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US sanctions on Venezuela are largely symbolic

The oil market was waiting for an embargo. But a full blockade would have hurt American firms too

Donald Trump's administration threatened "strong and swift economic sanctions" if Nicolás Maduro went ahead with his power-grab-by-plebiscite. The Venezuelan president didand the US response was heavy in symbolism, but light in effect. The oil sanctions awaited by the market did not happen.

US officials called Maduro a "dictator", and added his name to a growing list of Venezuelans, and a short list of heads of state, under American sanctions. Maduro's assets in the US, if he has any, are frozen and no Americans are allowed to do business with him. But the oil industry, Maduro's biggest vulnerability, was untouched.

Some kind of embargo on Venezuelan oil remains in the US' arsenal, but it now looks far less likely. Tellingly, during a White House briefing treasury secretary Steven Mnuchin said the US didn't want to "do anything that would hurt the Venezuelan people". The country's oil industry is the only productive sector left in the economy, and while oil sanctions would hit Maduro and the country's ruling class they would also deepen an already staggering economic crisis, inflicting further pain on average Venezuelans.

The White House also looks wary of action that would hurt US companies and consumers. Banning imports of Venezuelan crude, one of the harsher measures mooted so far by US officials, would complicate operations for refiners that rely on the 0.7m to 0.8m barrels a day of heavy oil that across the Caribbean to the US. Gulf Coast refiners have invested heavily to be able to process the Orinoco Belt's uniquely heavy and sour crude gradesnearly all US imports from Venezuela are less than 20°API. State-owned PdV's US subsidiary Citgo is the largest importer of Venezuelan crude, but Chevron, Valero, PBF Energy, Phillips 66 and Marathon are all big buyers.

Blocking their supply of Venezuelan crude would spark a scramble for new heavy oil feedstock, likely from Canada, Mexico and Colombia. The global oil market is deep and highly flexible, so new supply would be found. But the refiners say the disruption would hit operations and lift fuel prices at the pump.

Supply strangle

Another option is to ban the sale of oil and fuel products to Venezuela and PdV. US sales of crude and products to Venezuela and Curaçao, which PdV mixes with its heavy crude to create a more marketable blend, have averaged around 120,000 b/d this year and have been rising thanks to the slow break down of Venezuela's domestic oil industry.

Speaking loudly and wielding a small stick seems better than wading into the Venezuelan quagmire

But this measure would also hurt American firms. Those exports have been an important outlet for US refiners feasting on cheap oil and high margins to keep run rates higher than its local market can soak up. Much of the light oil Venezuela imports comes from surging Permian output that needs a market outside the US, now that nearby refineries have maxed out on the feedstock. Again, the market is flexible, and new trade routes would take shape. But the pain would not be felt exclusively on the Venezuelan side.

Finally, Venezuela appears low on Trump's list of foreign policy priorities—somewhere behind North Korea, Iran, the civil war in Syria, a Russian reset, Nafta renegotiations and so on. Speaking loudly and wielding a small stick seems better than wading into the Venezuelan quagmire. As some diplomatic hands point out, the principle of "if you break it, you buy it" is at play for the US in Venezuela. Heavy sanctions on Venezuela's oil industry would almost certainly push the country into default on its international debt obligations. The ensuing economic crisis would bring unknowable consequences. At that point, the Trump administration would probably need to engage even more deeply.

A few other options are available. The Obama administration crafted energy sanctions on Russia that specifically targeted new Arctic and shale projects, complicating longer-term investment without hurting short-term supply. The US could do the same in Venezuela by, for instance, barring investment in Orinoco heavy oil projects and the sharing of enhanced oil recovery technology. Getting Chinese, Indian, Russian and Europeans on board to enforce this would be the problem.

Eventually, the situation may get so bad that Washington and the region's governments feel their hands have been forced. Venezuela is now entering what Michael Shifter and Ben Raderstof of Inter-American Dialogue, a Washington think tank, describe as a "new and even darker phase" in the crisis.  In the early hours of the day following the constituent assembly vote, two prominent opposition leadersLeopoldo Lopez and Antonio Ledezmawere dragged from their homes, where they were under house arrest, and taken into custody. It was a clear and ominous sign of how Maduro plans to use his newfound power.

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