In 2005, Venezuela was the world’s eighth largest exporter of crude oil. Venezuelan Government Actions Have Decreased Crude Oil Production, but Exports to the United States Have Changed Little

Venezuelan oil production has fallen since 2001, largely as a result of  actions by the Venezuelan government. The Venezuelan  government announced plans in 2005 to expand its oil production and  exports significantly by 2012, but most experts with whom we spoke  doubted Venezuela’s ability to implement the expansion plan in the near  term. For example, EIA data show that  production decreased from 3.1 million barrels per day to 2.6 million  barrels per day, reflecting a decrease of about .5 million barrels per day, or  16 percent. The Venezuelan government’s firing of thousands of PDVSA employees  following the strike contributed to the decline in production. Venezuela’s Exports of Crude Oil and Refined Petroleum Products to the United States Have Remained Relatively Stable in Recent Years

Since shortly after the Venezuelan strike ended, Venezuela’s exports of  crude oil and refined petroleum products to the United States have  remained close to the prestrike levels. Several oil industry officials  and experts told us that national oil companies generally do not have the  expertise of the international oil companies to develop heavy oil fields. A Sudden Drop in Venezuelan Oil Production Would Have Significant Worldwide and U.S. Impacts

Given the current tight global supply and demand conditions, a sudden  loss of all or most Venezuelan oil from the world market, for example due  to a strike, would, all else remaining equal, result in a marked spike in  world oil prices and a decrease in the growth rate of the U.S. economy as  measured by GDP. However, since most replacement supplies are farther away than  Venezuela, U.S. oil refiners would experience higher costs and delays in  getting oil supplies; such an embargo would therefore increase U.S.  consumer prices for gasoline and other petroleum products in the short  term. EIA’s March 2005 analysis estimated that a Venezuelan oil embargo against  the United States would cause the price of West Texas Intermediate crude  oil (a commonly used benchmark oil) to increase in the short term by $4 to  $6 per barrel from the then-current price of $53 per barrel—an increase of  between 8 to 11 percent, as opposed to the 19 to 34 percent increase  associated with a sudden and severe loss of oil. According to a U.S. company that produces oil in  Venezuela, such an embargo would reduce PDVSA’s oil revenues from  between $3–4 billion dollars per year due to the following factors:    Refinery operations that Venezuela wholly and partly owns in the United  States, which take about 70 percent of Venezuela’s oil exports to the  United States, would be adversely affected by the embargo because they  would have to obtain crude oil from locations farther away than Venezuela  and the replacement crude oil would likely be of a different quality. Closure of Venezuela’s U.S. The impacts of shutting down  CITGO refineries would continue until the closed refineries were reopened  or new sources of refined petroleum products were brought on line. U.S. Government Programs and Activities to Ensure a Reliable Long-Term Supply of Crude Oil from Venezuela Have Been Discontinued, but the Government Has Options to Mitigate Supply Disruptions in the Short Term

The U.S. government has programs and activities intended, in part, to  ensure a reliable long-term supply of oil from Venezuela and other oil- producing countries to U.S. and world markets; these programs include  bilateral technology and information exchange agreements, bilateral  investment treaties, and multilateral energy initiatives. Most U.S. oil companies have not relied on assistance from the U.S.  government to help with issues in Venezuela in recent years although,  according to DOE officials, DOE stays in contact with companies  regarding the situation in Venezuela, and senior DOE officials frequently  report on the status of U.S. energy investment and overall energy  production in Venezuela at senior-level meetings of the U.S. government. Officials in the Departments of Commerce and State,  and in the Office of the U.S. Trade Representative, told us companies that  might otherwise seek their assistance in negotiating with foreign  governments do not do so in Venezuela because the companies do not  believe that federal agency intervention would be helpful. The U.S. Government Has Options to Mitigate the Impacts of Short-Term Venezuelan Oil Supply Disruptions

