Venezuela

Geopolitical risk is always a major feature of global oil and gas markets, but the interplay of wars without end, powerful non-state actors, and the proliferation of new weapons technologies across the globe is raising that risk. Energy Realpolitik sits down with Council on Foreign Relations (CFR) National Intelligence Fellow Michael Dempsey to discuss a host of risks that might impact the energy sector in the coming years. Topics are drawn from recent discussions by CFR fellows at Columbia University's Center for Global Energy Policy.  What are some broad trends that could influence the energy sector’s outlook in the next few years?       Mike Dempsey: First, it’s clear that the underlying conditions that brought us the Arab Spring in 2011 have not been resolved.   Just consider, according to the most recent Arab youth survey, youth unemployment remains at around 30 percent in the Middle East, and countries in this region by 2025 are projected to have a population of nearly 60 million between the ages of 15-24.    That’s a sizeable slice of the region’s population, and one-third of them are likely staring at long-term unemployment, especially if regional growth rates stay mired in the 1 to 3 percent range.       The young are not only restive, they are connected. So, during Iran’s protests in January, Iranians used forty-eight million iPhones to spread the word, and the protests spread to more than eighty cities across the country.  In 2009, estimates are that 15 percent of Iran’s population had iPhones; today it’s about half.   Just ask yourself, would we have imagined last December that protests in countries as diverse as Tunisia and Iran would be sparked by many of the same underlying conditions?    That’s not, of course, to say that there aren’t some positive trends in the Middle East (the increasing influence of women, a renewed focus on education and technology, etc.) but the negative trends are still dominant, in my view, and are likely to trigger rapid, unexpected crises in the future of the sort that we’ve experienced in recent years.   Second, a more serious debate is underway in the Middle East and beyond about the future of Political Islam. This issue is obviously being discussed in Saudi Arabia—with some encouraging signs, but also concerns—and is playing out in different ways in Egypt, Iran, and across the globe from parts of Africa to Indonesia, Malaysia and beyond. How this debate is resolved will obviously have profound implications for future political stability.   Third, if evolving economic and religious trends are shaping global stability, so too is technology. I won’t go into detail on all of the widely recognized positives that flow from recent advances in technology—energy experts certainly know the effects on the sector better than I do—but there are emerging risks that also have to be considered.  Recall on the security front: a decade ago, the U.S. military was the only country operating armed drones over Iran and Syria. Today, there are more than a dozen countries and non-state actors such as ISIS and Hezbollah that are doing so.  In fact, during the U.S.-backed coalition advances on both Raqqa and Mosul, ISIS used armed drones against U.S. forces.         And consider press accounts concerning armed drones being used in Syria only three months ago.   During the evening of January 5 and into the next day, the Russian military reportedly faced two separate swarm attacks using miniature drones against two of its bases. In total, thirteen drones were used by the attackers, each carrying ten bomblets; ten drones targeted the Russian airbase in Latakia, three the Russian naval base in Tartus.   According to press accounts, the drones each carried an explosive charge weighing about one pound, and included strings of metal ball bearings that were intended to harm individuals in the open. There are reports that several Russian fighter jets were damaged on the ground, though Moscow denies this.    Most of the individual components in the drones, including the motors, are commercially available. The drones used an onboard GPS system for navigation, but again, this technology is easily available for purchase online.   So, is it really hard to imagine in the next few years that similar attacks will be launched at other bases or sensitive oil infrastructure facilities around the world?   And here is the final kicker to the Russian story. To this day, it’s impossible based on open source information to determine who conducted the attack. So, how attractive could this type of plausibly deniable operation be to terrorists or even criminal elements in the future?   One final word on drones, if you’ve ever seen drone races you’ll know that the tiny drones used fly at great speeds—more than 150 mph—and with incredible maneuverability. That type of speed and maneuverability already poses a clear and present threat to those charged with protecting important government and commercial facilities.   And while we are discussing security threats, consider that in Yemen, as many of you are well aware, the Houthis within just the past few months have struck a Saudi tanker in the Bab-al-Mandeb Strait and fired drones and missiles of increasing accuracy and range into Saudi Arabia, producing the first casualty in Riyadh.   So, how different would the global energy outlook be tomorrow if a barrage of Houthi missiles hits Riyadh?  Would that not trigger a broader regional conflict?   Or how about if Houthi missiles penetrate Saudi air defenses and strike Aramco?       I don’t mention these threats because I think they will happen, but I, unfortunately, absolutely believe they could.   I could go on about other threats, including cyber intrusions and the long-term threat posed by autonomous weapons, but here is the bottom line: technology is going to make working in the energy sector in the future much easier, but also, in some ways, perhaps much harder.    