Energy Security: Issues Related to Potential Reductions in
Venezuelan Oil Production (27-JUN-06, GAO-06-668).
Venezuela is the world's eighth-largest oil exporter and among
the top 10 countries in total proven oil reserves. Venezuela also
supplies about 11 percent of current U.S. imports of crude oil
and petroleum products and wholly owns five refineries in the
U.S. Consequently, Venezuela is a key player in the future energy
security of the United States and the world. The current global
oil market is tight and may be more susceptible to short-term
supply disruptions and higher and more volatile prices. Recently,
tension between Venezuela and the United States has caused
concern about the stability of Venezuelan oil supplies. On
several occasions, Venezuela's President has threatened to stop
exporting oil to the U.S. or to close Venezuela's U.S.-based
refineries. In this context, GAO analyzed: (1) how Venezuela's
crude oil production and exports of crude oil to the U.S. has
changed in recent years, (2) the potential impacts of a reduction
in Venezuelan oil exports to the U.S., and (3) the status of U.S.
government programs and activities to ensure a reliable supply of
oil from Venezuela. Commenting on a draft of the report, the
State and Commerce Departments generally agreed with the report,
but DOE contended that the report presents an "alarmist view" of
U.S. energy security. We disagree and believe the report presents
a contextually balanced treatment of the issue.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-668
ACCNO: A56019
TITLE: Energy Security: Issues Related to Potential Reductions
in Venezuelan Oil Production
DATE: 06/27/2006
SUBJECT: Crude oil
Energy supplies
International relations
Oil importing
Petroleum products
Petroleum refining facilities
Oil resources
Strategic Petroleum Reserve
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GAO-06-668
* Results in Brief
* Background
* Venezuela Has Been a Key Player for Almost a Century
* U.S. and Other Foreign Companies Have Long Been Involved in
* Political Situation in Venezuela
* Involvement of International Organizations
* Venezuelan Government Actions Have Decreased Crude Oil Produ
* Venezuela's Total Crude Oil Production Has Fallen since 2001
* Declines in Production by PDVSA Have Been Partly Offset by I
* Venezuela's Exports of Crude Oil and Refined Petroleum Produ
* Future Venezuelan Production Is Uncertain
* A Drop in Venezuelan Oil Exports Would Have Worldwide Impact
* A Sudden Drop in Venezuelan Oil Production Would Have Signif
* A Venezuelan Oil Embargo against the United States Would Hav
* Closure of Venezuela's U.S. Refineries would Increase U.S. P
* U.S. Government Programs and Activities to Ensure a Reliable
* U.S. Programs and Activities to Ensure a Long-Term Supply of
* Oil Production Technology and Information Exchanges between
* Negotiations for a Bilateral Investment Treaty Ceased in 199
* The United States and Venezuela Participated in the Multilat
* Relations between the United States and Venezuela Have Becom
* The U.S. Government Has Options to Mitigate the Impacts of S
* Agency Comments and Our Evaluation
* GAO Contact
* Staff Acknowledgments
* GAO's Mission
* Obtaining Copies of GAO Reports and Testimony
* Order by Mail or Phone
* To Report Fraud, Waste, and Abuse in Federal Programs
* Congressional Relations
* Public Affairs
Report to the Chairman, Committee on Foreign Relations, U.S. Senate
United States Government Accountability Office
GAO
June 2006
ENERGY SECURITY
Issues Related to Potential Reductions in Venezuelan Oil Production
GAO-06-668
Contents
Letter 1
Results in Brief 5
Background 8
Venezuelan Government Actions Have Decreased Crude Oil Production, but
Exports to the United States Have Changed Little 13
A Drop in Venezuelan Oil Exports Would Have Worldwide Impacts, while
Impacts of a Venezuelan Embargo against the United States or Closure of
Its U.S. Refineries Would Be Felt Primarily in the United States and
Venezuela 22
U.S. Government Programs and Activities to Ensure a Reliable Long-Term
Supply of Crude Oil from Venezuela Have Been Discontinued, but the
Government Has Options to Mitigate Supply Disruptions in the Short Term 28
Agency Comments and Our Evaluation 37
Appendix I Objectives, Scope, and Methodology 40
Appendix II Comments from the Department of Commerce 43
Appendix III Comments from the Department of Energy 44
Appendix IV GAO Contact and Staff Acknowledgments 46
Table
Table 1: Results of Analyses and Studies of Impacts of a Sudden Disruption
of Crude Oil Production and Exports 25
Figures
Figure 1: Venezuelan Oil Production (2001-2005) 15
Figure 2: Foreign Company and PDVSA Production of Venezuelan Crude Oil,
2001-2005 18
Figure 3: Venezuelan Exports of Crude Oil and Refined Petroleum Products
to the United States, Excluding the U.S. Virgin Islands, 2001-2005 19
Figure 4: Changes in Wholesale Conventional Regular Gasoline Prices in the
U.S. Gulf Coast following Hurricanes Katrina and Rita 28
Abbreviations
DOE Department of Energy
EIA Energy Information Administration
GDP gross domestic product
OPEC Organization of the Petroleum Exporting Countries
PDVSA Petroleos de Venezuela S.A.
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separately.
United States Government Accountability Office
Washington, DC 20548
June 27, 2006 June 27, 2006
The Honorable Richard G. Lugar Chairman, Committee on Foreign Relations
United States Senate The Honorable Richard G. Lugar Chairman, Committee on
Foreign Relations United States Senate
Dear Mr. Chairman: Dear Mr. Chairman:
The United States imports about 13 million barrels of crude oil and
refined petroleum products each day, or about 65 percent of its total
daily consumption. Venezuela is the world's eighth largest crude oil
exporter and supplies about 1.5 million barrels per day of crude oil and
refined petroleum products, such as gasoline and fuel oil, to the U.S.
market, comprising about 11 percent of current U.S. imports. In addition,
Venezuela ranks among the top 10 countries in the world in the size of its
proven oil reserves-oil that has been proven to exist in the ground and
could be produced. Venezuela is also one of the founders and an
influential member of the Organization of the Petroleum Exporting
Countries (OPEC), whose 11 members control over three-quarters of the
world's total oil reserves and can greatly affect world oil prices.
Consequently, Venezuela is a key player in the future energy security of
the United States and the world. The United States imports about 13
million barrels of crude oil and refined petroleum products each day, or
about 65 percent of its total daily consumption. Venezuela is the world's
eighth largest crude oil exporter and supplies about 1.5 million barrels
per day of crude oil and refined petroleum products, such as gasoline and
fuel oil, to the U.S. market, comprising about 11 percent of current U.S.
imports. In addition, Venezuela ranks among the top 10 countries in the
world in the size of its proven oil reserves-oil that has been proven to
exist in the ground and could be produced. Venezuela is also one of the
founders and an influential member of the Organization of the Petroleum
Exporting Countries (OPEC), whose 11 members control over three-quarters
of the world's total oil reserves and can greatly affect world oil prices.
Consequently, Venezuela is a key player in the future energy security of
the United States and the world.
Most of Venezuela's crude oil that is not consumed domestically in
Venezuela is exported to the United States. The United States is a natural
market for Venezuelan oil because it is so close-about 5 days by tanker to
the U.S. Gulf Coast compared to about 30 to 40 days for supplies coming
from the Middle East. Moreover, Venezuela's national oil company,
Petroleos de Venezuela S.A. (PDVSA), wholly owns five refineries in the
United States and partly owns four other refineries in the United States
and U.S. Virgin Islands, either through partnerships with U.S. companies
or through PDVSA's U.S. subsidiary, CITGO, Inc. These refineries are
unusual in their capacity to refine large volumes of the heavy, sour
(high-sulfur) crude oil that constitute a large part of Venezuela's oil
exports. Most of Venezuela's crude oil that is not consumed domestically
in Venezuela is exported to the United States. The United States is a
natural market for Venezuelan oil because it is so close-about 5 days by
tanker to the U.S. Gulf Coast compared to about 30 to 40 days for supplies
coming from the Middle East. Moreover, Venezuela's national oil company,
Petroleos de Venezuela S.A. (PDVSA), wholly owns five refineries in the
United States and partly owns four other refineries in the United States
and U.S. Virgin Islands, either through partnerships with U.S. companies
or through PDVSA's U.S. subsidiary, CITGO, Inc. These refineries are
unusual in their capacity to refine large volumes of the heavy, sour
(high-sulfur) crude oil that constitute a large part of Venezuela's oil
exports.
Political strife within Venezuela and political tension between Venezuela
and the United States have caused concern about the stability of
Venezuelan oil production and exports to the United States. The election
of Hugo Chavez as President of Venezuela in 1998 signaled a major change
in how the Venezuelan government views the country's oil industry. For
example, the government took steps to shift managerial authority for
Political strife within Venezuela and political tension between Venezuela
and the United States have caused concern about the stability of
Venezuelan oil production and exports to the United States. The election
of Hugo Chavez as President of Venezuela in 1998 signaled a major change
in how the Venezuelan government views the country's oil industry. For
example, the government took steps to shift managerial authority for
Venezuela's oil resources from PDVSA to the Venezuelan Ministry of Energy
and Petroleum. The government also changed the way it deals with foreign
companies-it raised the maximum royalty rates paid by foreign oil
companies from 16-2/3 to 30 percent, established a new "extraction tax,"
raised income taxes for those companies, and instituted provisions
requiring joint ownership structures with majority shares for PDVSA.
Opposition to the new government culminated in a general strike that
lasted from December 2, 2002, until February 2, 2003, and virtually shut
down the oil sector of the economy. This strike temporarily decreased
world oil supplies by about 2.3 million barrels per day, or about 3.0
percent of total world daily oil supply, and reduced oil exports to the
United States by about 1.2 million barrels per day-equivalent to about 11
percent of total U.S. oil imports at the time. More recently, in April
2006, Venezuela seized two oil fields operated by two foreign oil
companies because the companies did not comply with new rules unilaterally
imposed by the Venezuelan government.
Instability in Venezuela's oil sector exists in a broader context of a
tightening global oil supply and demand balance. Surplus global oil
production capacity-the amount by which oil production could be increased
immediately without additional investment-was as high as 5.6 million
barrels per day in 2002, but has since decreased to only about 1 million
barrels a day; Saudi Arabia provides most of this surplus capacity.
Meanwhile, demand for crude oil is growing rapidly in China and other
countries. Market tightness, along with the fact that much of the world's
supply of oil is in relatively unstable regions, may make the global oil
market increasingly susceptible to short-term disruptions and lead to
higher and more volatile oil prices. In this context, instability of oil
supply from any significant individual oil-producing country can create
oil price volatility, which can cause an economic slowdown. Studies of
past oil supply disruptions indicate that sudden increases in oil prices
can contribute to inflationary pressure and economic slowdowns. In extreme
cases, such as the large oil price increases associated with the Arab oil
embargo and Iranian revolution in the 1970s, these high prices were
associated with severe economic recessions.
Four U.S. government agencies have significant involvement in implementing
U.S. energy security policy regarding Venezuela.
o The Department of Energy's (DOE) Office of Policy and
International Affairs establishes and implements U.S.
international energy policy, and is responsible for monitoring and
analyzing world energy market developments and the international
political, economic, and strategic factors that influence these
developments; managing relevant bilateral energy relationships;
and ensuring protection of U.S. interests in bilateral and
multilateral treaties and obligations that affect energy services,
commodities, and technology. Also, according to DOE officials, the
office holds dialogues with energy producers, monitors national
and global energy security, and serves as the U.S. lead in
coordinating oil supply disruption-response issues and measures
with the International Energy Agency. The Office of Fossil Energy
works with various countries through bilateral agreements to
identify areas of mutually beneficial collaboration in promoting
and developing fossil energy technologies. These agreements also
facilitate relationships that may lead to commercial development.
The Office of Fossil Energy also manages the U.S. Strategic
Petroleum Reserve, which is a U.S. stockpile of about 700 million
barrels of light crude oil maintained by the federal government
for use in the case of a major disruption of oil supplies to the
United States. DOE is also responsible for collecting and
analyzing data and information through its Energy Information
Administration (EIA).
o The Department of State's Office of International Energy and
Commodity Policy is responsible for coordinating U.S.
international energy policy, participating in dialogue with energy
producers, and monitoring national and global energy security. The
Department of State and DOE, in conjunction with other
stakeholders, advise the National Security Council on energy
security issues, including the potential impacts of oil supply
disruptions on the U.S. economy and on possible actions that could
mitigate these impacts.
o The Department of Commerce's Office of International Trade
Administration plays a role in advising U.S. business interests
seeking to invest in Venezuela's oil sector.
o The Office of the U.S. Trade Representative and Department of
State co-lead the negotiations of bilateral and multilateral
treaties, which may contain specific aspects that affect energy
security, trade, and investment.
