Easing sanctions against Venezuela: contribution to the oil markets is still a drop in the ocean!

Oil price on Tuesday - 23/10/23
Oil price on Tuesday - 23/10/23: www.oilfutures.co.uk

The US recently eased its sanctions against Venezuela on condition that the government led by Nicolas Maduro would hold free and fair elections in 2024. The move, not unexpected, came as the tension in the Middle East rose exponentially with the possibility of the US being sucked into the current conflict between Hamas and Israel at an unexpected time.

The conflict has already pushed the price of crude oil up and its impact is already apparent on the economic front. Even the US, the world's largest crude oil producer - and consumer - has failed to shield itself from the direct impact of rising energy prices.

With the US technically at an economic war with both Russia and Iran simultaneously, it knows the energy crisis could become a political bullet to rip open the heavy armour of complacency of the American middle classes that the administration has taken for granted,  unless handled strategically - especially, when the next presidential election  is just a year away.

Although there is plenty of black gold under its feet, the US does not want to contradict itself by promoting oil drilling on home soil for obvious reasons; they came to power to do just the opposite. Instead, the administration wants other players in the world to go on producing as that is the only way to address the growing demand.

The repeated appeals made by the US to its old ally, Saudi Arabia, in this regard failed to break any ice. On the contrary, the Saudis, along with Russia, decreased the oil production that ultimately led to the price being on the rise at least by $8 a barrel.

The political opponents of the Biden administration, meanwhile, are going to make the energy crisis a major campaign issue before the elections. President Trump, for instance, has already made it clear that he would increase the oil production in the US to such a level that could result in the price being in the range of $60 to $70 - far below from its current price of $80 a barrel.

In this context, the US, as the last resort, appeared to have turned to Venezuela to boost the global oil supply. 

With easing of the sanctions, Venezuela can produce around 200,000 barrels a day to counter the shortfall of 1.5 million barrels a day due to the production cuts made by Russia and Saudi Arabia; analysts are in the opinion that the contribution by the Latin American country is still a drop in the ocean.

Oil reserves by country
Proven Oil Reserves by Country: Credit: Reddit

Although Venezuela boasts about the possession of the largest proven oil reserves in the world - even bigger than that of Saudi Arabia - its production has been hampered by deteriorating infrastructure that stems from years of underinvestment and political turmoil. The serious economic crisis and the currency that is in freefall hardly help in turning around the situation. 

That means, in the short-term, Venezuela's contribution to the global oil markets is relatively insignificant. On the other hand, if Nicolas Maduro does not honour his pledge to hold free and fair elections, the US will be compelled to reimpose the sanctions. 

By going soft on Venezuela, the US may be having secondary goals too. The US, for instance, is fully aware of the growing ties between Iran and Venezuela at military level, in addition to the investments made in the energy sector. 

Analysts are watching how the latest political developments play out  in the arena of the Iranian interests, especially as the Middle Eastern nation ominously appears at the periphery of the current war between the Israel and Hamas. 

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