Fourth, while I am always worried about sudden country-specific crises that could influence the energy market, I’m frankly also concerned about a growing number of transnational challenges and their potential to trigger broader instability. Some of these challenges include the rapid spread of preventable diseases, as well as today’s unprecedented human displacement crisis.   Today, more than sixty-seven million people (or one of every 110 or so humans on the planet) is a displaced person, which is fueling instability in countries from the Middle East to Western Europe. I fear we are losing entire generations of young people in countries such as Syria, and the long-term effects on regional and international stability will be profound.    This trend is especially worrisome because it’s largely owing to the international community’s inability to end the conflicts that are driving instability and displacement—witness our seventeenth year of conflict in Afghanistan, seventh in Syria, and fourth in Yemen.   So, conflicts and threats that should be preventable or bounded, now seem to grind along into deeper crises with pernicious effects that we often don’t recognize until it’s too late. Just recall how the flow of people fleeing violence in Afghanistan, Libya, and Syria have affected Western Europe’s political landscape.    This challenge is made even more difficult by the inward turn of Western states. In my view, this is an especially problematic time for the West to retreat from the world stage and to turn its focus inward.  A fifth trend that will certainly affect the energy sector surrounds issues of transparency and corruption.   The push for greater transparency around the globe is a hugely positive development, in my view, that could eventually increase business and government efficiency, improve governance at many levels, and deepen public confidence in both government and business. As you know, the pernicious effects of corruption are well documented. For example, the IMF estimates that the cost of bribery alone (one subset of corruption) costs between $1.5 and $2 trillion a year, equal to about 2 percent of global GDP.   This cost has been evident in many countries for some time. Venezuela is a good example of this, where PDVSA has been raided for years both to pay for government expenses and as a patronage cash cow, all while the company’s infrastructure was neglected. Indeed, the fight against corruption is now a first-tier issue in countries of significant importance to global energy markets, from Brazil to Mexico and from Nigeria to India.    In the short-term, the anti-corruption fight could generate increasing political instability, but if it eventually leads to more transparent and better governance in these countries, I’m certain that it will invariably help their economic performance in general, and the energy sector in particular.      So, in my view, these are five critical trends that will influence the world’s energy market in the coming years.   Are there any current developments that you are following that could influence energy prices in the near-term?    MD: Sure. These include the outlook for the Iran nuclear deal after May 12, the prospects for the upcoming U.S.-North Korea Presidential Summit, Libya’s lack of progress toward political reconciliation and the recent terrorist activity against the country’s energy industry, and the ongoing negotiations concerning the global trade agenda, especially the near-term outlook for NAFTA.   How do you then view geo-strategic trends and the likely effects on global energy prices over the next year or two?   MD: I’d say the geo-strategic backdrop for the near-term leans heavily toward increased risk, with the potential for worrisome surprises—and potential oil flow disruptions—across a range of countries including Iran, Libya, Nigeria, Venezuela, and Saudi Arabia. But I hope I’m wrong!  Do you have any final advice/tips for energy analysts or those tracking the industry?  MD: Yes. In my view, the international environment is quite fraught at the moment, which means it would be a good time to:  Routinely challenge your underlying assumption about the energy market. There are enough gathering threats (from simmering regional conflicts that have the potential to spike on short notice to asymmetric threats such as cyber and other non-traditional weapons) that this isn’t a good time for analytic complacency.  Think deeply about the quality of leadership and governance in the countries you’re following. It’s always amazing, after the fact, to examine how signals were missed and how seemingly stable countries (and companies) can experience unexpected periods of profound turmoil. As a useful exercise in humility, for example, it’s worth going back and reviewing the leading investment banks’ economic forecasts in 2006-2007, right on the eve of the Great Recession. In both the intelligence and business sectors, then, it’s worth remembering that it’s easy to develop analytic blind spots, fall victim to straight-line analysis, discount worrisome alternative scenarios, and underestimate critical drivers of change.    Along these lines, I really would encourage everyone to look hard at physical and data security issues and to constantly re-evaluate how they are postured against the next generation of challenges.   And finally, I would urge folks to think broadly and systemically about the issue of risk. Is protecting one particular company good enough today? Or do industry leaders need to cooperate more in protecting the whole system they operate in? For example, if a cyber attack cripples one energy company, isn’t it possible that attackers will learn from that experience and attack others, and that the public’s confidence will be undermined in all parts of the industry?  The issues we face today are less about competitive advantage than about preventing systemic risk or failure. 