Until the strike in the winter of 2002-2003, the United States and
Venezuela had steady diplomatic contacts with respect to oil.
Since then, the relationship between the two countries has become
strained. On several recent occasions, Venezuela's President has
threatened to stop exporting Venezuelan oil and refined petroleum
products to the United States. He also has made statements
regarding the possible sale or closure of Venezuela's refinery
interests in the United States. Furthermore, Venezuelan officials
have repeatedly made statements that they are trying to develop
new markets for their crude oil.
In the context of effects on U.S. oil supplies, we addressed the
following questions: (1) How has Venezuela's production of crude
oil and exports of crude oil and refined petroleum products to the
United States changed in recent years, and what are the future
prospects? (2) What are the potential impacts of a reduction in
Venezuelan oil exports, a Venezuelan embargo on oil exports to the
United States, or sudden closure of Venezuela's refineries in the
United States? (3) What is the status of U.S. government programs
and activities to ensure a reliable supply of oil from Venezuela
and to mitigate the impacts of a supply disruption?
We used a number of methodological techniques to address these
questions. To address the first objective, we reviewed studies and
analyses of the Venezuelan oil sector and its history and met with
officials of numerous U.S. oil companies and other oil companies,
industry experts, and federal agency officials. In addition, we
visited Venezuela and met with the U.S. Ambassador and embassy
staff; Venezuela's Minister of Energy and Petroleum; PDVSA
officials, including the president of the company and a number of
board members and senior managers; the Venezuelan Auditor General;
members of the financial community; and other individuals with
expertise in the Venezuelan oil sector. Both in the United States
and in Venezuela, we spoke with numerous former PDVSA employees,
executives, and directors, and oil company officials. We also
collected, evaluated the reliability of, and analyzed data on
Venezuelan production, consumption, and exports of oil and
petroleum products. The sources of our data include U.S.
government agencies, especially the EIA; the Venezuelan government
and PDVSA; and other international and private sources. We deemed
these data to be reliable for the purposes of addressing our
objectives. Finally, we reviewed PDVSA's plan to expand oil
production, and collected oil industry officials' and experts'
views on the likely implementation of that plan.
Regarding the second objective, we reviewed studies of oil
disruptions, including studies of the impacts of the Venezuelan
strike. We also analyzed current conditions in the world oil
market to evaluate what might occur if a similar disruption
occurred today. Further, we evaluated the potential impacts of
several different scenarios involving reductions in Venezuela's
oil production or exports to the United States-(1) a sudden and
severe drop in Venezuelan oil exports from the world market, (2) a
sudden diversion of oil from the United States to other markets
through an embargo, and (3) the closure by Venezuela of its
wholly-owned U.S.-based refineries. Regarding the first scenario,
we asked a DOE contractor at the Oak Ridge National Laboratory to
use an economic oil-disruption model to analyze the impacts of a
hypothetical Venezuelan oil disruption on world oil prices and on
the U.S. gross domestic product (GDP).1 For this analysis we
constructed a hypothetical disruption scenario similar to the one
that actually occurred during the Venezuelan oil strike in the
winter of 2002-2003, but using assumptions regarding market and
economic conditions closer to those that prevailed at the time of
the analysis (late 2005). We also analyzed data from private
entities and met with numerous industry experts in Venezuela and
the United States; officials in the Departments of State and
Commerce; DOE officials; and officials in the International Energy
Agency to determine the impact of potential oil supply
disruptions.
To address the third objective-identifying the status of programs
and activities to ensure a continued supply of oil and to mitigate
a disruption of imports of crude oil and refined petroleum
products from Venezuela-we met with officials at the Departments
of State and Commerce, DOE, and the Office of the U.S. Trade
Representative. We also talked to oil company officials. In
addition, we spoke with Venezuelan officials and U.S. embassy
staff in Venezuela. This report focuses on federal programs and
activities related to U.S. energy security. Diplomatic and
political actions that may impact U.S. energy security may be
undertaken for a multitude of foreign policy goals that are beyond
the scope of this report. Therefore, our assessment of programs
and activities related to energy security is not an evaluation of
the U.S. government's approach to these broader goals.
To obtain the official Venezuelan government position on questions
relating to all three objectives, we made arrangements with the
Venezuelan Embassy in Washington, D.C., for an official
spokesperson.
A more detailed description of the scope and methodology of our
review is presented in appendix I. We performed our work between
March 2005 and May 2006, in accordance with generally accepted
government auditing standards.
Results in Brief
Venezuelan oil production has fallen since 2001, but exports of
crude oil and refined petroleum products to the United States have
been relatively stable except during the strike. EIA data show
that total Venezuelan crude oil production in 2001 (the last full
year before the Venezuelan strike) averaged about 3.1 million
barrels per day, but by 2005 had fallen to about 2.6 million
barrels per day-a 16 percent reduction. Venezuelan government
officials dispute these figures, and provided data that indicates
production has almost fully recovered to prestrike levels, but
most available data indicate that the Venezuelan government data
are overstated. Following the 63-day strike, Venezuela's President
ordered the firing of up to 40 percent of PDVSA's employees,
including many of the company's management and technical staff.
Experts told us that this loss of managerial and technical
expertise, along with Venezuela's underinvestment in oil field
maintenance since the early 1990s, contributed to the decline in
PDVSA's oil production. While overall production has fallen,
shortly after the strike Venezuela's exports of crude oil and
refined petroleum products to the United States returned (and have
remained) close to prestrike levels of about 1.5 million barrels
per day. Most of these exports go to CITGO or other refineries on
the U.S. Gulf Coast that are owned wholly or partly by PDVSA. In
2005, PDVSA announced plans to expand its oil production
significantly by 2012, but oil company officials and industry
experts expressed doubt about PDVSA's ability to implement the
plan, in part because, to date, the company has not negotiated any
of the numerous deals with foreign oil companies that are called
for in the plan. The absence of such deals increases the
likelihood that Venezuelan oil production will continue to fall
because, given that PDVSA's own production is in decline,
Venezuela needs willing foreign oil company partners to maintain
the country's current level of oil production.
A sudden and severe reduction in Venezuelan oil exports would have
worldwide impacts, while the impacts of a Venezuelan oil embargo
against the United States or closure of Venezuela's U.S.
refineries would be primarily concentrated in the United States
and Venezuela.
o A sudden loss of all or most Venezuelan oil from the world
market under the current tight global supply and demand balance
would raise world oil prices. For example, a model developed for
DOE estimates that a disruption of crude oil with a temporary loss
of up to 2.2 million barrels per day-about the size of the loss
during the Venezuelan strike-would, all else remaining equal,
result in a crude oil price spike of up to $11 per barrel in the
early stages of the disruption. Such an increase would raise the
price of petroleum products and, because petroleum products are
important to the functioning of the economy, would likely slow the
rate of economic growth in the United States and other countries
until replacement oil could be obtained. The model also predicted
that U.S. GDP would decrease by about $23 billion. Because a
severe drop in oil production would also cause large losses for
Venezuela in export revenues and jobs, Venezuela would likely try
to restore oil production as quickly as possible.
o A Venezuelan oil embargo against the United States would
increase consumer prices for gasoline and other petroleum products
in the short term because U.S. oil refiners would experience
higher costs getting oil supplies from sources farther away than
Venezuela. Also, some U.S. refineries that are designed to handle
Venezuelan heavy sour crude oil would lose some of their effective
capacity if they had to use the lighter replacement crude oil that
most likely would be available. In this scenario, because
Venezuelan oil would not be taken off the market entirely, the
impact on world oil prices would be minimal in the long term. The
impact of a U.S.-specific embargo would also be smaller on
Venezuela than if its total oil production fell.
o If Venezuela shut down its wholly-owned U.S. refineries there
would be a reduction in the supply of gasoline and other petroleum
products-and a corresponding increase in prices of these
products-until the closed refineries were reopened or new sources
of refined petroleum products were brought on line. The impacts
would be obviously most severe in the United States and Venezuela,
although greater demand by U.S. oil companies to buy petroleum
products from other countries could cause price increases in those
countries. Venezuela would suffer direct losses of revenues from
its U.S. refineries and, if closing the refineries was deemed a
threat to U.S. national security, Venezuela could potentially face
sanctions by the U.S. government.
The U.S. government's programs and activities to ensure a reliable
long-term supply of oil from Venezuela have been discontinued, but
the U.S. government has options to mitigate short-term oil supply
disruptions. DOE has had a bilateral technology and information
exchange agreement with Venezuela since 1980 to enhance oil
production in-and secure reliable and affordable sources of oil
from-that country, but these activities ceased in 2003. According
to DOE officials, the activities stopped in part as a result of
diplomatic decisions and in part because Venezuela no longer had
counterparts to DOE technical staff who could continue the
cooperative exchanges. In addition, the United States, co-led by
the Department of State and the Office of the U.S. Trade
Representative, attempted to negotiate a bilateral investment
treaty that would have provided rules on investment protection,
binding international arbitration of investment disputes, and
repatriation of profits, and assisted U.S. oil and other companies
doing business in Venezuela, but negotiations broke down in 1999
because of significant differences between the two countries.
Officials in many oil companies told us that poor relations
between the United States and Venezuela had made it difficult to
compete on new investment opportunities in Venezuela and that a
bilateral investment treaty would have helped protect their
investments in Venezuela when the Venezuelan government
unilaterally changed the way it deals with foreign companies. The
U.S. government has options to mitigate short-term supply
disruptions. It has relied on diplomacy in the past to persuade
oil-producing countries to increase production, and it could use
oil from the U.S. Strategic Petroleum Reserve. During the
Venezuela strike, for example, the U.S. government used diplomacy
to persuade oil-producing countries in the Middle East and other
areas to bring spare oil production capacity online and make up
for the lost oil. However, such diplomacy may be less effective
today because there is currently very little spare production
capacity. In addition, during the strike, DOE allowed oil
companies that were to deliver oil to the U.S. Strategic Petroleum
Reserve to delay those deliveries, which increased the available
oil supply in the United States. Officials in the Departments of
State and Commerce, DOE, and the Office of the U.S. Trade
Representative told us that they do not have Venezuelan-specific
contingency plans for a potential loss of oil; rather, they
believe diplomacy to persuade oil-producing countries to increase
production and using oil in the U.S. Strategic Petroleum Reserve
are adequate actions to deal with an oil-supply disruption.
Although the U.S. government has options to mitigate impacts of
short-term oil disruptions on crude oil and petroleum products
prices, these mitigating actions are not designed to address a
long-term loss of Venezuelan oil from the world market. If
Venezuela fails to maintain or expand its current level of
production, the world oil market may become even tighter than it
is now, putting further pressure on both the level and volatility
of energy prices. In this context, the United States faces
challenges in the coming years that may require hard choices
regarding energy sources, foreign relations and energy-related
diplomacy, and the amount of energy Americans use.
Background
As the United States has become more dependent on foreign sources
for crude oil, our energy security has become increasingly
intertwined with that of other countries. Crude oil is a global
commodity and, as such, any world event that increases instability
in crude oil prices reduces energy security for all oil-buying
countries in similar ways. Numerous empirical studies have shown a
correlation between oil price shocks and economic downturns. When
crude oil prices rise, this pushes up prices of petroleum
products. Consumers spend more of their income on energy and less
on other goods, which can cause an economic slowdown. In addition,
since much of the oil is imported, there is a greater flow of
funds overseas rather than increased domestic spending. World oil
prices have more than doubled since 2003 and are currently higher,
when adjusted for inflation, than in any time since the early
1980s. World demand for oil is projected to increase by about 43
percent over the next 25 years-from about 82 million barrels per
day in 2004 to about 118 million barrels per day in 2030-with much
of the increased demand coming from China and other countries.
Some experts believe oil prices will remain high for the
foreseeable future as suppliers struggle to increase production to
keep up with demand. In this tight demand and supply environment,
even small supply disruptions can create large increases in
prices. In this way, our energy security is tied to events in all
oil-producing countries.
