With oil boom, U.S. tests its might

Crude production enables country to use sanctions

WASHINGTON — The Trump administration, looking to pressure the increasingly authoritarian government of Venezuelan President Nicolas Maduro, is considering an option that only a decade ago would have seemed inconceivable: imposing sanctions that stop the flow of Venezuelan oil to the United States.

But the shale drilling boom has left the U.S. so awash in oil that it has enabled leaders to take aggressive postures against oil states with which they are at odds. From Iran to Sudan to Venezuela, U.S. diplomatic efforts can rely on domestic crude production to help counteract potential shocks that sanctions might bring to the world’s highly sensitized crude markets.

“What it’s meant for the United States, it’s removed it from at times being a supplicant to other countries in global oil market discussions,” said Carlos Pascual, a former special

envoy for international energy affairs at the State Department and now senior vice president at the consulting firm IHS Markit.

This newly gained leverage is another example of how innovations pioneered by Houston companies to extract oil and gas from shale rock have reshaped the world, not only in energy markets, but also geopolitics. For half a century, the global oil supply was firmly controlled by states in the Middle East. Through the Organization of the Petroleum Exporting Countries, of which Venezuela is a member, these countries could raise and lower prices and even cut off supplies to their enemies, as OPEC did to the U.S. following the Arab-Israeli War of 1973. No. 2 in crude production

But OPEC’s power is considerably reduced. The U.S. now produces more than 10 million barrels of crude a day — more than double what it produced in 2008 — and has surpassed Saudi Arabia to become the world’s second-largest oil producer behind Russia.

This change has been driven by growing production in the shale fields of West and South Texas, as well as North Dakota, where the combination of hydraulic fracturing and horizontal drilling is expected to increase output for years to come. The oil flowing out Texas alone last year, some 3.9 million barrels a day, was equivalent to the production of the United Arab Emirates or two Venezuelas or five Libyas.

The Trump administration signaled its willingness to use oil as a diplomatic weapon earlier this month when it announced it was sanctioning 15 oil companies in South Sudan, the world’s 39th largest crude producer at 150,000 barrels a day. The State Department said government officials were using oil revenues “to purchase weapons and fund irregular militias that undermine the peace, security, and stability of South Sudan.”

And in Venezuela, sanctions announced last summer blocking foreign countries from loaning the government money for more than 90 days has left Venezuela’s national oil company PDVSA short on cash. That in turn has delayed work in oil fields and refineries, hurting production and acting as a de facto oil sanction, said Antoine Halff, director of global oil markets at Columbia University’s Center on Global Energy Policy.

Those sanctions were possible in part because the U.S. does not rely on Venezuelan crude as it once did. Crude imports from Venezuela fell to 16 million barrels in December, less than 40 percent of imported a decade ago.

“The balance of trade and production (between the U.S. and Venezuela) has changed dramatically over the last few years,” Halff said. “There’s not that many U.S. refineries that import large amounts of Venezuelan crude on a regular basis. It’s down to just more than a handful.”

The Trump administration is not the first to use U.S. oil production as leverage in dealing with foreign countries.

That strategy has been on display since at least 2012 when the Obama administration was negotiating with Iran to give up nuclear energy programs that could help produce weapons. The U.S. needed the backing of Europe to impose sanctions on Iranian crude, but European leaders said they were worried it might drive up international oil prices, said Pascual, who was engaged in the talks for the State Department.

“The goal was to reduce Iranian oil exports and a little over a million barrels of day was taken off the market. The U.S. was increasing its supply by a million barrels per day,” he said. “You can give (allies) some comfort that by taking Iranian oil off the market, you’re not necessarily going to send the price of oil of skyrocketing.”

In 2014, Russia invaded eastern Ukraine, setting off a debate within the Obama administration on how to respond. Ultimately, administration officials decided against sanctions to block Russian oil from global markets because Russia’s production was so great it would have created a worldwide oil shock — even with the U.S. ready to pick up the slack.

But then-President Barack Obama imposed sanctions that blocked U.S. oil companies from helping Moscow develop what are believed to be massive, difficult-to-drill crude reserves off its Arctic coastline and in Siberian shale fields. The prospects in the Russian Arctic are so promising that Exxon Mobil signed a $3.2 billion deal to help Russian oil company Rosneft develop them in 2011.

But not everyone is convinced that sanctions targeting an oil state’s energy sector are as effective as State Department officials would like to think.

“Have (the Russian energy sanctions) caused some pain? Yes,” said Sarah Ladislaw, a senior fellow at the Center for Strategic and International Studies and former Energy Department official. “Have they gotten us to a different position on Ukraine? I don’t think so.” Sanctions soon?

Right now, all eyes are on Venezuela. Maduro has announced a general election for May but has banned his two strongest rivals from the ballot. Most foreign affairs experts believe that if Trump will impose oil sanctions, he will do so before the Venezuelan election.

But they also say there is little to be gained by such a move. Venezuela’s economy is already in free-fall, and Maduro might use the sanctions as an excuse for his administration’s failures as he tries to stay in power. And if the country collapsed, the U.S. would likely come under international pressure to help Venezuela rebuild.

Within foreign policy circles, there is an understanding that there are limits to U.S. oil diplomacy.

While the threat of an oil embargo like the 1970s has likely passed, the country is still susceptible to ups and downs of the global oil market and the damage dramatic swings can inflict on the national economy.

Once a barrel of oil is loaded onto a tanker, it ceases to have a nationality. In that moment, it mixes with the tens of millions of other barrels of crude the world produces each day.

“There’s this idea the U.S. is producing a ton, so whatever we do on sanctions can’t affect oil markets,” Ladislaw said. “That’s only true until it’s not.” james.osborne@chron.com twitter.com/osborneja