28 May 2020

 

Full Report: Venezuela

Predictions

  • Arrival of Iranian oil tankers will temporarily reduce petrol shortages, but fuel problems and economic deterioration will continue
  • Government will present tanker arrival as victory over US but it will continue to struggle to restore its own refining capacity, meaning that fuel problems will persist
  • Venezuela’s foreign allies will offer only limited financial support, meaning that economic and political crisis will continue

Event

The first of five Iranian oil tankers carrying an estimated 1.5 million barrels of petrol and other fuels between them, docked at the Puerto Cabello oil terminal on 24 May after being escorted on its final approach by the Venezuelan air force and navy. The flotilla’s progress was monitored by the US, which enforces economic sanctions against both countries. In April the US sent more warships to the Caribbean, in what it said was an operation against “cartels, criminals, terrorists and other malign actors”. However, these US forces took no action against the tanker convoy. Earlier, Iranian President Hassan Rouhani had warned the US not to intervene saying that if it created “problems” for Iranian ships, Iran would cause reciprocal “problems” for US ships. Venezuelan media covered the arrivals as a triumph, with Foreign Minister Jorge Arreaza hailing cooperation with Iran for the “benefit of our peoples”.

Context

Iran’s shipment of oil to Venezuela, which has the world’s largest proven oil reserves, was made necessary by the almost complete collapse of the country’s refining capacity due to a lack of maintenance and spare parts. The government initially sought petrol from Russian firm Rosneft but the company, facing US sanctions against two of its subsidiaries, withdrew from Venezuela in March. Shortly afterwards, Iran’s Mahan Air began direct flights to Falcon state, reportedly bringing in staff and equipment to try to restart the nearby Amuay and Cardon refineries. This mission had only limited success, leading Tehran to instead dispatch the tankers. There are credible reports that Venezuela is paying for the shipments in gold; since Iran has a glut of refined oil due to global oversupply, selling to Venezuela in this manner may be a financially attractive proposition.

Iran: An oil tanker anchored in the Persian Gulf

Analysis

Venezuela appears to have calculated correctly that the US would let the ships through. US officials may have chosen not to risk escalation for fear of Iranian attacks on US ships in the Gulf. With only six months to go before the US presidential elections, Trump may also want to prioritise dealing with the coronavirus (COVID-19) and the economy, and his advisors may have warned that a Caribbean naval adventure would not be popular. However, even allowing for lower domestic demand for oil in Venezuela because of the COVID-19 lockdown, the Iranian convoy represents only between two and four weeks’ consumption. It is not clear if Venezuela can afford to continue to purchase Iranian petrol, or that Washington will not act against future convoys. Venezuela will therefore continue to face the problem of non-working refineries: the US Treasury has also announced the blacklisting of a Chinese company that was supplying refinery parts, which will further hamper Venezuelan attempts to restore refining capacity.

Outlook

The tankers’ arrival will help Venezuela to temporarily address crippling petrol shortages. However, economic activity, already impacted by international oil price collapse, economic mismanagement and the COVID-19 lockdown will continue to be hit by intermittent fuel shortages and power cuts. Given that the government continues to hold the political upper hand over the domestic opposition, the outlook is for further social and economic hardship and economic deterioration, with the likely return of hyperinflation. While Venezuela will continue to turn to political allies like China, Russia and Iran, all three will place limits on the amount of aid they are prepared to dispense, for fear of worsening relations with the US and because of Venezuela’s limited finances and limited diplomatic utility, which will further ensure that the country’s economic and political crisis continues.

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