Trump’s Oil License Cancellation May Increase Inflation in Venezuela

Trump’s cancellation of foreign oil licenses for Venezuela is expected to stoke inflation by reducing dollar availability, exacerbating economic challenges for President Maduro’s government, as 85% of the nation’s income comes from crude exports. Analysts predict this could lead to a potential loss of up to $4.5 billion in oil income, increasing currency depreciation and inflation rates significantly.

U.S. President Donald Trump’s recent cancellation of licenses for foreign oil companies to operate in Venezuela is anticipated to exacerbate inflation within the country. Analysts indicate this policy shift will decrease the availability of U.S. dollars in Venezuela’s exchange market, leading to depreciation of the bolivar and heightened consumer prices. Given that approximately 85% of Venezuela’s income derives from crude oil exports, this cancellation poses a significant economic challenge for President Nicolas Maduro and his administration.

According to economist Jose Guerra of the Venezuelan Finance Observatory, the suspension of oil licenses will negatively impact oil production and reduce taxation revenue, which in turn will constrain the flow of foreign currency and accelerate currency devaluation. Since the imposition of sanctions against Venezuela’s energy sector by the U.S. in 2019, select oil companies have been granted licenses to export oil from Venezuela, but these are now at risk of being revoked.

The decision comes after President Joe Biden’s administration had permitted Chevron to expand its operations in Venezuela, permitting potential recovery of debt owed to the company. Trump’s announcement, however, criticizes Maduro for not implementing necessary electoral reforms, placing pressure on the Venezuelan economy amid an already contentious political landscape. The uncertainty surrounding both the Venezuelan election results and Trump’s political future has further reduced the dollar availability in the market, contributing to a significant depreciation of local currency.

Local analysts denote that oil income for Venezuela was projected at $15.4 billion for 2024, with approximately 30% of this amount attributable to Chevron and other international partners. The cancellation of licenses could therefore potentially result in a loss of oil income reaching between $4 billion to $4.5 billion. In the previous year, Chevron accounted for roughly a third of the dollars in the exchange market, amounting to $2.4 billion, underscoring its critical role in stabilizing the currency.

Following the announcement, Venezuelan dollar bonds experienced declines, evidencing market reactions to the retraction of oil licenses. Analysts fear that Trump’s move could be a tactical negotiation strategy, which might lead to increased unpredictability in the financial landscape of Venezuela. Additionally, the reduction in the dollar supply is likely to constrain private sector growth, as articulated by Conindustria’s head, Luigi Pisella, who emphasized the limitations ahead for industrial growth amid tightened currency conditions.

In summary, President Trump’s cancellation of oil licenses for foreign companies poses significant threats to Venezuela’s economy, primarily by diminishing the flow of dollars and potentially driving inflation higher. The ramifications could exacerbate ongoing economic challenges for the Maduro administration, which is already struggling with high inflation rates and a depreciating currency. The situation underscores the intertwined nature of U.S. foreign policy and Venezuela’s economic stability.

Original Source: www.tradingview.com