Venezuela Has Been a Key Player for Almost a Century
Oil was first produced commercially in Venezuela in the early
1900s, and by the late 1920s Venezuela was the world's second
largest producer, after the United States. Today, Venezuela's 78
billion barrels of proven reserves-crude oil in the ground that
geological and engineering data have demonstrated with reasonable
certainty is able to be produced using existing technology-are the
seventh or eighth largest in the world. Outside of the Persian
Gulf, only Canada's proven reserves are considered greater than
Venezuela's.2
In 2005, Venezuela was the world's eighth largest exporter of
crude oil. Most of Venezuela's crude oil that is not consumed
domestically in Venezuela is exported to the United States because
of its close proximity; additionally, Venezuela owns significant
refining assets in the United States and the U.S. Virgin Islands
that can refine its heavy sour oil. In the 1980s and 1990s, PDVSA
bought CITGO, Inc. and acquired interests in several other U.S.
refineries that had the ability or could be reconfigured to refine
such crude oil. Today, the refining capacity of PDVSA's share of
the nine U.S. refineries in which it has an interest is about 1.3
million barrels per day. For example, CITGO's five wholly-owned
refineries have a refining capacity of about 750,000 barrels per
day and market their refined petroleum products in the United
States through about 14,000 independently owned service stations
using the CITGO name. In addition, PDVSA partners directly, or
through CITGO, with ExxonMobil, Lyondell, ConocoPhillips, and
Amerada Hess in the U.S. Virgin Islands. These nine refineries buy
most of the crude oil and refined petroleum products exported by
Venezuela. While the United States is unique in its capacity to
refine large volumes of the heavy crude oil that constitutes a
majority of Venezuela's oil exports,3 China and other countries,
such as Brazil, have plans to build refineries that can process
heavy crude oil, which, if built, may create other attractive
markets for Venezuela's oil.4 In addition, the Venezuelan
government has launched several regional initiatives to increase
its export base, including (1) PetroCaribe, through which
Venezuela offers oil and some refined petroleum products to 14
Caribbean countries with favorable financing, and (2) PetroAndina
and PetroSur, which offer oil under similar terms to,
respectively, the Andean countries of Colombia, Ecuador, and
Bolivia and the South American countries of Brazil, Uruguay, and
Argentina.
The oil sector in Venezuela consists of a network of oil fields
and wells that produce crude oil, refineries to process the crude
oil, and an infrastructure to transport the crude and refined
products. The bulk of Venezuela's production comes from the Lake
Maracaibo area in the country's western region and from the Faja
area in the Orinoco Belt in the country's eastern region. The
crude oil is processed by PDVSA's six refineries in Venezuela or
is exported to the United States or other countries. Crude oil is
shipped by way of 39 oil terminals from Venezuela's major oil
ports, located in the western and eastern regions of the country.
U.S. and Other Foreign Companies Have Long Been Involved in the
Venezuelan Oil Sector
Foreign oil companies began producing crude oil in Venezuela in
the early 1900s. In 1976, Venezuela nationalized its hydrocarbon
industry, bringing control of oil-which is the main source of the
country's wealth-under the control of the national oil company.
However, beginning in 1992, the Venezuelan government reopened its
petroleum industry to foreign and private Venezuelan oil companies
in what was known as the "Apertura." Between 1992 and 1997,
Venezuela signed 32 operating service agreements to allow 22
private Venezuelan, U.S., and other foreign companies to produce
oil in fields that were considered, at the time, economically
marginal or high risk. The purpose of these 32 operating service
agreements was to allow foreign companies to assist PDVSA in
producing oil, and the contracts were structured so
foreign-company operators did not have any rights over the
volumes, reserves, or prices of crude oil but were reimbursed for
their costs plus a service fee for production. The Venezuelan
government granted the foreign company operators an indefinite
"royalty holiday" whereby the companies paid no more than 1
percent royalty on the extracted crude, instead of the maximum of
16-2/3 percent at the time.
Also during this period, PDVSA entered into four joint ventures
with foreign companies, including ExxonMobil, ConocoPhillips, and
ChevronTexaco from the United States, to produce crude oil in the
Faja. These joint ventures, whose majority shares were owned by
the foreign oil companies, were considered high risk at the time,
in part due to the challenges of producing "extra-heavy" sour oil
from the Faja, which is among the lowest quality oil commercially
produced anywhere in the world. Venezuela's extra-heavy Faja oil
has higher density (is "heavier") and has a higher sulfur content
than most commercially produced crude oil. Commercial production
of extra-heavy oil is relatively expensive-pumping it from the
ground requires the use of techniques to improve its flow
characteristics and readying it for market requires "upgrading" to
prepare it for final refining. During upgrading, the extra-heavy
crude oil is processed to make it lighter and remove much of its
sulfur content. In 1997, foreign companies began to produce
extra-heavy sour crude oil in Venezuela's Faja region, and, by
2005, the four joint ventures were producing about 600,000 barrels
per day of Faja crude. The projects in the Faja also paid only 1
percent royalty instead of 16-2/3 percent. Extra-heavy crude from
the Faja region is also used to produce Orimulsion, a boiler fuel
that is a mixture of bitumen and water. Orimulsion is marketed
internationally, especially to China.
Effective January 2002, a new law governing Venezuela's
hydrocarbon industry went into effect. The new law increased
maximum royalties from 16-2/3 percent to 30 percent, and increased
the percentage of ownership by PDVSA in all operating arrangements
with foreign and domestic companies to at least 51 percent. In
2005, the Venezuelan government took steps to make foreign and
domestic companies migrate from the terms of the existing 32
operating service agreements to the terms of the new law.
Essentially, beginning in 2006, the companies that had been paying
no more than 1 percent in royalty fees under the operating service
agreements had to pay as much as 30 percent. Also, instead of
paying 34 percent in income taxes as service providers, the
foreign companies had to pay 50 percent as part owners in the
joint ventures. If the foreign companies did not comply with the
new rules, the Venezuelan government took control of the
operations. While the new rules had not been applied to the four
joint ventures in the Faja, in March 2005 the Faja projects began
paying 16-2/3 percent royalties. Also, in May 2006, the Venezuelan
government established a new extraction tax in addition to the 50
percent income tax. According to a Venezuelan spokesperson, the
extraction tax is 33.33 percent applied to well production, but
royalty fees are deducted from this tax. The Venezuelan tax
authority also issued bills for millions of dollars in back taxes
to foreign companies conducting production activities under the 32
operating service agreements after the effective date of the law.
Political Situation in Venezuela
The oil industry is capital-intensive and heavily dependent on
continuous investment to maintain existing wells, establish new
wells for crude oil production, and develop and maintain the
infrastructure supporting the production network. According to the
EIA, PDVSA is Venezuela's largest employer and accounts for about
one-third of the country's GDP, about 50 percent of the
government's revenue, and 80 percent of Venezuela's export
earnings. PDVSA stated in 2005 that it plans to invest $26 billion
to expand its oil production to 5.8 million barrels per day by
2012.
After Hugo Chavez was elected president of Venezuela in 1998,
responsibility for the oil industry changed. Managerial authority
for the petroleum industry was shifted from PDVSA to the
Venezuelan Ministery of Energy and Petroleum; the way Venezuela
does business with foreign companies also changed, as discussed
previously. Domestic resistance to the Chavez administration and
the changes in hydrocarbon sector oversight resulted in a 63-day
strike by nearly half of PDVSA workers in the winter of 2002-2003.
Oil production almost completely stopped, as oil wells stopped
pumping, refineries closed, oil tankers stopped running, and
storage facilities reached full capacity. The strike caused a
temporary decrease in world oil supplies of about 2.3 million
barrels per day, an amount equivalent to about 3.0 percent of
total world daily oil supply.
Involvement of International Organizations
Venezuela is a founding member of OPEC, which controls about 40
percent of the world's estimated 84 million barrels of production.
Venezuela is the third largest producer within OPEC, according to
EIA data. OPEC can wield great power in the international oil
market, particularly by setting production quotas for its member
countries to raise and lower the supply of oil, thereby
influencing world oil prices. During the mid-1990s, Venezuela was
suspected of weakening oil prices by producing above the country's
quota. Since Hugo Chavez became President of Venezuela, the
Venezuelan government has favored stricter adherence to OPEC
quotas, and currently Venezuela is considered a price hawk in the
ranks of OPEC, generally favoring production restraint to keep oil
prices relatively high.
Energy security is a national priority for the United States, and
the United States has long had programs and activities designed to
foster energy security. The United States government also strives
to enhance cooperation with energy consuming and producing
governments to mitigate the impact of supply disruptions and to
support U.S. and world economic growth. The United States is a
member of the International Energy Agency, an organization
comprised of Organization of Economic Cooperation and Development
countries that was established to cope with oil supply disruptions
and coordinate an international response in case of a disruption
to the global oil supply market. International Energy Agency
member countries hold about 4.1 billion barrels of oil stocks, and
for a limited period can release an amount equivalent to 10
percent of global demand each day in case of a disruption.
Venezuelan Government Actions Have Decreased Crude Oil Production,
but Exports to the United States Have Changed Little
Venezuelan oil production has fallen since 2001, largely as a
result of actions by the Venezuelan government. Since that time
the production of Venezuelan crude oil decreased in oil fields
operated by PDVSA and increased in fields operated by foreign
companies, but, as of 2005, increased production by foreign
companies was not enough to bring total Venezuelan oil production
back to the prestrike level. Despite production declines, exports
of crude oil and refined petroleum products to the United States
since shortly after the strike have remained close to prestrike
levels of about 1.5 million barrels per day. The Venezuelan
government announced plans in 2005 to expand its oil production
and exports significantly by 2012, but most experts with whom we
spoke doubted Venezuela's ability to implement the expansion plan
in the near term.
Venezuela�s Total Crude Oil Production Has Fallen since 2001,
Largely as a Result of Venezuelan Government Actions
Data from EIA, the International Energy Agency, OPEC, and the
Venezuelan government all indicate that Venezuelan crude oil
production decreased between 2001 and 2005. For example, EIA data
show that production decreased from 3.1 million barrels per day to
2.6 million barrels per day, reflecting a decrease of about .5
million barrels per day, or 16 percent. OPEC, International Energy
Agency, and Venezuelan government data all indicate varying but
higher levels of production in 2005.5 While Venezuelan production
figures should be the most accurate because they have access to
all the production data, many oil industry officials and experts
told us that Venezuelan government figures have been overstated.6
Figure 1 shows production levels for 2001 through 2005 from four
sources and illustrates the drop in production as a result of the
strike and the recovery following the strike.
Figure 1: Venezuelan Oil Production (2001-2005)
While there are differences of opinion and uncertainty about the
accuracy of available production data, other data also support a
significant decline in production. For example, international
financial data show that foreign investment in Venezuela declined
between 2001 and 2004. Specifically, net foreign direct investment
in Venezuela was about $3.5 billion in 2001, declined to almost
zero in 2002, and recovered to about $1.9 billion in 2004, the
last year for which investment data are available. Because we were
unable to obtain reliable, independent data on specific investment
in Venezuela's oil and gas sector, we analyzed total foreign
investment in Venezuela as a proxy for the condition of the oil
sector. Our analysis indicates a high correlation between
Venezuelan oil production and net foreign investments in
Venezuela.7 In addition, experts told us that there is a high
correlation between the number of active oil drilling rigs and oil
production.8 However, the number of active rigs fell sharply
during and after the strike and, as of 2005, had not returned to
their 2001 levels. Specifically, there was an average of 66 active
drilling rigs in Venezuela in 2001; the number of rigs fell to as
low as 12 during the height of the strike in January 2003; and the
average increased to 60 in 2005. This provides further evidence
that Venezuela's oil production has decreased.
The Venezuelan government's firing of thousands of PDVSA employees
following the strike contributed to the decline in production. The
government dismissed about 40 percent of PDVSA's approximately
40,000 employees, including many management and technical staff.
Experts told us that the loss of managerial and technical
expertise caused a rapid decline in the company's oil production
from existing fields. In fact, some said that the loss of
expertise was so critical that after the strike, PDVSA was unable
to issue invoices for contractor services.
Venezuelan officials told us that strikers did deliberate damage
to the company and that this sabotage accounts for some of their
difficulties since the strike. PDVSA employees with whom we spoke,
some of whom were fired and others who resigned, disputed the
claims of sabotage and said that strikers had originally planned
only a two- or three-day strike, but that the government shut them
out before they could return to work. Venezuelan officials
acknowledged that the loss of expertise initially hampered
operations and said that they have been replacing and training
lost workers as quickly as possible. However, many industry
experts told us that a black list of former PDVSA managerial and
technical staff that the Venezuelan government will not rehire is
limiting Venezuela's ability to acquire the necessary staff to
meet its production goals. In addition, officials from foreign oil
companies with operations in Venezuela told us that since the
strike, PDVSA has become highly politicized and that PDVSA
officials are often slow to make key decisions, which have
complicated foreign companies' decisions to invest in the
Venezuelan oil sector. Many oil industry officials told us that
PDVSA's lack of managerial and technical expertise still remains
one of the biggest challenges in continuing operations in
Venezuela with PDVSA as a partner. In addition, experts told us
that Venezuela had underinvested in oil field maintenance since
the early 1990s, and that this had contributed to PDVSA's
declining production.