Years ago, Wanda Jablonski, the famous energy journalist and newsletter publisher, gave me an important piece of professional advice. Be careful how many conflicts you take on at one time.  Wanda’s admonition was intended to instruct me about how to be effective within the complex oil politics of the Middle East. But lately, I have been reminded of her wise counsel as I read the news. The Trump administration should heed her words in deliberating on the vast array of trade and oil sanctions issues that need to be considered by the White House. While it is true that chances are any individual policy that could affect oil and gas trade can be accommodated easily by markets, it could be a different calculation to impose multiple policies all at once. Oil markets are watching closely all of the various energy related trade and sanctions policies on the table. Right now, any tightening of oil sanctions against Iran are viewed as the most impactful upside market risk, with the U.S.-China trade war swinging sentiment in the opposite direction.    U.S. oil and gas exports are on the rise and that has been good for the United States geopolitically. U.S. energy exports help promote American influence while at the same time reducing the U.S. trade deficit. So far this year, U.S. energy exports have exceeded expectations and that is paving the way for some beneficial outcomes. Besides serving as a bulwark against Russian manipulation and Mideast supply disruptions, greater availability of U.S. oil and gas could make it easier to convince European countries they can afford to agree to renewed sanctions on Iran. They also up the pressure on Russia’s oligarchs by potentially shrinking the pie they have to split. One could even argue that rising U.S. shale production is playing a role in convincing Saudi Arabia’s new leaders to institute needed social and economic reforms by creating uncertainty about long run oil prices. In another example, high U.S. oil refinery exports are replacing lost Venezuelan refined products. This could pave the way for United States regional diplomacy, should it make greater efforts, to gain more support within the Organization of American States (OAS) to isolate the Maduro government, which is no longer in a position to provide finance or free oil to Caribbean and Central American countries. Right now, OAS Secretary General Luis Almagro has expressed support for a case against Venezuela’s leader Nicolas Maduro for “crimes against humanity” before the international criminal court in the Hague. Perhaps in time, as the lingering effect of Venezuela’s defunct Petrocaribe oil aid program fades however, OAS could be able to reach a majority decision to declare foul on Venezuela’s actions to dismantle its democracy and thereby strengthen diplomatic pressure on Caracas.  The United States should add stronger diplomatic effort in this direction, before it resorts to unilateral oil sanctions on Venezuela. Banning sales of U.S. tight oil to Venezuela should be used as a last resort measure only. That’s because the whole concept of U.S. energy “dominance” is based on the diplomatic gain that comes from the U.S. reputation as a pivotal free market oil and gas supplier that would never cut off another nation. Albeit Venezuela could be considered a situation that is sui generis given the humanitarian suffering of the Venezuelan people, but some international backing from OAS or the United Nations would give the United States better standing with other buyers for imposing restrictions on U.S. tight oil exports to Caracas. The United States is well positioned to leverage that fact that U.S. exports of refined products are supplying Latin America and the Caribbean in the face of the decimation of the Venezuelan refining industry, which was rumored last month to be about to indefinitely shutter three of the country’s four largest refinery complexes.      In addition to mooting sanctions against Venezuela, the United States is due in May to decide whether to take steps that would effectively re-impose oil sanctions against Iran. During his visit to Washington, Saudi Crown Prince Mohammed bin Salman lobbied the Trump administration to reopen the Iranian nuclear deal and pressure Iran for better terms that would ensure Iran never obtains nuclear weapons, rather than the announced terms which reduces the number of Iran’s centrifuges and limit the level of uranium enrichment to 3.67 percent, far below weapons grade, for 15 years. Under the deal, Iran is tasked to remove the core of its heavy-water reactor at Arak, capable of producing spent fuel that can yield plutonium. The Saudi crown prince told the New York Times that “Delaying it and watching them getting that bomb, that means you are waiting for the bullet to reach your head.” Last month, European leaders were sounding out the possibility that fresh sanctions be imposed on Iran aimed to moderate the country’s ballistic missile program and its role in regional conflicts in a manner they hope would maintain the Iran nuclear deal. Saudi Arabia is likely to oppose that approach and the Saudi diplomatic strategy regarding Iran could press the kingdom to offer to replace Iranian oil that would be lost to buyers during any re-imposition of oil sanctions against Iran. Iran has had increased difficulty marketing its oil in recent weeks, offering additional discounts to sway buyers who are worried about the effects of future sanctions policy. European companies are considering contingency plans, and Japan reportedly curtailed its oil imports from Iran in March.  