Key activities and programs that the U.S. government has used to mitigate  the impacts of short-term oil supply disruptions include diplomacy,  whereby U.S. government officials negotiate with senior officials in oil- producing countries to increase their supply of crude oil in case of a  disruption; using oil in the U.S. Strategic Petroleum Reserve; and  coordinating with the International Energy Agency, whose members hold  stocks equal to 90 days or more of its net imports to address supply  disruptions. If Venezuela fails to maintain or  expand its current level of production, the world oil market may become  even tighter than it is now, putting further pressure on both the level and  volatility of energy prices. Overall, we disagree that our report, as written, presents an “alarmist  view” of U.S. energy security. (2) What are the potential impacts of a reduction in Venezuelan oil  exports, a Venezuelan embargo on oil exports to the United States, or  sudden closure of Venezuela’s refineries in the United States?
Why GAO Did This Study

Venezuela is the world's eighth-largest oil exporter and among the top 10 countries in total proven oil reserves. Venezuela also supplies about 11 percent of current U.S. imports of crude oil and petroleum products and wholly owns five refineries in the U.S. Consequently, Venezuela is a key player in the future energy security of the United States and the world. The current global oil market is tight and may be more susceptible to short-term supply disruptions and higher and more volatile prices. Recently, tension between Venezuela and the United States has caused concern about the stability of Venezuelan oil supplies. On several occasions, Venezuela's President has threatened to stop exporting oil to the U.S. or to close Venezuela's U.S.-based refineries. In this context, GAO analyzed: (1) how Venezuela's crude oil production and exports of crude oil to the U.S. has changed in recent years, (2) the potential impacts of a reduction in Venezuelan oil exports to the U.S., and (3) the status of U.S. government programs and activities to ensure a reliable supply of oil from Venezuela. Commenting on a draft of the report, the State and Commerce Departments generally agreed with the report, but DOE contended that the report presents an "alarmist view" of U.S. energy security. We disagree and believe the report presents a contextually balanced treatment of the issue.

What GAO Found

Venezuelan oil production has fallen since 2001, but exports of crude oil and petroleum products to the United States have been relatively stable--except during a 2-month strike in the winter of 2002-2003, during which the oil sector was virtually shut down and exports to the United States fell by about 1.2 million barrels. Energy Information Administration data show that total Venezuelan oil production in 2001 averaged about 3.1 million barrels per day, but by 2005 had fallen to about 2.6 million barrels per day. Following the strike, Venezuela's President ordered the firing of up to 40 percent of Venezuela's national oil company employees. U.S. and international oil industry experts told us that the resulting loss of expertise contributed to the decline in oil production. In 2005, the Venezuelan government announced plans to expand its oil production significantly by 2012, but oil industry experts doubt the plan can be implemented because Venezuela has not negotiated needed deals with foreign oil companies as called for in the plan. A model developed for the Department of Energy estimates that a 6-month disruption of crude oil with a temporary loss of up to 2.2 million barrels per day--about the size of the loss during the Venezuelan strike--would, all else remaining equal, result in a significant increase in crude oil prices and lead to a reduction of up to $23 billion in U.S. gross domestic product. A Venezuelan oil embargo against the United States would increase consumer prices for petroleum products in the short-term because U.S. oil refiners would experience higher costs getting replacement supplies. A shutdown of Venezuela's wholly-owned U.S. refineries would increase petroleum product prices until closed refineries were reopened or new sources were brought on line. These disruptions would also seriously hurt the heavily oil-dependent Venezuelan economy. U.S. government programs and activities to ensure a reliable supply of oil from Venezuela have been discontinued, but the U.S. government has options to mitigate short-term oil disruptions. For example, activities under a U.S.-Venezuela oil technology and information exchange agreement were stopped in 2003, in part, as a result of diplomatic decisions. In recent years, U.S. oil companies have not sought assistance from the U.S. government with issues in Venezuela because the companies do not believe that federal agency intervention would be helpful at this time. To mitigate short-term oil supply disruptions, the U.S. government could attempt to get oil-producing nations to increase their production to the extent possible, or could release oil from the U.S. Strategic Petroleum Reserve. While these options can mitigate short-term oil supply disruptions, long-term reductions in Venezuela's oil production and exports are a concern for U.S. energy security, especially in light of current tight supply and demand conditions in the world oil market. If Venezuela fails to maintain or expand its current level of production, the world oil market may become even tighter than it is now, putting further pressure on both the level and volatility of energy prices.