Declines in Production by PDVSA Have Been Partly Offset by Increases
in Foreign Oil Companies� Production, but Not by Enough to Reach the
PreStrike Production Level
Data from EIA, the International Energy Agency, OPEC, and the
Venezuelan government indicate that, from 2001 through 2005,
Venezuelan crude oil production controlled by PDVSA decreased,
while production controlled by foreign companies increased.9 For
example, using EIA data as the base for total Venezuelan crude oil
production, of 3.1 million barrels of crude oil produced per day
in 2001, PDVSA produced about 2.4 million barrels per day (or 77
percent), and foreign companies produced about .7 million barrels
per day (or 23 percent). By 2005, these data indicated that of 2.6
million barrels produced per day, PDVSA produced about 1.5 million
barrels per day (or about 58 percent), and foreign companies
produced about 1.1 million barrels per day (or 42 percent).
International Energy Agency, OPEC, and Venezuelan government data
show similar trends, but the relative proportion of PDVSA's
production differs because each of these data sources reflects a
different total volume of Venezuelan crude oil production. All of
the data sources indicate that increases in production by foreign
companies were not enough to totally offset decreases in PDVSA's
production, resulting in a net crude oil production loss. Figure 2
shows the increase in foreign companies' production and decrease
in PDVSA's production for 2001-2005 using EIA's figures as the
base for total production.10
Figure 2: Foreign Company and PDVSA Production of Venezuelan Crude
Oil, 2001-2005
Note: Foreign companies' production is based on Venezuelan
government data, and PDVSA's production is based on EIA data for
total production minus the Venezuelan government's data for
foreign companies' production.
Venezuela�s Exports of Crude Oil and Refined Petroleum Products to
the United States Have Remained Relatively Stable in Recent Years
Since shortly after the Venezuelan strike ended, Venezuela's
exports of crude oil and refined petroleum products to the United
States have remained close to the prestrike levels. EIA data show
that Venezuelan exports of crude oil and refined petroleum
products to the United States (excluding the Virgin Islands) have
fluctuated month-to-month, but prior to the strike had averaged
about 1.5 million barrels per day. These exports reached a low of
about .4 million barrels per day during the strike,11 but by April
2003 had returned to approximately the average prestrike level.
Specifically, EIA data show that such Venezuelan exports averaged
between 1.5 million and 1.6 million barrels per day between April
2003 and August 2005, as shown in figure 3. The EIA data also show
that Venezuela exports most of its crude oil to the United States.
For example, the data show that exports to the United States
accounted for about 66 percent of Venezuela's total exports of
crude oil in 2004. Most of Venezuela's exported crude oil goes to
refineries on the U.S. Gulf Coast that are owned wholly or
partially by the Venezuelan government.
Figure 3: Venezuelan Exports of Crude Oil and Refined Petroleum Products
to the United States, Excluding the U.S. Virgin Islands, 2001-2005
1GDP is a quantifiable measure of a country's total income for a given
year. A sudden loss of crude oil would, all else remaining equal, harm the
economy by increasing petroleum product prices, resulting in higher costs
and lower employment. However, as will be discussed later in this report,
the United States and other oil-consuming countries may take steps to
mitigate the impact of a disruption, including using strategic petroleum
reserves.
2While Canada's proven reserves include oil sands, which are a low-quality
source of oil, Venezuela's extra heavy oil reserves are only partly
included in its proven reserves. Many industry sources believe that
Venezuela probably has extensive reserves of extra heavy oil. The
Venezuelan government estimates the country has an additional 235 billion
barrels of such crude oil that ultimately will be recoverable. If this
estimate is proven, Venezuela's reserves would exceed over 310 billion
barrels-the largest of any country in the world.
3The oil industry uses a "gravity scale" to characterize grades of crude
oil. Crude that has a higher numerical value is considered light; crude
that has a lower numerical value is considered heavy; crude that is less
than 10 degrees gravity, such as that contained in the Faja area of
Venezuela's eastern region, is considered extra heavy. Faja oil is
upgraded to a lighter synthetic oil.
4DOE told us that these plans are conceptual and have not been finalized.
5To make the data comparable, we made adjustments to the sources, as
necessary, to include crude oil, condensates, and extra-heavy oil, but
exclude natural gas liquids. Venezuelan government data for 2004 and 2005
are preliminary.
6During our review, the Venezuelan government provided many different
production numbers. Some of these numbers changed and some were incomplete
or inconsistent. We used the numbers we believe are most accurate.
7We estimated a correlation coefficient of 83 percent between Venezuelan
oil production and net foreign direct investment for1995-2004, which
indicates a similarity in the trends in oil production and net foreign
investment in the country.
8We calculated a correlation coefficient of 73 percent between Venezuelan
production and the number of active drilling rigs for 1995-2005, which
indicates a similarity in the trends in oil production and the number of
active drilling rigs.
9Production controlled by foreign companies includes extra-heavy oil
produced under joint ventures in the Faja and oil produced under operating
service agreements throughout the country.
10We used EIA data to illustrate the reduction in PDVSA's share of
production. All other sources show a similar pattern, but the reduction in
PDVSA's share would be somewhat less because these sources have varying
but higher 2005 production figures than does EIA.
11Exports to the United States decreased from about 1.6 million barrels
per day in November 2002 to about .4 million barrels per day in January
2003-a decline of about 1.2 million barrels per day.
Figure 3: Venezuelan Exports of Crude Oil and Refined Petroleum Products
to the United States, Excluding the U.S. Virgin Islands, 2001-2005
Venezuelan government data show that, like exports to the United States,
Venezuelan domestic consumption has remained close to the prestrike
level-about .5 million barrels per day. Given that Venezuelan crude oil
production has decreased and Venezuelan domestic consumption and exports
to the United States have remained relatively constant since shortly after
the strike, most of the loss of Venezuelan crude oil must have been
absorbed by decreased Venezuelan exports to countries other than the
United States. Some oil company officials also told us that in recent
years there have been smaller amounts of Venezuelan oil available for
purchase on world spot markets, which would also indicate that less
Venezuelan oil is going to non-U.S. markets. Venezuelan officials gave us
data that showed exports to non-U.S. markets were greater than EIA's
numbers, but we were unable to verify the Venezuelan data.
Future Venezuelan Production Is Uncertain
The Venezuelan government announced plans in 2005 to expand its oil
production to 5.8 million barrels per day by 2012, which is more than
double the figure reported by EIA for 2005. Some industry experts told us
that the expansion plan is technically feasible and that Venezuela's oil
revenue in recent years has been sufficient to fund the plan. However,
many oil industry officials and experts expressed doubt about the
government's ability to implement the expansion plan in the near term for
several reasons.
o According to Venezuelan officials, as of late 2005, no
agreements had been signed or investments made to start
implementing the major oil production expansions detailed in the
plan; experts told us that, without agreements, the plan will face
significant delays, at best. The absence of such deals increases
the likelihood that Venezuelan oil production will continue to
fall because, given that PDVSA's own production is in decline,
Venezuela needs willing foreign oil company partnership to
maintain its current level of oil production.
o PDVSA has not been able to maintain its own level of oil
production in recent years. U.S. and international oil industry
officials and experts, as well as Venezuelan government officials,
told us that PDVSA faces significant challenges in overcoming the
20 to 25 percent per year rate of production decline in its mature
oil fields. Venezuelan officials and other experts told us that
Venezuela faces a challenge in overcoming the normal decline in
productivity of its older fields, especially in the Maracaibo area
where oil production dates back to the 1920s.
o Future foreign investment is uncertain given the Venezuelan
government's recent decision to unilaterally change its business
dealings with foreign companies. Beginning in 2005, the Venezuelan
administration took steps to make private Venezuelan and foreign
companies producing crude oil under the 32 operating service
agreements renegotiate those agreements. Essentially, the new
agreements increase the maximum royalty from 16-2/3 percent to 30
percent, increase income taxes from 34 percent to 50 percent, and
give PDVSA at least a 51 percent share of the operations covered
by the agreement. Oil industry officials and experts have
generally reacted negatively to the changes in the agreements.
Most company officials we contacted told us that Venezuela's move
to unilaterally impose new agreements increased their risk and
eroded the investment climate in Venezuela, likely leading to
future production declines. Many oil industry officials and
experts told us that the changes in the foreign company
participation structure, such as mandating a majority share of the
operation for PDVSA, pose investment risks and uncertainty for
foreign companies because the Venezuelan government has ultimate
control in decisionmaking. When France's Total and Italy's Eni oil
companies failed to sign new agreements, the Venezuelan government
seized control of their operations in April 2006; five other
fields were turned over to PDVSA after negotiations, according to
the Venezuelan spokesperson. Also, ExxonMobil and Norway's Statoil
chose to sell their minority stakes in smaller fields rather than
accept Venezuela's required changes. Furthermore, in May 2006, the
Venezuelan Congress approved a new oil extraction tax. According
to the Venezuelan spokesperson, the extraction tax is 33.33
percent applied to well production, with royalty fees deducted
from this tax.
o Venezuela's decision to spend a significant part of its oil
revenues on social programs such as education and health care,
instead of reinvesting it in the oil industry, could slow further
development of the country's oil sector. Venezuela's new
hydrocarbon law imposes significant social commitments on PDVSA.
Venezuelan government officials told us that they directly spent
about $3.7 billion of oil revenues on social programs in 2004 and
about $5 billion on social programs in 2005. This spending was in
addition to money companies paid to the Venezuelan government as
royalties and income taxes, and therefore reduces the amount of
funds available for investing in oil production.
o Future production could be impaired by the Venezuelan
government's preference to use national oil companies from
developing countries (such as China) and other geopolitically
strategic countries (such as Brazil) as partners to explore and
develop new fields in Venezuela, instead of relying on experienced
international oil companies. Several oil industry officials and
experts told us that national oil companies generally do not have
the expertise of the international oil companies to develop heavy
oil fields.
A Drop in Venezuelan Oil Exports Would Have Worldwide Impacts,
while Impacts of a Venezuelan Embargo against the United States
or Closure of Its U.S. Refineries Would Be Felt Primarily in the
United States and Venezuela
The potential impacts of a disruption of production and exports of
Venezuelan crude oil and petroleum products on world oil prices
and on the U.S. economy would depend on the characteristics of the
disruption. The greatest impacts would occur if all or most
Venezuelan oil were suddenly removed from the world market due to
a Venezuelan oil industry shutdown. A Venezuelan oil embargo
against the United States would have smaller impacts that would
primarily affect the United States. Similarly, if Venezuela shut
down its U.S. refineries, the impacts would be felt primarily in
the United States. Venezuela would suffer severe economic losses
from all three types of disruption, especially a shutdown of its
oil production.
A Sudden Drop in Venezuelan Oil Production Would Have Significant
Worldwide and U.S. Impacts
Given the current tight global supply and demand conditions, a
sudden loss of all or most Venezuelan oil from the world market,
for example due to a strike, would, all else remaining equal,
result in a marked spike in world oil prices and a decrease in the
growth rate of the U.S. economy as measured by GDP. Because
Venezuela's economy is so dependent on its oil sector, Venezuela
would likely try to restore oil production as quickly as possible
following a strike or similar disruption to avoid large losses of
export revenues.
A model developed for DOE by a contractor, using a hypothetical
oil disruption scenario that we developed to resemble the
disruption caused by the Venezuelan strike during the winter of
2002-2003, predicted that, by the second month of a disruption,
worldwide crude oil prices would temporarily increase by about $11
per barrel-from an assumed pre-disruption price of $55 per barrel
to almost $66 per barrel.12 The increase in world crude oil prices
would, in turn, drive up prices of refined petroleum products.
Later, as the lost oil was replaced with oil from other sources or
production resumed, the price of crude oil would return to the
previous level. The model further predicted that the temporary
increase in world oil prices caused by a disruption would lower
the U.S. GDP by about $23 billion relative to what it would have
been otherwise-about $13 trillion. A loss of this magnitude for a
given year is likely to cause a small decline in the growth rate
of the U.S. economy, but is unlikely to result in a recession. In
this analysis, the rate of GDP growth would be about 0.18 percent
less than what it would have otherwise been for the year.
Our hypothetical disruption scenario lasts only a few months
because Venezuela, like any other country that is heavily
dependent on oil revenue, is likely to exert a great effort to end
any severe disruption of crude oil production. The country's
economy in general, and government revenues in particular, depend
heavily on the revenues that the country obtains from petroleum
production and exports. For example, oil revenues accounted for
between 45 and 50 percent of Venezuelan government revenues in
recent years. A severe drop in oil revenues for more than a few
months would cripple the economy, resulting in lower economic
growth and lost jobs; Venezuelan authorities would consider a
prolonged oil industry shut down as a very grave threat to the
government and to the country as a whole. Indeed, PDVSA officials
told us that they restored most of their lost production during
the first few months after the strike.