Any U.S. moves on Iran will have to be taken in the context of the desire to take similar moves against Venezuela, which like Iran exports heavy crude oil (in contrast with rising U.S. production, which is of a different lighter quality). The U.S. strategic petroleum reserve has some heavy crude oil stored in its caverns. Worst comes to worst, a loan to a particular U.S. refiner hard hit by sanctions could be made.  The U.S.-China trade negotiations are yet another backdrop to U.S. energy issues to consider. As a recent Citi brief to clients notes on the latter, it is “clear that energy specific trade with China continues to improve in the U.S. favor.” The bank’s rough estimate is that the U.S.-China net oil export balance rose from +$2.8 billion in 2016 to +$8.2 billion last year and could reach $11 billion in 2018 if January trends can be sustained. This trade has implications for the direction of the U.S.-China trade balance that will need to be kept in mind by the Trump trade team.  But the complexities go beyond oil, U.S. exports of liquefied natural gas (LNG) are also finding a profitable opportunity window in the global market based on higher than anticipated demand from China, South Korea, and Taiwan, aided by economic growth and new policies aimed to reduce coal use and fight air pollution across Asia.  As it accelerated its policies to promote coal-to-gas switching, China’s LNG imports rose almost 50 percent in 2017 and have continued to be strong this winter, including purchases of six cargoes via the U.S. LNG export terminal at Sabine Pass. South Korea surpassed Mexico as the largest buyer of U.S. LNG in the first quarter of 2018, and a boost in the long run appetite from South Korea for LNG is expected, given President Moon Jae-in’s pledge to curb use of coal and nuclear in favor of cleaner, cheaper renewables and natural gas.  In other words, growing U.S. LNG exports intersect with several ongoing trade negotiations, namely with China, Mexico, and South Korea. S&P Global Platts is forecasting U.S. LNG exports to increase by 8.1 billion cubic feet per day (bcf/d) by 2020 and another 4.9 bcf/d by 2025, a factor that needs to be considered in trade negotiations. Sales to Mexico are particularly important for the Permian Basin, where excess natural gas is already being flared at high levels.    China’s threat to impose a 25 percent additional tariff on U.S. propane (which is an important component of the liquefied petroleum gas or LPG used in Asia as a residential heating and cooking fuel and as a feedstock to China’s growing petrochemical industry) won’t affect U.S. propane producers all that much. That’s because the largely fungible commodity will be sold elsewhere, with rising supply from Iran and Australia likely to replace the U.S. LPG in China, along with other Middle East supplies. As that shift takes place, U.S. sellers will shift to non-Chinese buyers.  The bottom line is that markets will likely still rebalance in the wake of turmoil created in the coming weeks from any disruptive new trade and sanctions policies, leaving it a little less clear whether prices are facing headwinds or tailwinds. For U.S. energy dominance, it could also be a mixed bag, with commercial availability of U.S. oil and gas only part of the equation. As the upcoming events could show, even fully free market oriented production can face a geopolitical context in a world in disarray.    

Yesterday I joined Dany Bahar, David M. Rubenstein Fellow at the Brookings Institution, and Francisca Vigaud-Walsh, Senior Advocate for Women and Girls at Refugees International, at the Inter-American Dialogue for an event co-sponsored with CFR's Center for Preventive Action on Venezuela's migration crisis. You can watch our discussion of the increasingly dire situation and potential roles the United States, regional governments, other donor countries, and multilateral bodies can and should take here. 

As senior officials from the Organization of Petroleum Exporting Countries (OPEC) gather in Houston for the international industry gathering CERA Week, they will be listening carefully to speeches by the CEOs of the largest U.S. independent oil companies about the prospects for the rise in U.S. production in 2018 and 2019. Likely, they won’t like what they hear. U.S. industry leaders are saying U.S. shale production could add another one million barrels per day (b/d) or more on top of already substantial increases, if oil prices remain stable. Best C-suite guesses from Texas are that a sustained $50 to $60 oil price could result in a fifteen million b/d mark for U.S. production in the 2020s, up from ten million b/d currently. U.S. shale’s capacity to surprise to the upside is likely to leave OPEC producers with some soul searching to do as they consider their strategy for the second half of the year and beyond. OPEC has received some unexpected help to make space for rising Iraqi and U.S. oil exports from the sudden collapse of Venezuela’s oil industry where workers, faint from lack of food, are abandoning their posts to emigrate or worse to sell stolen pipes and wires to make ends meet for their families. Energy Intelligence Group is reporting this week that Venezuela’s oil production has fallen to 1.4 million b/d last month, down from 1.8 million b/d just last autumn. But ironically, a further collapse of Venezuela’s oil industry could make OPEC’s deliberations harder, not easier, if it ruptures the conviction of the current output reduction sharing coalition. If too many Venezuelan