Venezuela crisis: Why US sanctions on will hurt

The United States announced sanctions this week that are intended to produce the most damage possible to the government of President Nicolás Maduro: the oil sector and its state company, PDVSA.

Up until now White House executive orders were only targeting government officials and certain sectors of the economy. Now new sanctions will finally hurt the one sector that is responsible for more than 90% of the government’s revenues.

Many outstanding contracts are still expected to be honoured in the coming days, but new deals with PDVSA are being subjected to restrictions. From April sanctions are expected to kick in.

A new phase in the Venezuela crisis started last month when Washington recognised opposition leader Juan Guaidó – who is the leader of the National Assembly – as the rightful head of state.

Venezuela’s Congress, which has been stripped of most of its powers by the government, says Mr Maduro is a “usurper”. Washington has embarked on an open campaign with Mr Guaidó to oust Mr Maduro.

What is Washington trying to do?

The White House is trying to do a difficult thing: to make oil revenues directly reach ordinary Venezuelans and bypass the government of Mr Maduro, which owns most of the oil industry through PDVSA.

Sanctions are meant to oust Mr Maduro and lead to new elections in Venezuela.

US National Security Adviser John Bolton says the US wants oil revenue to reach Mr Guaidó, giving his National Assembly some economic power to combat Mr Maduro.

One of the ways of doing so is through PDVSA-owned refineries based in Texas, through a subsidiary called Citgo. Mr Bolton has already met Citgo executives and there is an effort to change its management with executives appointed by Mr Guaidó’s National Assembly.

In effect the opposition is trying to set up a parallel government to Mr Maduro’s with its own cabinet.

“The oil that Venezuela currently exports to the US will be diverted to other countries and sold at lower prices. For countries like China and India, the news was akin to Black Monday. They will be able to pick up these oil volumes at great discounts,” writes Venezuelan-born analyst Paola Rodriguez-Masiu, from Rystad Energy.

She adds that the impact of sanctions will be substantially lower than the ones predicted by Washington.

Venezuela exports to the US about 450,000 barrels of oil per day, a little under half of its total output. This is the amount of new oil that will flood the markets. Venezuela’s market share in the US will be up for grabs, favouring Saudi, Mexican and Iraqi oil companies.

Mrs Rodriguez-Masiu says that so far, oil markets have largely shrugged off this new oversupply as investors have been pricing in Venezuela’s crisis for a long time.

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