It should be noted that the model somewhat understates the impacts
on the United States of a sudden and severe loss of oil from
Venezuela because it treats any disruption of oil supplies as
equal, regardless of the location or the characteristics of the
lost oil. In other words, the model does not differentiate between
heavy sour crude oil (such as that produced in Venezuela) and any
other type of crude oil-for example, "Arab Medium" (which is Saudi
Arabia's medium-quality crude oil). Thus, the model does not
consider the economic cost of replacing, for example, 100,000
barrels of heavy sour oil with the same amount of lighter, sweeter
oil.13 In fact, Arab Medium may cost more than some Venezuelan
crude oils because of its higher quality, and because the
transportation cost of a barrel of oil from Saudi Arabia is higher
than that of a barrel of oil from Venezuela. In addition, there
may be an economic penalty associated with some U.S. refineries'
switching from their normal significant reliance on Venezuelan oil
to replacement oil from alternative sources. For example, one U.S.
oil company that refines Venezuelan crude oil ran its refinery
optimization model for us to illustrate the impact of switching
crude oil types on its refining costs. Its model showed that
replacing a large quantity of the Venezuelan oil that it uses on a
regular basis with oil from Mexico and the Middle East would cause
a 7 percent drop in the capacity utilization of one of its
refineries. This would reduce supplies of petroleum products,
putting upward pressure on consumer prices.
The DOE contractor who developed the model acknowledged that the
model does not account for the effects of higher transportation
costs or changes in refinery capacity utilization caused by
switching from one type of crude oil to another. He said that
higher transportation costs and switching crude oil types could
result in larger impacts than the model predicts, but that the
price impact of switching crude oil types is not understood well
enough to be accurately modeled and is likely to be small.
We also did an analysis of the impact of the same hypothetical
Venezuelan disruption scenario on world oil price and on U.S. GDP
using parameters developed by EIA to evaluate oil price
disruptions. EIA has also done similar analyses, including (1) a
slightly larger oil supply disruption and (2) an analysis of the
impacts of the actual Venezuelan strike. The impacts on the price
of oil are quite close in all the analyses. However, the impacts
on U.S. GDP vary significantly as a result of differing
assumptions about how sensitive the economy is to increases in oil
prices. DOE officials told us that the impact of such a disruption
on the U.S. economy would likely fall somewhere between the
estimates derived in the model and our analysis. The results of
the analyses and studies are shown in table 1.
Table 1: Results of Analyses and Studies of Impacts of a Sudden Disruption
of Crude Oil Production and Exports
Temporary impact
on world crude oil Impact on U.S.
prices (U.S. GDP (billions
Disruption dollars per of U.S.
Analyses or studies description barrel) dollars)a
DOE contractor model Disruption of a 11 ($23)
using our maximum of 2.2
hypothetical million barrels per
scenario (January day for 6 months
2006)
Our analysis using Disruption of a 9-13 (2.6-7.5)
EIA disruption maximum of 2.2
parameters (January million barrels per
2006) day for 6 months
EIA analysis using Disruption of 2.4 10-18 b
EIA's own million barrels per
hypothetical day for 6 months
scenario (March
2005)
EIA study of actual Actual disruption <10c b
Venezuelan of a maximum of 2.8
disruption in winter million barrels per
of 2002-2003 day
Source: GAO based on Leiby, Paul N. and David W. Bowman, "Disruption
Scenarios and the Avoided Costs Due to SPR Use," Oak Ridge National
Laboratory Working Paper, January 19, 2005; GAO analysis conducted in
January 2006; EIA, Impacts of Hypothetical Oil Supply
Disruptions-Venezuela, Mar. 5, 2005 (unpublished); and EIA, Impacts of the
Venezuelan Crude Oil Production Loss, by Joanne Shore and John Hackworth,
Sept. 25, 2003.
aNumbers in parentheses reflect reductions in the U.S. GDP from what it
would be without a disruption.
bThis analysis did not include impacts on the U.S. GDP.
cEIA attributed the $10 per barrel increase to the Venezuelan oil strike
and low petroleum inventories.
A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts,
Primarily in the United States
A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts,
Primarily in the United States
An EIA analysis shows (and several industry experts told us) that a
Venezuelan oil embargo against the United States would have a smaller
impact on oil prices than a sudden and severe drop in production. The
impact of an embargo would be smaller because the Venezuelan oil would go
to other destinations instead of being taken off of the world market.
However, since most replacement supplies are farther away than Venezuela,
U.S. oil refiners would experience higher costs and delays in getting oil
supplies; such an embargo would therefore increase U.S. consumer prices
for gasoline and other petroleum products in the short term. Also, as
discussed previously, some U.S. refineries that are designed to handle
large amounts of Venezuelan heavy sour crude oil would operate less
efficiently if they had to switch to different types of crude oil.
EIA's March 2005 analysis estimated that a Venezuelan oil embargo against
the United States would cause the price of West Texas Intermediate crude
oil (a commonly used benchmark oil) to increase in the short term by $4 to
$6 per barrel from the then-current price of $53 per barrel-an increase of
between 8 to 11 percent, as opposed to the 19 to 34 percent increase
associated with a sudden and severe loss of oil. The price would rise
because the embargo would cause (1) higher transportation costs resulting
from longer distances to transport oil from locations farther away than
Venezuela; (2) refinery inefficiencies resulting from switching crude oil
types; and (3) a market psychology premium reflecting fears of further
escalation.
The EIA analysis did not quantify the impact of an oil embargo on U.S.
prices of gasoline and other refined petroleum products. However, an
increase in U.S. crude oil prices by 8 to 11 percent per barrel would
raise costs of refined petroleum products to the extent that the increase
would be passed on to the consumer. All else being equal, such an increase
would add 11 to 15 cents to the price of a gallon of gasoline, assuming
the conditions in March 2005.14
DOE officials told us that their analysis assumes the $4 to $6 per barrel
increase would last as long as the disruption. However, adjustments would
reduce this price impact over time. Refineries, for example, could
reconfigure some of their processes and make other adjustments over time
to improve their ability to efficiently handle replacement crude oil
types. Transportation costs could also adjust over time. For example,
Venezuela likely could switch from the relatively small tankers used for
the short haul to the United States to very large tankers to move its oil
to more distant locations, thereby helping offset Venezuela's increased
transportation costs for shipping the oil longer distances.
A Venezuelan oil embargo against the United States would also affect the
Venezuelan economy, but the impact would not be as great as the impact of
a sudden loss of oil. According to a U.S. company that produces oil in
Venezuela, such an embargo would reduce PDVSA's oil revenues from between
$3-4 billion dollars per year due to the following factors:
o Refinery operations that Venezuela wholly and partly owns in
the United States, which take about 70 percent of Venezuela's oil
exports to the United States, would be adversely affected by the
embargo because they would have to obtain crude oil from locations
farther away than Venezuela and the replacement crude oil would
likely be of a different quality.
o Venezuela's crude oil revenues would be adversely affected by
the higher cost of transporting oil to locations farther away than
the United States market.
In addition, oil company officials and industry experts told us
that few countries have significant refining capacity that is
designed to efficiently process the heavy sour oil from Venezuela.
Therefore, it would be difficult for Venezuela to find markets for
all the oil it currently exports to the United States.
Closure of Venezuela�s U.S. Refineries would Increase U.S. Petroleum
Product Prices and Reduce Venezuelan Revenue
If Venezuela shut down its wholly-owned U.S. refineries, the
supply of gasoline and other refined petroleum products made from
crude oil would decrease and, correspondingly, the prices of these
refined petroleum products in the United States would increase.
Venezuela wholly owns five refineries in the United States through
its PDVSA subsidiary, CITGO, and these account for about 750,000
barrels per day of refining capacity-4 percent of total U.S.
refining capacity. The impacts of shutting down CITGO refineries
would continue until the closed refineries were reopened or new
sources of refined petroleum products were brought on line. The
impacts would be obviously most severe in the United States,
although increased demand by U.S. oil companies to buy petroleum
products from other countries could cause prices to rise in those
countries as well. Venezuela would also lose the profits of these
refineries for as long as they were shut down, and could face
sanctions by the U.S. government-including freezing Venezuelan
assets in the United States-if the closure of the refineries were
deemed a threat to U.S. security.
We identified no studies of the impacts of oil refinery shutdowns
on the prices of refined petroleum products, but a shutdown of
several large U.S. refineries as a result of hurricanes Katrina
and Rita in 2005 clearly contributed to sharp increases in U.S.
fuel prices. For example, Hurricane Katrina caused a shutdown of
879,000 barrels per day, or 5.2 percent of U.S. refining capacity.
Figure 4 shows that following hurricanes Katrina and Rita in late
August and late September 2005, gasoline prices increased by over
$1 per gallon on the U.S. Gulf Coast Wholesale Market. While these
price spikes are indicative of what can happen in the event of
refinery shutdowns, it must be noted that there were other very
important disruption factors that affected these prices-such as
major pipeline shutdowns and damage-which make it difficult to
isolate the impact of the refinery shutdowns.
A Drop in Venezuelan Oil Exports Would Have Worldwide Impacts, while Impacts of
a Venezuelan Embargo against the United States or Closure of Its U.S. Refineries
Would Be Felt Primarily in the United States and Venezuela
A Sudden Drop in Venezuelan Oil Production Would Have Significant Worldwide and
U.S. Impacts
12This analysis was done in fall 2005. In consultation with the
contractor, we chose a starting price for oil of $55 per barrel-lower than
the actual price of light oil at the time-to reflect a composite of light
and heavy oil and the fact that future oil price forecasts were falling in
the medium term. In the event that an actual oil supply disruption occurs,
the predictive power of the model estimate will depend in part on how
close the actual starting price of oil is to the assumed price in the
model.
13Arab Medium was used to help replace lost oil during the Venezuelan
strike. However, in any disruption, any quality oil may be used to replace
lost oil. According to DOE officials, "Arab Heavy," which has qualities
closer to much of Venezuela's crude oil, constitutes the bulk of spare
capacity in 2006.
Table 1: Results of Analyses and Studies of Impacts of a Sudden Disruption
of Crude Oil Production and Exports
Temporary impact
on world crude oil Impact on U.S.
prices (U.S. GDP (billions
Disruption dollars per of U.S.
Analyses or studies description barrel) dollars)a
DOE contractor model Disruption of a 11 ($23)
using our maximum of 2.2
hypothetical million barrels per
scenario (January day for 6 months
2006)
Our analysis using Disruption of a 9-13 (2.6-7.5)
EIA disruption maximum of 2.2
parameters (January million barrels per
2006) day for 6 months
EIA analysis using Disruption of 2.4 10-18 b
EIA's own million barrels per
hypothetical day for 6 months
scenario (March
2005)
EIA study of actual Actual disruption <10c b
Venezuelan of a maximum of 2.8
disruption in winter million barrels per
of 2002-2003 day
Source: GAO based on Leiby, Paul N. and David W. Bowman, "Disruption
Scenarios and the Avoided Costs Due to SPR Use," Oak Ridge National
Laboratory Working Paper, January 19, 2005; GAO analysis conducted in
January 2006; EIA, Impacts of Hypothetical Oil Supply
Disruptions-Venezuela, Mar. 5, 2005 (unpublished); and EIA, Impacts of the
Venezuelan Crude Oil Production Loss, by Joanne Shore and John Hackworth,
Sept. 25, 2003.
aNumbers in parentheses reflect reductions in the U.S. GDP from what it
would be without a disruption.
bThis analysis did not include impacts on the U.S. GDP.
cEIA attributed the $10 per barrel increase to the Venezuelan oil strike
and low petroleum inventories.
A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts,
Primarily in the United States
A Venezuelan Oil Embargo against the United States Would Have Smaller Impacts,
Primarily in the United States
An EIA analysis shows (and several industry experts told us) that a
Venezuelan oil embargo against the United States would have a smaller
impact on oil prices than a sudden and severe drop in production. The
impact of an embargo would be smaller because the Venezuelan oil would go
to other destinations instead of being taken off of the world market.
However, since most replacement supplies are farther away than Venezuela,
U.S. oil refiners would experience higher costs and delays in getting oil
supplies; such an embargo would therefore increase U.S. consumer prices
for gasoline and other petroleum products in the short term. Also, as
discussed previously, some U.S. refineries that are designed to handle
large amounts of Venezuelan heavy sour crude oil would operate less
efficiently if they had to switch to different types of crude oil.
EIA's March 2005 analysis estimated that a Venezuelan oil embargo against
the United States would cause the price of West Texas Intermediate crude
oil (a commonly used benchmark oil) to increase in the short term by $4 to
$6 per barrel from the then-current price of $53 per barrel-an increase of
between 8 to 11 percent, as opposed to the 19 to 34 percent increase
associated with a sudden and severe loss of oil. The price would rise
because the embargo would cause (1) higher transportation costs resulting
from longer distances to transport oil from locations farther away than
Venezuela; (2) refinery inefficiencies resulting from switching crude oil
types; and (3) a market psychology premium reflecting fears of further
escalation.