oil workers abandon their posts at once out of desperation, the country’s fate could more closely mirror Iran in 1979 when a crippling oil worker’s strike brought Iranian oil exports to zero and rendered the Shah’s rule untenable. The U.S. also continues to mull additional sanctions against Venezuela, including oil trade related restrictions, to pressure Caracas to restore democratic processes inside its borders. Trading with state owned PDVSA is becoming more difficult but Venezuela has been using U.S. tight oil as a diluent for its heavy oil. Historically, during many past oil disruptions, OPEC’s Arab members like Saudi Arabia and Kuwait have increased exports to prevent oil prices from skyrocketing. Kuwait especially is likely to argue that will be necessary to keep oil prices from going too high since it is keenly aware that the high prices of the early 2010s were exactly what stimulated the very U.S. shale oil investment and energy efficiency technologies that are plaguing the long run outlook for OPEC oil today. Studies on how digitization of mobility can eliminate oil use has led many organizations, including some large oil companies, to speculate that oil demand could peak sometime after 2030. The argument that the OPEC cuts need to be abandoned sooner rather than later could also sit well with Russia’s oil oligarchs who have been unhappy to see continued cooperation with OPEC that has left some one to two million b/d of potential Russian projects on hold. But Saudi Arabia could worry that a premature relaxing of the “super” OPEC coalition agreement could bring prices lower than the $70 it is targeting to keep its domestic spending on track and to position state oil firm Saudi Aramco for a successful five percent initial public offering (IPO) sale. It has been seeking a long lasting condominium with Russia to prevent a return to destabilizing competition for market share. Expanding U.S. exports have eaten away at Mideast sales to Asia. Russia is also looking to sell more oil and gas eastwards. All this leaves OPEC (and its partnership with Russia) in a quandary. Traditionally, OPEC’s Gulf cooperation council members, Saudi Arabia, Kuwait and the United Arab Emirates have made extra investments to carry spare capacity to respond to sudden supply shocks and/or to punish usurpers who could challenge OPEC for market share. But in the age of U.S. oil abundance, OPEC’s Gulf members are questioning whether this approach continues to make sense. In a world where peak oil demand is being mooted, will “the shareholder” (eg ruling royal governments) order national oil companies to spend billions of dollars to develop new spare capacity, even if it could not be needed? But if producers fail to make those investments and oil prices ratchet up to extremely lofty levels, can that propel a faster acceleration to low carbon electric cars, shared mobility services, and oil saving devices, hurting those very same oil producers even more harshly in the long run? China is clearly positioning itself to take advantage of such an eventuality with a multi-trillion dollar industrial export policy for renewables and clean tech of its own making. The overall uncertain situation has led to some incoherent commentary by OPEC leaders. On the one hand, some leaders talk about the global oil field three percent decline rate in near hysterical terms as potentially leading to an epic supply crisis in the coming years. They cite this risk as a reason to keep oil prices high. On the other hand, even as they sound that alarm, they are not willing to bet with their own pocketbooks on making major investments to plug that supposed hole. The alternative option for OPEC to restart the price war seems equally toothless, especially if those flooding the market do not appear to be able to survive the sustained revenue drop to make it an effective threat. Citi projects that even with expected declines in production in certain non-OPEC producing countries, continued increases from Brazil, Canada, Africa, and global natural gas liquids will overwhelm losses elsewhere, even without a higher than expected contribution from U.S. shale, assuming geopolitical events don’t create an unexpected cutoff of a major producer. It is in this context of confusion that the United States needs to consider the dangers of altering a suite of energy policies that are working. The United States is well positioned to supply individual U.S. refiners with heavy crude from the Strategic Petroleum Reserve (SPR), should it find that new sanctions or internal strife means those refiners have to abandon Venezuelan heavy oil imports. In other words, the SPR is not superfluous. Corporate efficiency standards for U.S. cars help constrain U.S. domestic oil use, freeing up U.S. refined products and crude oil for export and enhancing the role of U.S. energy production to constrain OPEC and Russian market power. Free trade agreements with Canada and Mexico are ensuring a strong nearby pipeline market for rising U.S. surpluses of natural gas. U.S. assistance for its clean tech industry prevents China from monopolizing benefits that can come to an economy when higher oil prices prompt countries to shift more quickly to energy saving technologies and renewable energy. The Trump administration needs to slow down in busting with tradition when it comes to energy. Some of the tried and true policies of the past are contributing to this administration’s mantra of energy dominance. They need to focus on the old saying “If it ain’t broken, don’t fix it.”

