Explainer: US sanctions to hit Venezuelan state-owned oil company

The administration of US President Donald Trump has imposed sanctions on Venezuela’s state-owned oil company, Petroleos de Venezuela SA (PDVSA), its harshest economic punishment to date against the government of President Nicolas Maduro, whom the United States and other countries no longer recognise as the legitimate leader of the South American country.

Here’s a look at how the measures announced on Monday might affect both the US and Venezuela.

What sanctions did the US announce?

The Trump administration did not directly ban imports of Venezuelan crude oil. Instead, it blocked US companies from entering into financial transactions with PDVSA.

That’s for as long as the state-owned oil company remains under control of Maduro’s government. That means that any payment for Venezuelan crude imports will go to blocked bank accounts, according to US Treasury Secretary Steven Mnuchin.

The measure almost certainly means Maduro’s government will seek to redirect its US exports to other countries.

How dependent is the US on Venezuelan oil?

Venezuelan oil exports to the US have declined sharply in recent years as its production plummeted amid an economic collapse. The US imports fewer than 500,000 barrels a day of Venezuelan crude, down from more than 1.2m barrels a day in 2008, according to the Energy Information Administration (EIA).

Venezuela is still among the top four suppliers of crude oil to the US, though it now only supplies about six percent of imports.

Most Venezuelan exports go to refineries in the Gulf Coast, which are equipped to process the type of heavy grade crude that Venezuelan produces.

Many of those companies gradually reduced Venezuelan imports over the past two years, though Gulf Coast refineries still depend on Venezuelan crude for about a quarter of their imports, according to data from the EIA.

How would the US replace Venezuelan oil?

There’s no shortage of oil in the world right now, with global supplies hitting a record last summer. The International Energy Agency said in September that the global oil supply reached 100m barrels a day for the first time ever in August, boosted by rising production in the US and several OPEC nations. A report from the American Petroleum Institute last week said that the US has surplus gasoline stockpiles that “could approach burdensome levels” and force gas prices down further.

But supply is tighter for heavy crude oil, which is what the US imports from Venezuela. Production of heavy crude in Mexico has been declining, and although there is a strong supply in Canada, there are challenges to getting that crude to the Gulf Coast refineries. Heavy crude production the Middle East also declined with the most recent round of OPEC output cuts.

John Auers, executive vice president of the refining consultancy Turner, Mason & Company, said Gulf Coast refineries have been switching to lighter or medium grade crude amid the tight supply of heavy crude.

But the tighter market for heavy crude also means that those companies that are most reliant on Venezuelan crude will have a harder time finding alternatives. Auers said they would likely turn to the Middle East, particularly Iraq. He also said that more supply from Colombia and Mexico could be redirected to the US if Venezuela redirects its own exports to Asian customers.

What US businesses would be most affected by an embargo?

Refineries along the Gulf Coast are set up to process heavy crude and they may end up spending more money buying it elsewhere. Valero, Chevron and Citgo are among the largest importers of Venezuelan crude.

The American Fuel & Petrochemical Manufacturers, which represents 95 percent of the refining sector, has lobbied hard over the past two years against any attempts to restrict imports of Venezuelan oil, arguing it would hurt U.S. companies while Venezuela could redirect its exports to other markets.

However, the group has been less public in its opposition in recent weeks as the Trump administration hinted at looming oil sanctions.

The association offered a muted response on Monday, promising to work with the US government “to minimise any unnecessary disruptions or negative impacts to the market and American consumers”.