The EIA analysis did not quantify the impact of an oil embargo on U.S.
prices of gasoline and other refined petroleum products. However, an
increase in U.S. crude oil prices by 8 to 11 percent per barrel would
raise costs of refined petroleum products to the extent that the increase
would be passed on to the consumer. All else being equal, such an increase
would add 11 to 15 cents to the price of a gallon of gasoline, assuming
the conditions in March 2005.14
DOE officials told us that their analysis assumes the $4 to $6 per barrel
increase would last as long as the disruption. However, adjustments would
reduce this price impact over time. Refineries, for example, could
reconfigure some of their processes and make other adjustments over time
to improve their ability to efficiently handle replacement crude oil
types. Transportation costs could also adjust over time. For example,
Venezuela likely could switch from the relatively small tankers used for
the short haul to the United States to very large tankers to move its oil
to more distant locations, thereby helping offset Venezuela's increased
transportation costs for shipping the oil longer distances.
A Venezuelan oil embargo against the United States would also affect the
Venezuelan economy, but the impact would not be as great as the impact of
a sudden loss of oil. According to a U.S. company that produces oil in
Venezuela, such an embargo would reduce PDVSA's oil revenues from between
$3-4 billion dollars per year due to the following factors:
o Refinery operations that Venezuela wholly and partly owns in
the United States, which take about 70 percent of Venezuela's oil
exports to the United States, would be adversely affected by the
embargo because they would have to obtain crude oil from locations
farther away than Venezuela and the replacement crude oil would
likely be of a different quality.
o Venezuela's crude oil revenues would be adversely affected by
the higher cost of transporting oil to locations farther away than
the United States market.
In addition, oil company officials and industry experts told us
that few countries have significant refining capacity that is
designed to efficiently process the heavy sour oil from Venezuela.
Therefore, it would be difficult for Venezuela to find markets for
all the oil it currently exports to the United States.
Closure of Venezuela�s U.S. Refineries would Increase U.S. Petroleum
Product Prices and Reduce Venezuelan Revenue
If Venezuela shut down its wholly-owned U.S. refineries, the
supply of gasoline and other refined petroleum products made from
crude oil would decrease and, correspondingly, the prices of these
refined petroleum products in the United States would increase.
Venezuela wholly owns five refineries in the United States through
its PDVSA subsidiary, CITGO, and these account for about 750,000
barrels per day of refining capacity-4 percent of total U.S.
refining capacity. The impacts of shutting down CITGO refineries
would continue until the closed refineries were reopened or new
sources of refined petroleum products were brought on line. The
impacts would be obviously most severe in the United States,
although increased demand by U.S. oil companies to buy petroleum
products from other countries could cause prices to rise in those
countries as well. Venezuela would also lose the profits of these
refineries for as long as they were shut down, and could face
sanctions by the U.S. government-including freezing Venezuelan
assets in the United States-if the closure of the refineries were
deemed a threat to U.S. security.
We identified no studies of the impacts of oil refinery shutdowns
on the prices of refined petroleum products, but a shutdown of
several large U.S. refineries as a result of hurricanes Katrina
and Rita in 2005 clearly contributed to sharp increases in U.S.
fuel prices. For example, Hurricane Katrina caused a shutdown of
879,000 barrels per day, or 5.2 percent of U.S. refining capacity.
Figure 4 shows that following hurricanes Katrina and Rita in late
August and late September 2005, gasoline prices increased by over
$1 per gallon on the U.S. Gulf Coast Wholesale Market. While these
price spikes are indicative of what can happen in the event of
refinery shutdowns, it must be noted that there were other very
important disruption factors that affected these prices-such as
major pipeline shutdowns and damage-which make it difficult to
isolate the impact of the refinery shutdowns.
14The impact on the price of gasoline at the pump could be higher or lower
depending on many factors, such as whether the refiner passed all crude
oil cost increase on to the consumer and whether the gasoline retailer
passed all the increases on to the customer.
Closure of Venezuela's U.S. Refineries would Increase U.S. Petroleum Product
Prices and Reduce Venezuelan Revenue
Figure 4: Changes in Wholesale Conventional Regular Gasoline Prices in the
U.S. Gulf Coast following Hurricanes Katrina and Rita
U.S. Government Programs and Activities to Ensure a Reliable Long-Term Supply of
Crude Oil from Venezuela Have Been Discontinued, but the Government Has Options
to Mitigate Supply Disruptions in the Short Term
The U.S. government has programs and activities intended, in part, to
ensure a reliable long-term supply of oil from Venezuela and other
oil-producing countries to U.S. and world markets; these programs include
bilateral technology and information exchange agreements, bilateral
investment treaties, and multilateral energy initiatives. However, these
programs and activities have not been pursued with regard to Venezuela in
recent years. The U.S. government has options to mitigate the impacts of
short-term oil disruptions to global oil supplies, such as the disruption
caused by the Venezuelan strike. These options include diplomacy to
persuade oil-producing countries to increase production and using oil in
the U.S. Strategic Petroleum Reserve, with or without the release of oil
from other International Energy Agency countries' strategic reserves.
However, none of the U.S. government agencies, and few of the U.S. oil
companies that we contacted, have contingency plans specifically to
mitigate a Venezuelan oil disruption, although DOE conducts analyses of
the effects on the market of potential supply disruptions.
U.S. Programs and Activities to Ensure a Long-Term Supply of Venezuelan Crude
Oil for the United States Were Discontinued
The United States has had a bilateral technology and information exchange
agreement with Venezuela since 1980, and this agreement was expanded in
1997 to include policy dialogue on topics such as energy data exchange,
natural gas policy, and energy efficiency. Also, in the 1990s, the two
countries entered negotiations for a bilateral investment treaty and
worked together under the multilateral energy initiative to organize
hemisphere-wide meetings on energy security. By 2004, however, these
programs and activities had been discontinued as the result of strained
relations between the two countries and diminished technical capacity in
Venezuela.
Oil Production Technology and Information Exchanges between the United States
and Venezuela Occurred until 2003
According to DOE, it maintains bilateral technology and information
exchange agreements with Venezuela and 21 other oil-producing countries:
Angola, Argentina, Australia, Azerbaijan, Brazil, Canada, China,
Equatorial Guinea, Kazakhstan, India, Italy, Iraq, Mexico, Norway,
Pakistan, Peru, Russia, Saudi Arabia, the United Kingdom, Ukraine, and
West Africa/Nigeria. DOE officials told us that bilateral technology and
information exchange agreements are generally designed to offer avenues to
leverage publicly funded domestic research, accelerate scientific
achievement through technical cooperation, and support U.S. economic
competitiveness by providing U.S. scientists with opportunities to gain
access to (and build upon) other countries' research. They also said that
the agreements with four countries-Venezuela, China, Canada, and
Mexico-include provisions for cooperation on oil and natural gas recovery
technology that DOE requires be based on joint research of mutual benefit.
In the case of Venezuela, the specific purpose of the bilateral technology
exchange agreement was to cooperate on oil and gas technology and, after
1997, incorporate policy dialogue on such issues as the exchange of
information regarding the design and implementation of energy regulatory
systems, the development and evaluation of energy resources and
production, and the application of alternative energy sources. DOE
headquarters and field staff told us that the technical exchanges between
the United States and Venezuela under the agreement were robust. For
example, meetings were held about twice annually where technical staff
from both countries exchanged information.
Since November 21, 2003, however, no formal meetings of the countries'
technical staff have occurred. DOE headquarters and field officials told
us they were directed in 2003 by DOE headquarters to stop activities under
the agreement to accommodate diplomatic decisions. In addition, DOE
officials also told us that the last few technical meetings involved very
little exchange of technology information. Specifically, they said that
after the Venezuelan government fired a significant number of technical
employees following the Venezuelan strike, DOE technical staff had
difficulty identifying technical counterparts in Venezuela to maintain
activities under the agreement.
Venezuelan officials told us that attempts to encourage DOE to continue
activities under the technology exchange agreement were unsuccessful. For
example, Venezuela sent two letters to DOE in 2005 to arrange meetings
between Venezuela's Minister of Energy and Petroleum and the Secretary of
DOE, but DOE's response to one letter stated that the Secretary of DOE was
unable to meet, and, according to the Venezuelan spokesperson, DOE did not
respond to the other letter. Also, the Venezuelan spokesperson told us
that in November 2003, Venezuela presented DOE with a plan to reactivate
projects under the agreement but DOE demonstrated no interest. The
spokesperson also said that in March 2006, DOE officials told PDVSA's vice
president of production that DOE would not resume activities under the
agreement until the political relationship between Venezuela and the
United States improved. DOE officials confirmed this, but said DOE also
told PDVSA's vice president of production that part of the reason
activities could not be resumed was because DOE research on technology to
extract extra-heavy oil and gas was not a high priority, as it had been at
one time, because high energy prices removed the need to subsidize such
research.
Negotiations for a Bilateral Investment Treaty Ceased in 1999
According to Department of State and the Office of the U.S. Trade
Representative officials, informal bilateral investment treaty discussions
with Venezuela began in 1992 and formal negotiations began in October
1997. The United States has bilateral investment treaties in force with 39
countries, including many oil- and gas-producing countries such as
Bolivia, Kazakhstan, Trinidad and Tobago, and the Ukraine. These treaties
provide rules on investment protection, binding international arbitration
of investment disputes, and repatriation of profits, and assist U.S.
companies doing business in foreign countries. In our 1991 report on
Venezuelan production and conditions affecting potential future U.S.
investment there, we observed that most of the 22 oil companies with whom
we spoke during that effort told us that a bilateral investment treaty
would help increase their investment protection. In that report, we also
noted that an official in the Office of the U.S. Trade Representative said
that, in order for negotiations to be successful, Venezuela would have to
meet standards set forth in the model U.S. treaty-including provisions
prohibiting nationalization of property, providing for repatriation of
profits, and providing for international arbitration to resolve disputes.
U.S. and Venezuelan government officials said that bilateral investment
treaty negotiations broke down in 1999 because of significant policy
differences between the two countries. A Venezuelan spokesperson and U.S.
officials identified three major differences, including the model treaty
provisions relating to performance requirements, such as rules stipulating
minimum content requirements and obligations to compensate investors for
damage done by internal strife.
In May 2001, the U.S. National Energy Policy Development Group recommended
that the United States conclude bilateral investment treaty negotiations
with Venezuela. Department of State officials told us that later in 2001,
when they revisited the issue in response to this recommendation, they
made an effort to reengage Venezuela, but the effort proved unsuccessful
because of continued major differences between the two countries.
Department of State officials said they decided that the probability of
negotiating a treaty that contained the high standards the United States
expects was very unlikely, and they pursued the treaty no further.
Department of State officials told us that in bilateral investment treaty
negotiations generally, it is overall policy to insist on the high
standards contained in the U.S. model treaty to avoid a dilution of
standards across agreements.
Many oil company officials and experts said that a bilateral investment
treaty could have helped protect oil companies' investments in Venezuela
when the Venezuelan government unilaterally required them to change their
existing operating service agreements to comply with the new hydrocarbon
law. For example, officials from one U.S. oil company said new agreements
that companies were required to sign did not contain provisions allowing
international arbitration to settle disputes. The officials said their
company was concerned about the fairness of having Venezuelan arbitrators
settle disputes between U.S. companies and PDVSA or the Venezuelan
government. International arbitration was required under the company's old
agreements, and the current U.S. model bilateral investment treaty
provides for it. Some U.S. oil company officials also told us that some
companies are considering incorporation in other countries that have
bilateral investment treaties with Venezuela, such as the United Kingdom
and the Netherlands, because the treaties would help protect their
investments. Similarly, some oil experts also told us companies from
countries with bilateral investment treaties have assurances that they can
repatriate profits if Venezuela seizes control of their operations.
The United States and Venezuela Participated in the Multilateral Hemispheric
Energy Initiative until 2004
In 1994, DOE and the Venezuelan Ministry of Energy and Petroleum became
the principal coordinators of what was known as the Hemispheric Energy
Initiative. The goal of this activity was to stimulate dialogue and
cooperation on energy issues among countries in the Western Hemisphere and
identify and promote actions to foster regional interconnections through
the development of energy sector projects in the hemisphere. As the
coordinators, DOE and Venezuela's Ministry of Energy and Petroleum
organized a series of hemispheric-wide summit meetings to discuss energy
cooperation beginning in 1995. For example, at the third hemispheric
meeting in Caracas, Venezuela, in January 1998, officials from the 26
countries in attendance agreed to promote policies that facilitated trade
in the energy sector and facilitate the development of the energy
infrastructure, develop regulatory frameworks that are transparent and
predictable, and promote foreign private investment in the sector
throughout the hemisphere. DOE officials told us that this initiative
ended with the meeting in Mexico in 2002, but that, in 2004, Trinidad
offered to host a meeting of hemispheric energy ministers in a less formal
setting to discuss energy security. The meeting, which was held in
Trinidad and Tobago in April 2004, was organized by DOE and Trinidad,
without Venezuela playing a significant role organizationally. The meeting
focused on hemispheric energy security and included high-ranking energy
officials from 35 countries, including the United States, Canada, Mexico,
and Venezuela, as well as other key energy-producing countries from
Central and South America. DOE officials told us that, during the meeting,
Venezuela's Minister of Energy and Petroleum met with DOE's Secretary and
agreed that it was very important not to politicize the oil trade between
the United States and Venezuela and that both countries recognized the
importance of that trade. According to DOE officials, no action has taken
place since the meeting in Trinidad and Tobago.
