Dr. Mamdouh G. Salameh is an international oil economist, one of the world’s leading oil experts and a visiting professor of energy economics at the ESCP European Business School in London. His research interests are economics & geopolitics of oil and energy.
On March 5, 2022, Venezuelan President Maduro met with the visiting high-level delegation of the United States at the presidential palace. This was the first bilateral talks between the two sides in many years to discuss issues such as energy security and regional stability. Some media analysts believe that the United States may relax or lift sanctions against Venezuela in exchange for splitting the alliance between Venezuela and Russia, and hopes to import crude oil directly from Venezuela to ensure its own energy supply.
In response to these problems, the center conducted an exclusive interview with Dr. Mamdouh G.Salameh on the energy issues after the conflict between Russian and Ukrainian, hoping to understand his views on the interaction between Venezuela, the United States and Russia in oil and energy and China's position.
Mamdouh G Salameh: The United States Is Courting Venezuela Again
Venezuela will be a great pillar of the global oil market well into the future by virtue of sitting on the world’s largest proven crude oil reserves of 303.8 billion barrels (bb). Venezuela also accounts for 92% of Latin America’s oil reserves. However, the United States Geological Survey (USGS) estimates that there may be more than 513 bb of extra-heavy crude oil and bitumen deposits in Venezuela’s Orinoco belt region.
In fact I can go as far as to say that Venezuela’s Orinoco Belt will be one of three regions in the world that will be producing the very last barrels of oil. The other two are the Arab Gulf region and Russia’s Arctic.
In the early 2000s, Venezuela’s crude oil production and exports exceeded 3.0 million barrels a day (mbd) and 2.8 mbd respectively. This dropped to 2.4 mbd in 2016 and to 1.2 mbd by 2021 due to a combination of factors including mismanagement of the economy, declining oil prices, the most intrusive American sanctions against it and lack of investment in its oil industry.
Recently, senior American officials visited Venezuela to meet with Venezuelan President Nicolas Maduro and his government to discuss principally a resumption of Venezuelan crude oil exports to the United States. It looks as if the United States has suddenly discovered the importance of Venezuela to the global oil market and wanted to assiduously court it. This begs the question as to what lies behind the United States’ change of heart towards Venezuela. The answer lies in the eruption of the Ukraine armed conflict and the US recent decision to ban imports of Russian crude oil and products as part of its sanctions against Russia. However, the motives behind the United States’ approach to Venezuela can only be explained in terms of the prevailing conditions in the global oil market in the aftermath of Russia’s incursion into Ukraine.
1.The Current Situation in the Global Oil Market
In 2021 crude oil prices surged to their highest level since 2014 with Brent crude going beyond $90 a barrel. Prices were underpinned by a global economy growing in 2021 at 6.3% or more than double its growth rate in 2019, a most bullish oil market since 2014 and a global oil demand which has entered a super-cycle phase, defined as a sustained period of expansion driven by robust growth in demand. As a result, Brent crude oil price hit $95 a barrel in February 2022.
The Ukraine conflict and the possibility of a disruption of global oil and gas supplies have led to skyrocketing oil and gas prices. Market concerns about sanctions on Russian oil and gas exports pushed Brent crude at one time to $132.0 a barrel. This was followed on Monday the 7th of March by the United States banning Russian crude oil imports estimated at 600,000-700,000 barrels a day (b/d). The Ukraine conflict has added some $25.0-$32.0 to the price of a barrel of Brent crude. But such rises can neither be justified by the global oil demand nor tolerated by the global economy. If they persist they will lead to a destruction of oil demand.The global oil market is currently facing a shrinking global spare production capacity resulting from underinvestment, tighter market conditions, declining global oil inventories, sanctions against Russia and a United States’ ban on Russian oil imports.
Global oil production capacity has been shrinking steadily as a result of underinvestment. Since 2019 investment in oil and gas has declined by 37% from $552 bn to $350 bn as a result of the pandemic, incessant pressure by environmental activists on the global industry to divest of its oil and gas assets, hasty policies by the European Union (EU) to accelerate energy transition at the expense of fossil fuels abetted by the International Energy Agency (IEA) and also pressure on banks not to lend investment money to the oil industry. Investments of $600 bn annually in oil and gas are needed for the next ten years to expand global production in order to meet rising global demand for oil and gas.Furthermore, the oil market is getting tighter as evidenced by a decline of an estimated 1.0 billion barrels from the global oil inventories during 2021.