Venezuela’s refugee crisis is metastasizing. According to the United Nations, 5,000 Venezuelans have fled to Curacao, 20,000 to Aruba, 30,000 to Brazil, 40,000 to Trinidad and Tobago, and more than 600,000 to Colombia. In times past, the U.S. has led in responding to exoduses sparked by political or humanitarian crises. In 1980, it welcomed 125,000 Cubans fleeing in what became known as the Mariel Boatlift. Nearly two decades later, it provided respite for tens of thousands of Hondurans and Nicaraguans in the wake of Hurricane Mitch, and more than a quarter-million Salvadorans after a 2001 earthquake. Much as the region has not always welcomed some U.S. interventions — think Grenada in 1983, Panama in 1989 and Central America throughout the 1980s — when crises arise, Latin American nations still look north. Yet although the U.S. has put pressure on Venezuela to restore its democracy, the burden of coping with the implosion of what used to be Latin America’s richest nation has fallen most heavily on its immediate neighbors. They can’t afford to wait for a distracted and less benevolent U.S. to do the right thing. Instead, for their immediate and collective future, they must forge a regional response to what has become the hemisphere’s greatest humanitarian crisis. Despite touting its “year of engagement” with Latin America and dredging up unfortunate echoes of the Monroe Doctrine, the Trump administration seems to have little desire to lead in the Americas — at least on the region’s most pressing issues. It pulled out of the Trans-Pacific Partnership, leaving Canada, Chile, Mexico and Peru bereft, and has repeatedly threatened to end the North American Free Trade Agreement. It walked away from the Paris climate accord, which Latin American nations widely supported, and rolled back the opening with Cuba. As for Latin Americans themselves, the U.S. is more likely to kick them out or wall them off than extend its welcome mat. It recently ended Temporary Protected Status for some 200,000 Salvadorans and 60,000 Haitians (the fate of an additional 87,000 Hondurans is unclear), and looks to begin deporting some 700,000 Mexican and Central American “Dreamers,” undocumented immigrants brought to the U.S. as kids. Not only has it halved the number of spots open to refugees, it is speeding up asylum applications for recent applicants — a decision that will likely result in the rapid repatriation of many Venezuelan asylum seekers who would otherwise have been able to work while waiting for the processing of their cases. Top U.S. diplomats have called out Venezuela’s humanitarian plight and human rights abuses. But on his five-country trip to the region, Secretary of State Rex Tillerson focused more on building support for new sanctions than on addressing this more immediate catastrophe. And while the Trump administration has offered aid to Venezuela — which the Maduro government has repeatedly rejected — the countries receiving Venezuela’s refugees have been largely left to deal on their own. Colombia, bearing the heaviest burden, has granted its own version of temporary protected status to some 150,000 Venezuelans, even as it has cut back on new visas, beefed up military patrols to stanch illegal crossings, and visited refugee camps in Turkey to look for best practices. Brazil declared a state of emergency in border state Roraima, doubling troops and ramping up basic services for the tens of thousands of newcomers. And while often not the first stop for those fleeing, Peru and Argentina have somewhat loosened visa requirements, enabling more Venezuelan migrants to stay and work. These piecemeal responses won’t be enough, however. The flood of people is already overwhelming border economies, schools, health systems and basic shelter in Colombia, Brazil and even Ecuador. Venezuela’s Caribbean neighbors, many with weak institutions and still recovering from last year’s hurricanes, are ill-equipped to meet such new challenges. And those fleeing are vulnerable to human trafficking and extortion, providing fodder for transnational drug and criminal organizations. The surge threatens to shift politics in this year of the Latin American election, when nearly two out of every three voters heads to the polls to elect a new president. Unfortunately, coordination among Latin American nations won’t be easy. Despite much cooperative rhetoric and nearly two dozen regional economic and diplomatic bodies, the countries and their foreign policy efforts remain quite solitary. There is no NATO, no true customs union, and so far no regional body able and willing to act decisively. Instead, and in part due to the weight and leadership of the giant to the north, most every country has historically adopted a non-intervention mantra toward its neighbors. Still, Latin American nations today differ from their more passive past incarnations. With a combined GDP of more than $5 trillion, and two of the world’s 15 biggest economies, the region’s increasing economic heft means more resources are available to address the costs of such a crisis. Mexico recently joined the growing roster of Latin American nations that contribute to peacekeeping missions. Nearly all the countries are democratic, with most committed to spreading these ideals broadly. And the spillover effects of the Venezuelan crisis on their own voting populations have created a shared urgency. To assuage the humanitarian crisis will require coordinating and funding massive efforts to bring food, water, shelter and medicine to those already displaced and the many more to come. It will mean creating schools (one-half of refugees are usually children), building infrastructure, and finding ways to enable the exiled to make a living. And it will mean getting more nations to take in those forced into exile, relieving the crush on Venezuela’s immediate neighbors. To galvanize a response, the region’s leaders should turn to the Inter-American Development Bank and World Bank to fast-track cheap loans for refugee-focused infrastructure. They should pressure China, which covets not only Latin America’s raw materials but its growing consumer markets, both to support that effort and to make clear to Venezuela that its conduct must change. And they should forcefully call out Cuba, which has supported and advised President Nicolas Maduro as he dismantled his country’s democracy and engineered its economic and financial self-destruction. Latin America doesn’t need a new mechanism to pursue this more cohesive and comprehensive response — the recently created 14-country Lima group could suffice, and older diplomatic bodies desperate for a mission abound. Its nations need only to summon the will and leadership to pick up the regional humanitarian mantle. If they do so, it may then be the U.S.’s turn to follow. View article originally published on Bloomberg.