Relations between the United States and Venezuela Have Become Strained
According to Department of State and other U.S. government officials, the
United States has had historically strong ties to Venezuela with respect
to oil issues, and the dialogue between the two countries in the past was
robust. But the relationship between the two countries with respect to
energy issues has changed in recent years-some energy related activities
previously used to foster energy security have been discontinued. For
example, DOE officials told us that 3 years have elapsed since the last
formal discussion between DOE and the Venezuelan Ministry of Energy and
Petroleum regarding energy security. Also, officials in the Commerce
Department and in the Office of the U.S. Trade Representative reported
there is no current engagement between them and their counterparts in
Venezuela regarding energy security. Officials in Department of State
headquarters said that they have worked hard for years to build a
productive energy relationship with Venezuela by participating in frequent
consultations with Venezuelan energy officials, meeting most recently in
March 2006. DOE officials also said they have maintained open dialogue
with Venezuelan energy officials.
Most U.S. oil companies have not relied on assistance from the U.S.
government to help with issues in Venezuela in recent years although,
according to DOE officials, DOE stays in contact with companies regarding
the situation in Venezuela, and senior DOE officials frequently report on
the status of U.S. energy investment and overall energy production in
Venezuela at senior-level meetings of the U.S. government. The U.S.
Ambassador to Venezuela told us he does not have good access to Venezuelan
government officials and, correspondingly, it is difficult to help U.S.
companies doing business in Venezuela obtain access to Venezuelan
officials. Officials in the Departments of Commerce and State, and in the
Office of the U.S. Trade Representative, told us companies that might
otherwise seek their assistance in negotiating with foreign governments do
not do so in Venezuela because the companies do not believe that federal
agency intervention would be helpful. For example, an official from the
Department of Commerce said that U.S. government involvement would be
extremely harmful to the relationship between U.S. companies and their
business interests in Venezuela. Officials in several U.S. oil companies
told us that the poor bilateral relationship between the United States and
Venezuela makes it difficult for them to operate and compete for new
investment contracts in Venezuela.
The U.S. Government Has Options to Mitigate the Impacts of Short-Term Venezuelan
Oil Supply Disruptions
Key activities and programs that the U.S. government has used to mitigate
the impacts of short-term oil supply disruptions include diplomacy,
whereby U.S. government officials negotiate with senior officials in
oil-producing countries to increase their supply of crude oil in case of a
disruption; using oil in the U.S. Strategic Petroleum Reserve; and
coordinating with the International Energy Agency, whose members hold
stocks equal to 90 days or more of its net imports to address supply
disruptions.15 Officials in the Department of State and DOE, as the lead
agencies in crafting U.S. energy security policy, consult with each other,
with other U.S. government agencies (as appropriate), and with U.S.
companies doing business in foreign countries to identify potential oil
disruptions and craft responses to the disruptions, if necessary.
15DOE officials also told us that they encourage energy efficiency and
conservation during oil disruptions.
U.S. government agencies used diplomacy to mitigate the impact of the oil
disruption resulting from the Venezuelan strike. Anticipating a potential
oil supply problem in Venezuela, representatives from key DOE offices
began coordinating with the Department of State months before the strike
to produce a plan to bring together data and information about possible
supply problems and to produce an appropriate response to the potential
disruption. The overall effort was headed by the National Security Council
and top U.S. government administration officials, with Department of State
and DOE officials acting as subject experts. After the strike began, the
Department of State and DOE used diplomacy to encourage increases in OPEC
member and other countries' crude oil production by 1.3 million barrels
per day. Also, according to DOE officials, DOE officials responsible for
coordinating oil supply disruptions responses with the International
Energy Agency upgraded their day-to-day contact with emergency response
officials at the agency, focusing on the strike's potential impacts and
assessing possible mitigation measures. According to an EIA study, most of
the replacement oil came from Mexico and the Middle East, especially Iraq.
Not withstanding this success, most oil industry officials and experts, as
well as U.S. government officials, said that using diplomacy to obtain
additional oil likely would be less effective today because there is less
surplus oil production capacity now than there was during the Venezuelan
strike. During the Venezuelan strike, as much as 5.6 million barrels per
day of spare oil production capacity was available from several regions,
including Mexico, West Africa, and the Middle East. Now, experts say that
the total world spare production capacity is only about 1 million barrels
per day, and most of it is in Saudi Arabia. If the oil balance continues
to tighten and surplus production capacity shrinks, increasing production
in response to disruptions will be more difficult, if not impossible.
Aside from using diplomacy, another tool for mitigating supply disruptions
is the use of oil reserves. The U.S. government can use the U.S. Strategic
Petroleum Reserve to increase the supply of crude oil available to U.S.
refineries in three ways: selling oil from the reserve, exchanging oil
from the reserve whereby Reserve oil is replaced at a specified date in
the future, and allowing oil companies to delay delivering oil to the
reserve. Federal law requires that the drawdown and sale of oil from the
Strategic Petroleum Reserve be authorized by the President. However, DOE
can authorize an exchange of oil from or a delay in delivery of oil to the
Reserve. 16 While no set criteria exist for triggering the release of oil
from the reserve in the case of a supply disruption, U.S. agency officials
told us that, during any disruption, the Department of State and DOE
provide analytical and technical advice through the National Security
Council to help the President evaluate his options. U.S. policy makers
believe that providing oil during a supply disruption is the most
efficient mechanism to counteract the impacts of the disruption.
The United States currently maintains about 700 million barrels of crude
oil in the U.S. Strategic Petroleum Reserve. If 1.5 million barrels a day
were released-the amount of crude oil exported by Venezuela to the United
States-the reserve is enough to replace over 450 days of lost Venezuelan
oil. During the Venezuelan oil strike, oil was not withdrawn from the U.S.
Strategic Petroleum Reserve, mostly because other oil-producing countries
increased production by 1.3 million barrels a day. However, the U.S.
government allowed U.S. oil companies to delay delivering oil that they
were committed to deliver to the U.S. Strategic Petroleum Reserve, which
added about 18 million barrels to the U.S. oil supply available to
refineries-an amount equivalent to almost 1 day of U.S. oil consumption,
or almost 2 weeks of Venezuelan oil exports to the United States.
In addition to using the U.S. Strategic Petroleum Reserve to mitigate the
impact of a supply disruption, the United States could also benefit if the
strategic reserves of International Energy Agency member countries were
released. Each International Energy Agency member country is required to
hold stocks equal to 90 days or more of its net imports. Presently,
International Energy Agency countries hold about 4.1 billion barrels of
oil stocks. According to a DOE official, the three countries with the
largest government controlled reserves-the United States, Germany, and
Japan-are able to release about 8 million barrels a day at the onset of a
disruption. This quantity is equal to about 10 percent of total world oil
demand. The International Energy Agency also requires member countries to
release stocks, restrain demand, and share available oil, if necessary, in
the event of a major oil supply disruption. While there are no criteria
for triggering the release of oil from the member countries' reserves, the
International Energy Agency has specified arrangements for the coordinated
use of a drawdown, the restraint of demand, and other measures that member
countries could implement in case of a disruption. Also, International
Energy Agency officials say that a disruption of 7 percent or more of
world supply is a de facto trigger.
16Energy Policy and Conservation Act S: 161(d) as amended, 42 U.S.C. S:
1641(d) et seq. The Secretary is also authorized to carry out test
drawdowns and sales not to exceed 5,000,000 barrels of petroleum products.
42 U.S.C. S: 6241(g).
During the Venezuelan strike, the Department of State and DOE maintained
steady diplomatic contact with members of the International Energy Agency
to discuss the evolving situation and to share concerns in case a drawdown
of member reserves was deemed necessary. A later International Energy
Agency analysis of the Venezuelan disruption concluded that, although
International Energy Agency member-country stocks were not used during the
Venezuelan disruption, the presence of the International Energy Agency
stocks played an important role in reassuring the market. Furthermore, the
availability of government stocks muted speculation on the markets,
according to an International Energy Agency analysis of the disruption.
Although the U.S. government has options to mitigate impacts of short-term
oil disruptions on crude oil and petroleum products prices, these
mitigating actions are not designed to address a long-term loss of
Venezuelan oil from the world market. If Venezuela fails to maintain or
expand its current level of production, the world oil market may become
even tighter than it is now, putting further pressure on both the level
and volatility of energy prices. In this context, the United States faces
challenges in the coming years that may require hard choices regarding
energy sources, foreign relations and energy-related diplomacy, and the
amount of energy Americans use.
Officials in the four U.S. government agencies we contacted said they do
not have contingency plans to deal with oil losses specifically from
Venezuela or any other single country. Officials at the lead agencies for
energy security, the Department of State and DOE, said they do not have
specific plans because the available mechanisms to mitigate the impacts of
an oil disruption-diplomacy to persuade oil-producing countries to
increase production and using oil from the U.S. Strategic Petroleum
Reserve-are adequate to deal with disruptions from any source. According
to DOE officials, it conducts scenario analyses of the vulnerabilities of
disruptions from certain countries and relies on these options to deal
with disruptions. They said that these options have been proven to be
adequate.
Officials in most oil companies we contacted also said they do not have
plans to deal specifically with a disruption of Venezuelan oil because, as
with any oil disruption, if a Venezuelan oil disruption were to occur they
would replace the lost oil with oil from other sources. The officials said
that oil is a fungible commodity and typically available on the spot
market. During the Venezuelan strike, for example, U.S. refiners replaced
Venezuelan crude oil with crude oil from other sources, including Mexico,
Brazil, Russia, Ecuador, and the Middle East.
Agency Comments and Our Evaluation
We provided the Departments of State and Commerce, DOE, and the Office of
the U.S. Trade Representative with a draft of this report for their review
and comment. The Department of State and the Office of the U.S. Trade
Representative told us that they generally agreed with the findings of the
report but did not provide written comments. DOE and the Department of
Commerce provided written comments. The Department of Commerce agreed with
the report's overall findings; Commerce's letter is reproduced in appendix
II. DOE neither agreed nor disagreed with the report's overall findings,
noting that the United States has had a long and mutually beneficial
relationship with Venezuela and that our report makes valuable points
regarding the challenges facing Venezuelan crude oil production. However,
DOE raised two issues that it contends provide an "alarmist view" of U.S.
energy security. DOE's concerns and our response to them are summarized
below; DOE's letter is reproduced in appendix III. All four agencies also
provided technical comments, which we incorporated as appropriate.
DOE's first concern is that a $23 billion loss to U.S. GDP, which we
reported and attributed to a model developed for DOE by a contractor, is
misleading and will be taken out of context because the prediction does
not take into account mitigating factors that could influence the impact
of an oil disruption on U.S. GDP. Specifically, DOE said that the
prediction does not take into account worldwide response to an oil supply
disruption, the availability of Arab Heavy oil to replace lost Venezuelan
heavy oil, and the ability to use the U.S. Strategic Petroleum Reserve and
worldwide stocks to mitigate the impact of a disruption. We disagree that
our reporting of the model results is misleading or out of context and
believe all the mitigating factors raised by DOE have been addressed in
our report. Contrary to DOE's assertion, the model that predicted the $23
billion loss incorporates the worldwide response and availability of
replacement oil from surplus production capacity, such as Arab Heavy oil.
However, as our report notes, because there is much less surplus capacity
available today than there was in winter 2002-2003 when a similar
disruption occurred as a result of the Venezuelan strike, relying on
surplus capacity would not be as effective as it was at that time. Also,
our report discusses in detail the options the U.S. government has to
mitigate the impacts of an oil disruption, including using strategic
petroleum reserves, either unilaterally or in concert with other
countries. DOE also states that the report does not contain an analysis of
the impact of a Venezuelan oil supply disruption on that country's
economy. We disagree with this assertion. Our report discusses the severe
impact a Venezuelan oil disruption would have on that country's
economy-the Venezuelan national oil company is the country's largest
employer, and accounts for a third of Venezuela's GDP, four fifths of its
export revenue, and half of government revenue-and notes that Venezuela
would likely take steps to correct any such disruption as soon a possible
to avoid that impact.