Following economic and banking sanctions imposed on Russia by the United States and the EU, concerns were raised in the global oil market that they may be followed by sanctions on Russian oil and gas exports.While the United States did ban imports of Russian crude oil and gas, the EU didn’t because in so doing it will be plunged into a far worse and more destructive energy crisis than the one in which it has been embroiled since the last quarter of 2021. This would have severely impacted the EU economy and reduced its growth in 2022 to almost zero.Moreover, such sanctions would harm the economies of the United States and the EU more than it would hurt Russia’s. The impact on Russia’s economy will be muted for the simple reason that a big chunk of its oil and gas exports goes anyway to China, the world’s largest energy market. Moreover, selling a smaller volume of oil at much higher price diminishes the financial loss of Russia.
The United States is the world’s second largest importer of crude oil after China importing 9.0 mbd. Its economy is more vulnerable to oil price shocks than all the other major economies. On the other hand, the EU depends on Russian gas supplies for more than 40% of its needs and 30% for its oil needs. The combined LNG exports of the United States, Qatar and Australia and also Norway’s gas exports could barely replace Russian piped gas supplies of 200 billion cubic metres (bcm) annually to the EU and 15-16 million tonnes of LNG supplies.
It would be virtually impossible to replace Russian oil exports of 8.0 mbd composed of 5.0 mbd of crude and 3.0 of refined products in the current prevailing conditions in the global oil market. Furthermore, 8.0 mbd of Russian oil exports wouldn’t disappear into thin air. A large chunk of these exports will find its way to China and another chunk will be bought discretely by oil traders. Oil traders in the capitalist countries of the West worship money so they aren’t going to miss a chance of making more money from buying Russian discounted crude.
So what is the wisdom behind imposing an embargo on Russian crude oil exports when such an action will lead to much higher crude prices and inflict heavy damage on the global economy particularly the United States’ and EU’s economies?
Russia’s economy is virtually if not totally self-sufficient meaning that Russia doesn’t have to import anything. So despite the sizeable devaluation of the ruble against the dollar, its purchasing power inside Russia is unchanged. That is how Russia is financing its military operations in Ukraine. That is also why Russian lifting cost of a barrel is $2.8 compared with Saudi Arabia’s $3.0-$3.5. Still, the Russian economy seems to be better prepared today than it was back in 2014 when the ruble collapsed. Russia has increased its holding of foreign currencies to an estimated $635 bn in an attempt to support the ruble and the economy.
Barring Russian banks from the global SWIFT payment system has forced Russia to use its own counterpart payment method (SPFS) for domestic bank usage and potentially as a way to circumvent Western sanctions by trading with its closest ally China.
Additionally, Russia’s economic trade with China has surged from $13 bn in the early 2000s to over $150 bn in 2021, making this a significant economic hedge that will be further boosted by the latest 30-year agreement between Moscow and Beijing for natural gas supplies. Moreover, Russia has agreed to settle its new gas deal with China in an effort by the two countries to diversify away from the US dollar. China’s increasing imports of Russian oil, gas and coal look set to provide Russia with the much-needed finance to weather the global storm of sanctions.
2.China’s Position on the Ukraine Conflict
Three major issues occupy China’s strategic thinking: Energy Security, Economic growth, Taiwan and a multipolar world order. The strategic Chinese-Russian alliance enables China to deal efficiently with these three issues.
To begin with, Taiwan is a very major flashpoint that could erupt anytime between the United States and China. China is concerned that the United States may renege on the Taiwan status accord reached between former President Nixon and Chinese leader Mao Zedong during the American President’s visit to Beijing in 1972. China is bound to benefit handsomely from the Ukraine conflict. Russia’s ultimate attainment of its strategic objectives in Ukraine and security goals vis-à-vis the United States and NATO in Europe will strengthen the Chinese-Russian strategic alliance. China’s tacit support of Russia in Ukraine and its ability to help Russia withstand Western sanctions against it will eventually get a quid pro quo from Russia when the time comes for China to restore Taiwan to the Mainland.
Moreover, the economies of both China and Russia complement each other to a great extent. China, the world’s largest economy based on purchasing power parity (PPP), is wedded to Russia, the World’s superpower of energy. Also China, the world’s largest importer of food can get all its needs from Russia, the world’s largest producer and exporter of wheat and food materials.
Furthermore, China and Russia continue to work closely to enhance the petro-yuan in the global oil market at the expense of the petrodollar with the ultimate objective of undermining the US economy and weakening the dollar’s impact on the global economy.