Venezuela’s latest attempt to raise capital by issuing a cryptocurrency, the petro, linked allegedly to its Orinoco oil reserves is problematical on so many levels, it is hard to know how to comment on it beyond pointing out the U.S. government has already said that trading in the new market could risk exposure to U.S. sanctions. Stopping the cryptocurrency could wind up being the easiest item for the Donald J. Trump administration to address in the steps that Caracas is taking to obviate Venezuela’s state oil company Petróleos de Venezuela, S.A’s (PDVSA) creditors. PDVSA is engaging in all kinds of no cash deal making to bypass oil cargo seizures. But the company could face even more difficulty this year as Venezuela’s financial woes have bitten into its capacity to keep its oil fields running. Citibank estimates that Venezuela’s oil production capacity could sink to one million (barrels per day) b/d over the course of 2018, down from 2.8 million b/d in 2015, as its access to credit worsens, sending even more of its facilities into disrepair. International service companies are limiting activities in the country as they take write downs on hundreds of millions of dollars in unpaid fees. Venezuela’s oil fields have a natural decline rate of 25% that requires constant attention to maintain capacity. Finding a soft landing out of the crisis for PDVSA’s U.S. subsidiary Citgo Petroleum could become increasingly complex for the United States as it seeks to manage Venezuela’s deteriorating situation. Washington has placed sanctions on critical members of the Venezuelan government but has been reluctant to take action that could spill over to Citgo’s ability to operate. Citgo operates three of America’s largest oil refineries for a total capacity of 750,000 b/d, including an important regional facility near Chicago. Citgo supplied fifteen billion gallons of gasoline in the United States in 2015. So far, Citgo has been shielded from creditors by its corporate structure. But recently, impatient creditors of state oil company PDVSA are starting to use more aggressive tactics, with one such group trying to seize an oil cargo ship in an attempt to get paid. To avoid such circumstances, PDVSA, which for all intents and purposes can no longer attain bank letters of credit, is “time swapping” ownership of some of the undesignated crude oil cargoes it can muster for export for exchange of later delivery of badly needed fuel and feedstock. The arrangements are designed to discourage creditors from trying to grab oil in international locations because, in effect, the oil is already owned by other parties before it sets sail from Venezuela. Last year, Venezuela shipped about 450,000 b/d to China as part of a repayment of $60 billion in Chinese loans. That is less than half of the oil volume originally anticipated in the payback schedule. In fact, one of the largest lenders, China Development Bank, has been receiving barely enough oil and refined oil products from Venezuela to cover the interest payments on its loans, according to Energy Intelligence Group. China and Russia are still receiving repayments via oil shipments, with some small percentage of the value of the cargoes allegedly getting back to Caracas. Other buyers such as Indian refiners are still seen picking up cargoes on a F.O.B. basis (free on board) that gives immediate ownership on pickup. The question is whether the status quo will prevail or whether Citgo’s operations will be affected as financial problems escalate. The fate of PDVSA’s bonds, which are also in a state of “quasi-default,” are particularly tricky because many diverse parties are laying claim in a manner that could foreclose on Citgo shares. A deal that pledged company stock to bondholders is creating an opening to hasten foreclosure. In another deal, Goldman Sachs purchased $2.8 billion worth of PDVSA bonds at thirty cents on the dollar back in 2017. The thesis behind the Goldman purchase, and most every other credit line extended to PDVSA is that the state firm has valuable assets, some of which are abroad, and giant reserves of oil. Governments come and go but eventually, so the thinking goes, that oil can be turned back into cash. The Venezuela case could test that kind of thesis, with implications for other oil producers trying to go to global markets to turn their oil reserves into cash. The disruption of Venezuela’s oil exports from international trading has been gradual, perhaps somewhat muting its effect to date. The breakdown of the country’s refining system has created openings for U.S. refiners to export increasing volumes of gasoline and diesel to Latin America and elsewhere. To some extent, the drop in its crude oil exports has facilitated the ongoing collaboration between the Organization of Petroleum Exporting Countries (OPEC) and important non-OPEC producers to steady oil prices at higher levels. Higher oil prices are a bit of a help to the Venezuelan regime but with most of its oil having to be sold in barter format, convertible foreign exchange will be increasingly hard to come by, especially if oil field production problems leave it with fewer available barrels to trade. As the financial situation for PDVSA worsens, the oil market effects could widen, especially if it leads to the collapse of Citgo Petroleum. U.S. policy makers should think about whether it’s advisable to develop a contingency plan now for the latter outcome. The Trump administration could consider being pro-active, perhaps offering a crude for products swap open tender for the U.S. Strategic Petroleum Reserve (SPR) with other U.S. refiners now to create at least a small government buffer stock of refined product that could be directed to Illinois or other affected markets in the spring, should Citgo’s operations get unexpectedly interrupted by financial problems or legal proceedings. Such a plan could ameliorate the effect on U.S. consumers from any sudden event related to Venezuela and give Washington more flexibility to respond to the ongoing crisis inside Venezuela. Should nothing go wrong in the coming weeks, the contingency planning could still be a win-win. The refined product stocks could offer the same protections ahead of next summer’s hurricane season and serve as a test case for how to modernize the SPR to include refined products at no government cash outlay.

