Venezuela is a pretty hot topic around these days. It seems that what’s going on in the South American country is in the news on a daily basis. The political situation of the nation has led to a lot of uncertainty regarding Venezuela’s biggest treasure: oil. It’s no secret that the reserves that lay in the countries fields are second to none and that many oil dependent countries would like to get a chance to dig into the wells. It seems that after the National Constituent Assembly came to be, that once unfathomable possibility has become quite a reality. Russia recently acquired a significant amount of oil assets from Venezuela, due in large part to the political turmoil and the very real chance of civil war in the country and the desperation shown by Maduro to get funds for his socialist (to not say dictatorial) regime. The purchase gives Putin’s government a lot of strength in the western hemisphere, with more acquisitions in the horizon. So, what does this all mean for the oil industry? Great question. Suzzanne Uhland is here with some thoughts to help clear the fog surrounding the implications of the transaction that has just gone down between Venezuela and Russia.
Russians could and probably will take over Citgo
Many Americans may not know, but Citgo is majority-owned by Petroleos de Venezuela (PDVSA) at 50.1 percent of ownership. The other 49.9, you ask? Rosneft, Russia’s most important and biggest state-owned oil company. If Venezuela fails to deliver on payments to Russia, then the Soviet giant could be given more ownership in Citgo, which would mean that Russia would control one of the biggest petroleum industry companies in the states. No biggie, right? Wrong. Having control of a controlling share of Citgo could give the Russians a whole lot of leverage when it comes to dealing with the United States, by far the most oil-dependent country in the world. In other words, being the majority owner of Citgo could very possibly help Russia avoid any sanctions from the United States regarding current and future scandals (like how they allegedly meddled and impacted the presidential elections, cough, cough).
Vladimir Putin could determine oil prices
One of the most worrying possible side effects from the deal between PDVSA and Rosneft and the probable change in ownership of Citgo is the impact it could have on oil prices. Think about this for a second. Tension stemming from different points of views on international issues leads to Russia (which now controls Citgo remember) not selling oil to the United States. That, in turn, would force Uncle Sam to look elsewhere for oil and oil rich companies to take advantage of the situation. Basic economics tells us that the more need for a commodity, the higher the price to acquire it. Oil rich countries could very easily take advantage of an oil shortage in the United States to hike up the prices of crude. The American government would surely pay for it given the current government is a heavily in favor of fossil fuels. The oil industry has been looking for a way to raise oil prices, and it may have it sooner than later thanks to Maduro’s dealing away a huge chunk of oil assets to Russia.
The United States political situation could lead towards an oil crisis
There is now a pretty high possibility that the U.S. could be heading towards an oil crisis. As long as PDVSA controlled the majority of Citgo, Uncle Sam had nothing to worry about when it came to receiving its shipments of oil. The moment Venezuela gave Russia oil assets in important projects was the moment the American oil industry began to worry a little about getting their oil. It’s very public that relations between Russia and the United States are at a very sensitive point and one bad commentary by the U.S., coupled with Russian control of oil in the west, could very well result in a kind of embargo on oil to the United States. Not getting the oil it needs may and surely will cause America to dip into its precious reserves and once they start running low, fuel prices are going to grow and the economy could very likely slow down considerably.
The oil industry and oil-dependent nations will be looking carefully towards Venezuela to see whether or not they can come out of the troubles and get the local industry back on track. If they can, oil prices will likely stay around where they are now, and it will be business as usual. However, if the opposite happens and Venezuela has to relinquish control of Citgo, we could be looking at oil prices increasing to where they haven’t been for a while. Only time will tell, and it will most definitely impact the United States, one way or the other. Stay tuned!
* Featured Image courtesy of Carsten ten Brink at Flickr.com