DOE's second concern is that by focusing on the discontinuation of
bilateral programs with Venezuela our report leads the reader to believe
that such programs could guarantee U.S. energy security. We disagree;
nowhere in the report do we imply that such programs with Venezuela could
guarantee the United States' energy security. On the contrary, we point
out that instability in Venezuela's oil sector exists in a broader context
of tightening global oil supply and demand balance and that instability of
any significant individual oil-producing country can have a significant
impact on U.S. and world energy security. Further we report that a number
of factors create energy security concerns, including a reduction in
global surplus oil production capacity in recent years, the fact that much
of the world's supply of oil is in relatively unstable regions, and rapid
growth in world oil demand that has led to a tight balance between demand
and supply. DOE also states that our report does not address the
comprehensive actions the U.S. is taking domestically and internationally
to ensure energy security. While a comprehensive assessment of U.S. energy
security was beyond the scope of this report, our report nonetheless notes
that the United States has long had a number of programs and activities
designed to ensure energy security. For example, for those initiatives
identified as within the scope of our report, we listed the 21 other
countries with which the U.S. government has negotiated bilateral
technology and information exchange agreements.
Overall, we disagree that our report, as written, presents an "alarmist
view" of U.S. energy security. We point out that oil supply disruptions
can have adverse economic impacts but that the U.S. government has options
to mitigate such impacts. However, we also point out that these mitigating
options are only designed for short-term disruptions and there remain
potential long-term concerns with regard to Venezuelan oil supply in the
event that Venezuelan oil production continues to fall.
We are sending copies of this report to interested congressional
committees, the Secretary of Energy, the Secretary of State, the United
States Trade Representative, and the Secretary of Commerce. In addition,
the report will be available at no charge on the GAO Web site at
http://www.gao.gov .
If you or your staff have any questions, please contact me at (202)
512-3841 or at [email protected] . Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. GAO staff who made major contributions to this report are
listed in appendix IV.
Sincerely yours,
Jim Wells Director, Natural Resources and Environment
Appendix I: Objectives, Scope, and Methodology
The Chairman of the Senate Committee on Foreign Relations asked us to
answer the following questions: (1) How have Venezuela's production of
crude oil and exports of crude oil and refined petroleum products to the
United States changed in recent years, and what are the future prospects?
(2) What are the potential impacts of a reduction in Venezuelan oil
exports, a Venezuelan embargo on oil exports to the United States, or
sudden closure of Venezuela's refineries in the United States? (3) What is
the status of U.S. government programs and activities to ensure a reliable
supply of oil from Venezuela and to mitigate the impacts of a supply
disruption? We used a number of methodological techniques to address these
issues.
To address the first objective, we reviewed studies and analyses of the
Venezuelan oil sector and its history. We met with officials from 10 U.S.
and multinational oil companies, eight refiners, and two service
companies; industry experts from the International Energy Agency, the
Center for Strategic and International Studies, the National Petrochemical
and Refiners Association, an international energy consulting firm, and
other institutions; and officials from the Department of Energy (DOE),
Department of State, Department of Commerce, the Office of the United
States Trade Representative, the U.S. Geological Survey, and various other
U.S. government agencies. In addition, we visited Caracas, Venezuela, and
met with the U.S. Ambassador and embassy staff; Venezuela's Minister of
Energy and Petroleum; Petroleos de Venezuela S.A. (PDVSA) officials,
including the president, the vice president of production, and a number of
PDVSA board members and senior managers; the Venezuelan Auditor General;
members of the financial community; and other individuals with expertise
in the oil sector of Venezuela. We met with operations officials at
various oil exploration, production, and refining centers in the Maracaibo
and Faja regions of Venezuela. Both in the United States and in Venezuela,
we spoke with numerous former PDVSA employees, executives, and directors,
and oil company officials. We also collected, evaluated the reliability
of, and analyzed data on Venezuelan production, consumption, and exports
of oil and petroleum products. The sources of our data include U.S.
government agencies, especially the Energy Information Administration
(EIA); the International Energy Agency; the Venezuelan government and
PDVSA; and other governmental and private sources. We deemed these data to
be reliable for the purposes of addressing our objectives. Regarding
Venezuela's plans for future production, we analyzed plans and data
provided by the Ministry of Energy and Petroleum and PDVSA officials. We
also discussed the feasibility of Venezuela implementing its plans with
Department of State and DOE officials, as well as with numerous oil
company officials and industry experts.
To address the second objective, we reviewed several studies of the
impacts of oil disruptions, including the impact of the Venezuelan strike
in the winter of 2002-2003. We also analyzed current conditions in the
world oil market to evaluate what might occur if a similar disruption
occurred today. We also evaluated the potential impacts of-(1) a sudden
and severe drop in Venezuelan oil exports from the world market, (2) a
sudden diversion of oil from the United States to other markets through an
embargo, and (3) the closure by Venezuela of its wholly-owned U.S.-based
refineries. Specifically, we asked a DOE contractor at the Oak Ridge
National Laboratory to use an economic oil-disruption model to analyze the
impacts of a hypothetical Venezuelan oil disruption on world oil prices
and on the U.S. gross domestic product (GDP). For this analysis we
constructed a hypothetical disruption scenario similar to the one that
actually occurred during the Venezuelan oil strike in the winter of
2002-2003, but using assumptions regarding market and economic conditions
closer to those that prevailed at the time of the analysis (late 2005). We
also conducted our own analysis of the same scenario using EIA's oil
disruption rules of thumb that predict how oil prices and the U.S. GDP
respond to disruptions in world oil supplies. For the analyses of the
potential impacts of a Venezuelan embargo against the United States, we
relied largely on EIA analyses. For the impacts of Venezuela's sale or
closure of its CITGO refineries in the United States, we analyzed the
response of gasoline prices to the major loss of refinery capacity that
accompanied hurricanes Katrina and Rita in 2005. In addition, we discussed
the impact of potential Venezuelan oil disruptions with numerous industry
experts in Venezuela and in the United States; officials in the
Departments of State and Commerce, and DOE; and International Energy
Agency officials.
To address the third objective, we met with officials at various U.S.
government agencies, including the Departments of State and Commerce, DOE,
and the Office of the U.S. Trade Representative, to identify the status of
programs and activities to ensure a continued supply of oil and to
mitigate a disruption of imports of crude oil and refined petroleum
products from Venezuela, as well as to determine whether the agencies have
Venezuelan-specific contingency plans. We also met with officials of 10
U.S. and multinational oil companies, eight refiners, and two service
companies; industry experts from the International Energy Agency, the
Center for Strategic and International Studies, the National Petrochemical
and Refiners Association; Purvin and Gertz; and other institutions. In
addition, we obtained information on Venezuelan decrees and legislation
governing foreign investment in the petroleum industry. We reviewed our
previous work on U.S. energy security, especially our 1991 study,
"Venezuelan Energy: Oil Production and Conditions Affecting Potential
Future U.S. Investment."
Because the Department of State advised us that visiting port facilities
may be considered too sensitive to the Venezuelan government given that
government's apprehension about the U.S. government, we did not assess
port or other facilities for vulnerability to sabotage or attack. However,
the Coast Guard, as part of its port security responsibilities, identifies
countries that are not maintaining effective antiterrorism measures.
According to Coast Guard officials, Venezuela has not been identified as
such a country.
This report focuses on federal programs and activities related to U.S.
energy security. Diplomatic and political actions that may impact U.S.
energy security may be undertaken for a multitude of foreign policy goals
that are beyond the scope of this report. Therefore, our evaluation of
programs and activities related to energy security is in no way intended
to evaluate the U.S. government's approach to these broader goals.
Department of State officials reviewed a draft of our report to ensure we
did not include information in our report that could influence diplomatic
relations.
To obtain the official Venezuelan government position on questions
relating to all three objectives, we made arrangements with the Venezuelan
Embassy in Washington, D.C., for an official spokesperson. Generally, we
submitted questions to the spokesperson who then asked for answers and
explanations from the appropriate officials in Venezuela and provided the
answers to us, usually in writing. In addition, the spokesperson made
several presentations to provide information on Venezuela's oil sector. We
did not verify the information provided by the spokesperson. In addition,
we did not independently review Venezuelan laws and decrees, and relied on
secondary sources such as interviews.
We performed our work from March 2005 through May 2006 in accordance with
generally accepted government auditing standards.
Appendix II: Comments from the Department of Commerce
Appendix III: Comments from the Department of Energy
Appendix IV: GAO Contact and Staff Acknowledgments
GAO Contact
Jim Wells (202) 512-3841
Staff Acknowledgments
In addition to the individual named above, Philip Farah, Byron S.
Galloway, Carol Kolarik, Michelle Munn, Cynthia Norris, Melissa Arzaga
Roye, Frank Rusco, and Barbara Timmerman made key contributions to this
report.
(360592)
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Highlights of GAO-06-668, a report to the Chairman, Committee on Foreign
Relations, U.S. Senate
June 2006
ENERGY SECURITY
Issues Related to Potential Reductions in Venezuelan Oil Production
Venezuela is the world's eighth-largest oil exporter and among the top 10
countries in total proven oil reserves. Venezuela also supplies about 11
percent of current U.S. imports of crude oil and petroleum products and
wholly owns five refineries in the U.S. Consequently, Venezuela is a key
player in the future energy security of the United States and the world.
The current global oil market is tight and may be more susceptible to
short-term supply disruptions and higher and more volatile prices.
Recently, tension between Venezuela and the United States has caused
concern about the stability of Venezuelan oil supplies. On several
occasions, Venezuela's President has threatened to stop exporting oil to
the U.S. or to close Venezuela's U.S.-based refineries.
In this context, GAO analyzed: (1) how Venezuela's crude oil production
and exports of crude oil to the U.S. has changed in recent years, (2) the
potential impacts of a reduction in Venezuelan oil exports to the U.S.,
and (3) the status of U.S. government programs and activities to ensure a
reliable supply of oil from Venezuela. Commenting on a draft of the
report, the State and Commerce Departments generally agreed with the
report, but DOE contended that the report presents an "alarmist view" of
U.S. energy security. We disagree and believe the report presents a
contextually balanced treatment of the issue.
Venezuelan oil production has fallen since 2001, but exports of crude oil
and petroleum products to the United States have been relatively
stable-except during a 2-month strike in the winter of 2002-2003, during
which the oil sector was virtually shut down and exports to the United
States fell by about 1.2 million barrels. Energy Information
Administration data show that total Venezuelan oil production in 2001
averaged about 3.1 million barrels per day, but by 2005 had fallen to
about 2.6 million barrels per day. Following the strike, Venezuela's
President ordered the firing of up to 40 percent of Venezuela's national
oil company employees. U.S. and international oil industry experts told us
that the resulting loss of expertise contributed to the decline in oil
production. In 2005, the Venezuelan government announced plans to expand
its oil production significantly by 2012, but oil industry experts doubt
the plan can be implemented because Venezuela has not negotiated needed
deals with foreign oil companies as called for in the plan.
A model developed for the Department of Energy estimates that a 6-month
disruption of crude oil with a temporary loss of up to 2.2 million barrels
per day-about the size of the loss during the Venezuelan strike-would, all
else remaining equal, result in a significant increase in crude oil prices
and lead to a reduction of up to $23 billion in U.S. gross domestic
product. A Venezuelan oil embargo against the United States would increase
consumer prices for petroleum products in the short-term because U.S. oil
refiners would experience higher costs getting replacement supplies. A
shutdown of Venezuela's wholly-owned U.S. refineries would increase
petroleum product prices until closed refineries were reopened or new
sources were brought on line. These disruptions would also seriously hurt
the heavily oil-dependent Venezuelan economy.
U.S. government programs and activities to ensure a reliable supply of oil
from Venezuela have been discontinued, but the U.S. government has options
to mitigate short-term oil disruptions. For example, activities under a
U.S.-Venezuela oil technology and information exchange agreement were
stopped in 2003, in part, as a result of diplomatic decisions. In recent
years, U.S. oil companies have not sought assistance from the U.S.
government with issues in Venezuela because the companies do not believe
that federal agency intervention would be helpful at this time. To
mitigate short-term oil supply disruptions, the U.S. government could
attempt to get oil-producing nations to increase their production to the
extent possible, or could release oil from the U.S. Strategic Petroleum
Reserve. While these options can mitigate short-term oil supply
disruptions, long-term reductions in Venezuela's oil production and
exports are a concern for U.S. energy security, especially in light of
current tight supply and demand conditions in the world oil market. If
Venezuela fails to maintain or expand its current level of production, the
world oil market may become even tighter than it is now, putting further
pressure on both the level and volatility of energy prices.
*** End of document. ***