The first round of NAFTA negotiations now concluded, the three nations will take a two week breather before reconvening in Mexico City on September 1. While the policy differences should be surmountable, in Why NAFTA Needs More Than a Few Tweaks for Fortune, I argue that the biggest threat to NAFTA is Trump. Thinking about the broader U.S.-Mexico relationship in the September/October 2017 issue of Foreign Affairs, The Mexican Standoff: Trump and the Art of the Workaround, I argue that despite the frequent animosity coming from the White House, Mexico has a historic opportunity to ambitiously lead its northern neighbor to a stronger North America. To do so, it needs to draw on the latent support from the farms, companies, and industries, as well as towns, cities, and states that benefit from these now indelible bilateral ties. The other overriding foreign policy challenge in the hemisphere comes from the worsening economic, political, and humanitarian catastrophe in Venezuela. In this piece for CNN, Venezuelan Sanctions Without Diplomacy Will Fail, I argue that unilateral sanctions, much less the military action President Trump has intimated, will be counterproductive to U.S. goals of regime change. Only concerted diplomacy, uniting governments in the region and around the world, can pressure those in Caracas.

Last Thursday, I had the pleasure of joining David Gura and Francine Lacqua on Bloomberg Surveillance to discuss Venezuela and Mexico. You can watch the full show here, with the Venezuela portion from 1:52:30-1:57:00 and Mexico from 1:58:30-2:04:30.

August has brought a number of depressing reversals in the United States’ relation with Latin America: President Trump’s seemingly offhand statement on the possibility of military intervention in Venezuela, which sucked all the oxygen out of Vice President Pence’s much anticipated tour of the region; the cancellation of the Central American Minors (CAM) Parole program, a decisive step in the administration’s broader nativist turn on immigration; and the beginning of NAFTA renegotiation, where the U.S.’ opening gambit was to complain about trade deficits. The foolishness of these moves is remarkable. The call for military intervention was a beautifully wrapped, sumptuous gift to dictator Nicolás Maduro, who has had few foils on which to blame that country’s devastating crisis. Maduro did not waste a minute in harking back to old shibboleths about the evil Empire that is seeking to subvert the Venezuelan people, and has seized upon those accusations to further discredit the peaceful opposition. The Department of Homeland Security’s decision on the CAM Parole program is simply cruel: the program was tiny, benefiting fewer than 3,000, and now children of parents legally in the United States who had benefited from the program have lost a safe and legal way to be with their families. As for trade deficits, one of the basic lessons of introductory economics is that deficits are not in and of themselves a bad thing. While there are good reasons to renegotiate NAFTA, attempting to eliminate trade deficits is not one of them. Perhaps the focus on deficits is merely rhetorical, but the bluster and bombast of this negotiating position will only throw sand in the gears of a complex three-party negotiation on an extraordinarily intricate set of issues. Not surprisingly, Trump’s presidency has led to a cratering of Latin American perceptions of the United States. In the seven largest nations in the region, a global Pew Research poll shows that perceptions of the U.S. have declined by 19 percent on average under Trump. Among those seven countries, median levels of confidence in President Trump to “do the right thing regarding world affairs” are at 14 percent, the lowest of any region in the world. In the face of the onslaught of poorly considered U.S. moves toward the region, one possible reaction for Latin American foreign ministers would be to duck and cover, and hope to go unnoticed by the bullying twitterer-in-chief for the next three years. This strategy is a nonstarter, though, because for many Latin countries the bilateral relationship is too big and too important, or because they know that regional cooperation is needed, as in the effort to address the Venezuelan crisis. A second response would be to mount an anti-yanqui crusade, full of bluster about the return of gunboat diplomacy and imperialism, a la Maduro. Thankfully, only a few of the usual suspects have gone down this path. To their credit, most of Latin America has instead chosen a third route: giving the United States a lesson in grown-up diplomacy. All of the major Latin leaders forcefully rejected Trump’s calls for military intervention, while nonetheless calling out the Maduro dictatorship’s fraudulent Constituent Assembly. The largest Latin countries have worked to generate a consensus on a peaceful approach to isolate Venezuela: the Lima Declaration by twelve regional powers rejected the Constituent Assembly, and Mercosul has invoked its democratic clause against the country.  In the face of Trump’s decision to pull out of the Trans-Pacific Partnership (TPP) and renegotiate NAFTA, Latin America is doubling down on trade: Mercosul is pushing hard to finalize a deal with the EU; countries involved in the original TPP are discussing a new deal; and investment agreements with China continue to multiply. In sum, Latin American leaders are offering a lesson in a type of foreign policy that many in Washington long considered hallmarks of American diplomacy: democracy, trade, and consensus-building within international organizations. For this, perhaps Trump should be thanked. This is my last blog post for Latin America’s Moment. After a rewarding stint at CFR, I am returning to my research at American University, where I hope we can stay in touch.  

President Nicolas Maduro has neither the desire nor the capacity to institute the market reforms and debt restructuring needed to revive Venezuela’s sinking economy, says economist Ricardo Hausmann.