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US is 'not ready' for Chávez oil ban threat
By Andy Webb-Vidal
FT
CARACAS
Petroleumworld.com 06 15 06
A Venezuelan embargo on oil exports to the US would lead to an immediate 15 per cent surge in world oil prices and crimp economic growth in the short term, according to a US congressional investigation.The study by the Government Accountability Office, Congress's non-partisan investigative agency, obtained by the Financial Times before its release this month, warns that the US is inadequately prepared for a potential loss of oil from Venezuela.The investigation was requested 18 months ago by Senator Richard Lugar, Republican chairman of the Senate foreign relations committee, reflecting growing concerns about the reliability of Venezuelan oil supplies.Mr Lugar, who has described energy as a national security issue, introduced legislation in March that called on the US to expand its international co-operation on energy issues. The findings are likely to embolden his efforts.
Hugo Chávez, president of the world's fifth largest oil exporting country, has threatened to "cut off" oil shipments to the US if Washington continues, as he alleges, to "plot" his overthrow. Venezuela supplies 11 per cent of US oil imports while Petróleos de Venezuela (Pdvsa), the state-owned oil company, wholly owns five refineries in the US and partly owns four others through its subsidiary, Citgo.
A production shutdown by managers of Pdvsa in a political dispute with the Chávez government cut supplies to the US for three months in early 2003, just before the US-led invasion of Iraq. Disruption to these supplies, the GAO report warns, would boost oil prices significantly. "A loss of 2.2m barrels a day of crude oil for six months," the report said, "would, all else remaining equal, result in a crude oil price spike of up to $11 a barrel in the early stages of the disruption."This increase, equal to about 15 per cent over current prices of about $70 a barrel, would cut US economic output by about $23bn, the report estimated.The warnings from the GAO come as lawmakers from both parties struggle to boost US energy independence in an attempt to address public anger over high petrol prices.
A disruption or cut in Venezuelan oil supplies could also have a political impact. In the past two years, Venezuelan officials have floated the idea of selling Citgo's assets in the US. The Venezuelan-owned refineries' closure, at least temporarily, would be likely to prompt major diplomatic repercussions, the GAO warned.
"If closing the refineries was deemed a threat to US national security, Venezuela could potentially face sanctions by the US government."
The draft GAO report is still subject to final revision by the departments of energy or state.Short-term options available to Washington to mitigate a disruption to Venezuelan oil supplies, the GAO said, could include use of the US Strategic Petroleum Reserve and attempts to persuade other oil-exporting countries to increase output.
Industry experts believe, however, only Saudi Arabia, the largest oil producer, enjoys any significant amount of idle capacity. In contrast to Mr Chávez, lower-ranking Venezuelan officials have insisted that the country is a reliable supplier of oil. In the short term, Venezuela would also find it difficult to shift its oil to other countries for technical reasons.
Venezuela's heavy crude oil is suited to its refineries in the US. But Mr Chavez's suggestions that he could divert oil exports to China are unrealisable, analysts say, because Chinese refineries are not configured to process Venezuela's heavy crude.
Transport costs would also be much higher.
A cut in oil exports would also lead to economic ructions in Venezuela, a factor that casts doubt on the probability of such a scenario. Mr Chávez is dependent on oil for his political survival. Oil accounts for half of Venezuelan government income and 80 per cent of export revenue.
Nevertheless, the GAO also warned of long-term consequences for the US. "The US government's programmes and activities to ensure a reliable long-term supply of oil from Venezuela have been discontinued," it said.
Venezuela is currently almost doubling tax rates on most foreign-operated oilfields, a move that could discourage future investment and reduce output.
The GAO said Venezuelan oil production had fallen by 16 per cent since 2001, to about 2.6m b/d.
Venezuelan officials say output is above 3m b/d. Members of Congress frequently request GAO studies to help bolster the case for their policy proposals.
"Oil exporting states wield power for which we must account," he said at the time.
"Not working with these states will lead to unproductive political showdowns and conflict. Even in challenging relationships such as Venezuela and Russia, we must explore how to improve our energy dialogue."
Mr Lugar has suggested co-ordination with China and India as they develop strategic petroleum reserves and proposed a western hemisphere energy forum to promote co-operation.
FT 13 06 06
Copyright ©2006 Finacial Times. All Rights Reserved.
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