It is no longer news that Venezuela is in big trouble – the Venezuelan Bolivar is not worth the paper on which it is printed and Venezuelans prefer to trade with Bitcoin instead. At the background of the economic woes ailing the South American country is a political malaise of epic proportions. Venezuela’s government headed by President Nicolas Maduro has done little to refute allegations of endemic corruption and attempts to silence opposition figures.
Now, U.S. President Donald Trump, is considering placing a ban on oil imports from Venezuela as part of efforts to sanction Maduro and his cronies. The U.S. is also considering freezing Maduro and his associates out of the U.S. financial system. The sanctions will in theory reduce Maduro’s revenue and cause him to rethink his positions. This piece over provides objective insight how such a ban could affect the economies of the U.S. and Venezuela.
A ban won’t have a material effect on oil imports from Venezuela
In 2016, Venezuelan tankers delivered 10% of U.S. oil imports and the South American nation is currently the third-largest supplier for crude oil to the countries. Interestingly, U.S. energy giants seem to have a soft spot for Venezuelan heavy crude oil and many firms have repurposed their refineries to be suited to Venezuelan crude.
However, a ban on Venezuelan crude oil is not likely to have a material effect on U.S. oil imports. Raul Boyd, a commodities strategist at Saxon Trade observes “Venezuelan crude oil production has already suffered a marked reduction since the country got into a depression and Venezuelan crude oil exports to the U.S. actually dropped to a 24-year low in the first three months of 2017.”
A ban might cause short-term headwinds for U.S. refiners
Investors and traders with exposure to the stocks of U.S refiners who buy Venezuelan crude oil might want to prepare for short-term headwinds immediately after the ban. Citgo Petroleum Corp, Valero Energy, Phillips 66, and Chevron Corp are some of the biggest U.S. buyers of Venezulan oil. If the proposed ban becomes active, many of the refiners will experience short-term disruptions in their operations. The disruptions could cause them to record lower operating profit in the quarter if the output from their refineries is reduced or if they have to scramble to get crude supplies from other parts of the world.
U.S. consumers can expect to see a marginal increase in the price of gas and diesel
On a basic level, U.S. consumers can expect the price of gasoline, diesel and other by products of petroleum to increase (albeit temporarily) if the ban on Venezuela oil goes into effect. To start with, the loss of Venezuelan crude import will reduce their output and ultimately reduce the supply of petroleum products in the market. In basic economics, we can expect the price of a commodity to increase if the supply is lower than the demand.
Secondly, the loss of Venezuelan crude imports could force U.S. refiners to search for crude supplies from the Middle East or other parts of the world. The cost of negotiating new supply deals and transporting oil from such regions will increase the costs for refiners. In essence, might be forced to increase operating costs, and they may want to pass that on to gasoline prices.”
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