GP Short Notes

GP Short Notes # 673, 9 October 2022

The US: Courting dictators to keep a favourable energy market
Ankit Singh

What happened?
On 5 October, Wall Street Journal reported that the White House may ease sanctions on Venezuela and its dictator Nicolás Maduro to increase the supply of oil for the global market.
Another energy-related development was the decision by OPEC+ to reduce oil production by 2 million barrels per day. The group currently supplies around 44 per cent of the world crude oil exports. The decision to reduce productions was not appreciated by the US which expected an increase in production.

What is the background?
First, the premise of the decision. The development came after Venezuela, on 1 October, released seven American prisoners, five of which were oil executives. In the same week, Venezuela’s opposition leader’s team consulted the US for the preliminary technical service agreement reached between Petróleos de Venezuela, S.A. (PDVSA), a Venezuelan state-owned oil and natural gas company and Chevron, an oil major from the US to further expand the joint ventures in Venezuela.
Second, oil is primary and democracy is secondary. After the presidential elections in Venezuela in 2018, a sanctions policy led by the US was enforced on Maduro’s cabinet members for rigging elections. Venezuela was primarily isolated in the Americas. However, the joint venture between Chevron and PDVSA in oil production continued. The joint venture is set to expire on 1 December and the tight oil market might nudge Biden to cooperate with Venezuela while Maduro agrees to provide constructive steps in conducting elections. Parallelly, the US also restarted talks on Iran's nuclear deal so that, as an outcome, Iranian oil in the global market could offset the shortage caused by disruptions in oil supplies due to conflict between Russia and Ukraine.
Third, Biden’s climate change promise and upcoming mid-term election. When Biden was elected as the President, he announced that the US would re-join the Paris Climate Agreement. Since then, Joe Biden has taken several steps to curb domestic fossil fuel production. Stringent climate disclosure rules for the private sector and environmental regulations have affected the growth of fossil fuel-based energy production. However, the approval rating of Joe Biden has dropped way below the 50 per cent mark and any positive news on easing of oil supplies from outside will help the US populace and Joe Biden in long term.
Fourth, contracting the US economy and geopolitics. Since the onset of the Russia-Ukraine conflict, the US has imposed sanctions on Russia’s oil and gas business. The West, led by the US, has been hit by disruptions in oil supplies and that problem is further complemented by recessionary trends across the world as all central banks have been raising interest rates to cool off demand while supply stabilizes. The recalibration of supply chain networks which might result in ousting of Russian oil and gas stakes needs further support from outliers and hence the US is courting dictatorial regimes like Venezuela.

What does it mean?
First, challenges to sanctions policy. The US is in the concessionary corner now and that might give space for dictatorial regimes like Venezuela and Iran to wait further and seek maximum concessions. The sanctions policy has proven to be temporary and it might mean more than just sanctions to bring everyone on board to ensure a global recovery from the pandemic-induced disruptions. This will make the fiscal challenges for developing economies far worse as they would have to pay for uncertain import energy bills for a longer time.
Second, higher credit bills and mortgage rates will push lower-income families in the US to pay for higher bills and subsequently higher guarantee from the US federal reserve to remain the leader in driving market-led development and growth. The soft landing of the economy may remain a distant dream for the US for now. The alliances of the west may become more de-hyphenated as oil economies, most of them dictatorial, will not concede to the larger policy perspective of the US in the current development paradigm.
Third, the US might have to release more reserves from its strategic petroleum reserves until the oil dictators come in confidence with restoring supply chain disruptions. That will make the US more prone to any global disruptions and it will cause a blood bath in markets based on the speculative practices in the market.