3.Alternative Sources to Russian Crude Oil Exports
In desperation, the United States is trying to find new sources of crude oil to replace Russian crude oil exports ad its own imports of Russian crude and refined products. Its first port of call has been OPEC+. Even before the Ukraine crisis came on the scene, US President Biden has been repeatedly calling on OPEC+ to raise its production beyond the agreed 400,000 b/d monthly to no avail. Even he was considering visiting Saudi Arabia to urge it to raise its production. But Saudi Arabia said it will continue to adhere to the current OPEC+ production policies. OPEC+ still sees the global oil market as balanced despite the big rises of prices as a result of the Ukraine conflict. So it will keep whatever small spare capacity it has to use when the market becomes imbalanced.
The second alternative source is Iran. Of recent days rumours have been circulating that a new nuclear deal between Iran and the United States is very close. I am on record having been saying since the Iran nuclear negotiations started in Vienna last year that a lifting of US sanctions against Iran will never see the light of day soon or ever. The reason is that the positions of the United States and Iran are irreconcilable. The only deal Iran will accept is one on its own terms meaning a lifting of all US sanctions against it with no new limitations on its nuclear and ballistic missile development programmes. This is something the United States egged by Israel can’t accept. Iranian negotiators sense that the United States is in a hurry to reach a deal so as to focus all its energies on China and the evolving Ukraine crisis. Therefore, they will drag their feet to extract major concessions from the United States. If in the very unthinkable event that a deal is reached, the maximum additional oil Iran can initially bring to the global oil market is some 650,000 b/d being the difference between pre-sanctions and post-sanctions Iranian crude oil exports.
The third alternative source is shale oil production in the United States, although it is a spent force. Producers haven’t been able to take advantage of rising oil prices and lift their production significantly not because of capital discipline as they claim but because they can’t. This has less to do with capital discipline and far more to do with their inability to raise production by much. The reason is that the sweet spots in the shale plays have already been exhausted so shale drillers have had no alternative but to move to the less productive and more expensive to produce plays. Another reason is that well productivity has been on the decline adding to costs of production. And yet another reason is that shale drillers have far less access to capital than before the pandemic. Investors want good returns on their investments rather than reckless and unprofitable production as was the case before 2019. US shale oil production can’t rise this year beyond an estimated 200,000-300,000 b/d above its average production of 11.0 mbd in 2021.
4.The US Approach to Venezuela
Despite their harshness, US sanctions failed miserably to effect a regime change in Venezuela and to cripple the country’s economy and crude oil exports thanks to help from China, Russia and Iran. China and Russia who between them are owed more than $30 bn worth of investment have defied US sanctions and continued to do everything within their power to prevent a collapse of Venezuela’s economy and its oil industry. One of the fastest growing destinations of Venezuelan crude oil exports has been China. Moreover, China has been providing technical help to enable Venezuela to raise its crude oil production and its refining capacity while Russia has been helping with the selling of Venezuela’ s crude oil clandestinely around the world. Iran on the other hand, has been shipping diluents to Venezuela to enable its oil industry to convert the extra-heavy crude into a lighter crude for transport and refining.
Yet, without a lifting of US sanctions, Venezuela can’t attract much foreign Investments to help upgrade its oil industry and lift its crude production to its potential. Only a rapprochement with the United States could enable Venezuela to attract foreign investment. That is also why Venezuela wasn’t able to lift its production above the current 1.2 mbd though it has in the past produced more than 3.0 mbd.
The bulk of its oil exports goes to China to pay for the loans China has extended to it over the years. Venezuela can’t raise its production beyond 1.2 mbd currently because of US sanctions and lack of investments. Moreover, Venezuela won’t supply the United States with any crude even if it did have a surplus of production without a total lifting of US sanctions against it including returning ownership of PDVSA’s majority shares in the Houston-based Citigo refinery to Venezuela and unfreezing all its assets in the United States. Even if the sanctions were lifted today, it will take Venezuela at least five years to attract the investments it needs to lift production to its 2016 level of 2.4 mbd.
Russia’ s exports of some 600,000 b/d of its Urals heavy crude to the United States replaced Venezuelan heavy crude that US refineries are tooled to process. And with the banning of Russian crude exports, the United States approached Venezuela to see if it can get some of its heavy crude.
It is only natural that Venezuela wants to sell its crude around the world including to the United States and the EU. However, a lifting of US sanctions will never come at the expense of Venezuela's cooperation with China, Russia, and Iran. Venezuela will always be ever grateful to China, Russia and Iran for defying US sanctions and coming to its aid without which Venezuela’s economy and oil industry would have collapsed.
China’s support and investments are particularly welcome by the Venezuelans who see them as life-saving for both their economy and oil industry. They particularly appreciate the fact that China has been defying US sanctions as it does with Iran to both help a friend in need and also ensure that its huge investments are safe.
Editors: Li Yuhan
2022.03.22
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