy is high due to loss in transfer of dollars as over 60 percent of the oil suppliers are foreigners. This further illustrates the need for the United States to seek control of the oil market using the Strategic Petroleum Reserve (SPR) to control the oil prices as any drop in U.S. demand can force the oil prices down.

Conclusion

Idealistically, United States can engage its trading partner, Venezuela, towards negotiating an accommodative pact that will end the incessant antagonisms. This can be done in the lines adopted to accommodate Venezuela’s neighbor, Colombia, which was the major U.S. drug source where the Coca-plants were cultivated openly. Using both economic and social programs, Columbia has been effectively engaged and become an ally to United States efforts to fight the drug cartels. Venezuela’s ideological differences with the U.S. revolve around the control of the oil supply. Both countries, as they are very dependant on each other, can work out an accommodative way through a partnership involving both country’s resources. The U.S. can be given oil mining concessions in Colombia while ensuring appropriate returns to the communities in line with the programs initiated by Chavez and further poverty elimination programs. Venezuelan sovereignty should be guaranteed by ensuring the strategic political control of the disbursement is in the hands of the locals.

If the world’s natural resources persist in being exploited at the current rate, total energy resources will be exhausted. Without changes in lifestyles habits and a curb in population growth that demands more or the discovery of new energy sources, the present conservation won’t save the diminishing oil sources.

The U.S.’s unquenchable thirst for oil continues unabated; the United States gradually will be forced to mine petroleum from unusual sources. Oil sands and heavy oils are now in the initial stages of development in Canada and Venezuela. The continued requirements have led to oil shale, coal, or methane for liquid fuels as alternatives. The use of low-carbon energy sources or even hydrogen fuel is another alternative. However, this will be unable to sustain the required quantities for a global economy. Fresh technologies are therefore crucial to determine the distribution and use of energy resources. In view of sufficient resources for the U.S. and the world oil consumption demand, fossil oil still remains the cheapest and best alternative as an energy source. This means that Venezuela and OPEC remain the lowest producers of oil and will keep holding the key to energy sources for decades while supplying more than a third of the world market. The United States and Venezuela should therefore curb their antagonistic tendencies and forge a closer union towards each other as the energy and other financial crisis currently gripping the world can ill-afford the distraction. These actions eventually assist in the stabilization of the volatile oil markets hence keeping the fluctuating price at sustainable levels.

Reference

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Cohen, S. J. (2004). Minimizing Mischief in Venezuela,. Backgrounder , pp. 1-9.

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Darmstadter, I. W. (2003). The Costs of U.S. Oil Dependency. Resources for the Future. , 03–59.

Dave Cohen. (2006). Venezuela Tightens Grip. Christian Science Monitor Online. Web.

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