Mexico Sees an Opportunity in Venezuela's Struggles

6 MINS READAug 29, 2017 | 11:37 GMT
With the decline of Venezuelan oil production, Mexico considers its options in the Caribbean

With Venezuelan oil output in decline, Mexico is considering supplying Cuba and nations participating in Caracas' Petrocaribe program with fuel and crude.

  • The Mexican finance and foreign ministries are considering a plan to step in and replace subsidized Venezuelan oil and fuel deliveries to Cuba, as well as to some Caribbean and Central American nations.
  • The plan is tentative, but if Mexican energy deliveries displaced Venezuelan ones to Cuba, it eventually could sever the 18-year alliance between Havana and Caracas.
  • Such an outcome would help the United States isolate Venezuela and open the door to heavier sanctions against the Venezuelan government. For Mexico, helping the United States pressure Venezuela would give it important leverage in its political relationship with Washington.
A steady drop-off in Venezuelan oil production may give Mexico an opportunity to increase its stature in the Caribbean. The Mexican government is considering a plan to replace subsidized Venezuelan oil and fuel shipments to Central American and Caribbean nations should the economically struggling country be unable to continue meeting regional demand, according to an Aug. 23 report. It is not yet clear under what payment mechanism that such shipments, which currently are provided at a discount through Venezuela's Petrocaribe program, would be sold if Mexico decides to implement the idea. Beginning in 2005, Venezuela exported crude oil, gasoline and diesel to Cuba and 13 other Petrocaribe beneficiaries under a pricing mechanism in which the up-front cost to buyers decreased as global crude oil prices rose. Under that program, recipients would repay the rest of the value of oil shipments, with interest, to Venezuela over a period of years. Since early last year, the Cuban government reportedly has been preparing to deepen its political ties with Mexico to access the countries' oil deliveries.

Mexico's decision to even consider assuming the role of energy patron is significant for three reasons. First, it clearly assists the U.S. aim of increasing political pressure on Venezuela. If Mexico displaces Venezuela as a provider of oil to Cuba, the Cuban intelligence and security relationship with Venezuela will decline. Second, the decision shows that Mexico is taking on a more active role in Latin American foreign affairs. For the past century, Mexico's diplomacy and trade policy has overwhelmingly been focused on the United States. Third, Mexico may gain leverage in its relationship with the United States if it appears its plan is capable of successfully displacing Petrocaribe. The United States would like to cushion the effect that a Venezuelan collapse would have on Petrocaribe member states while driving a political wedge between Cuba and Venezuela. Additional leverage with Washington would be important to Mexico as it renegotiates the North American Free Trade Agreement (NAFTA).

Replacing Oil Shipments, Severing an Alliance

Reports that Mexico was looking at supplying Cuba and Petrocaribe client states with oil followed an Aug. 17 trip to Cuba by Mexican Foreign Minister Luis Videgaray. A Mexican offer to supply Cuba with oil would have implications beyond displacing Venezuelan shipments. It could also displace Venezuelan influence in Cuba and sever Havana's 18-year alliance with Caracas, which was forged to ensure the survival of the cash-strapped Cuban government.

Cuba relies on diesel and fuel oil from Venezuela, which it uses to fuel electricity generation. Havana has stuck by Venezuela despite Caracas' declining ability to provide heavily subsidized oil simply because it has few other options. The Cuban government budgeted only around $2 billion in 2017 in central government revenue. Venezuela provides around 55,000 barrels, mostly of crude oil, per day to Cuba, which at current prices would approach $1 billion yearly. Cuba's leaders know the Venezuelan government can't supply oil at current levels over the long run, but they lack the government income or cash reserves to buy shipments from elsewhere. In return for the oil supplies, Cuba cooperates heavily with Venezuela's government and its intelligence and security services. Without Venezuela's oil, Cuba's long-term need for its alliance with Caracas will diminish.

Having Mexico begin to replace Venezuela's oil shipments in Petrocaribe would be a significant breakthrough for Washington as it tries to pressure the Venezuelan government not to cement one-party rule. Splitting the Cuban-Venezuelan alliance likely would reduce, if not end, Venezuela's wide access to Cuban government intelligence and deprive it of a crucial early warning system concerning potential risks from the United States. It also could sway the loyalties of other Caribbean states away from Venezuela and allow the United States to build support for heavier sanctions against Petroleos de Venezuela (PDVSA), Venezuela's state-run oil and gas company, by condemning Venezuelan actions as undemocratic in international forums such as the Organization of American States. States that receive oil from Mexico rather than from Venezuela may be less likely to resist Washington's moves against Venezuela in these international bodies. Supplying Petrocaribe client states with oil from Mexico also would help cushion the blow that U.S. sanctions against PDVSA would have. Haiti, for example, depends on Petrocaribe for more than half of the 19,000 barrels per day of oil and fuel it consumes. Certain sanction options against PDVSA, such as denying it access to the U.S. financial system, would become more plausible if small states attempting to repay Petrocaribe debts to PDVSA through U.S. banks were not at risk of suffering unintended consequences.

Venezuelan Shipments to Petrocaribe and Cuba

Weighing Benefits Against Risks

The steady decline of Venezuelan supplies through Petrocaribe over the past few years has opened this opportunity for Mexico and the United States. To displace Petrocaribe in its current form, Mexico would have to deliver 39,000 barrels per day to nations in the Caribbean and Central America, with 55,000 additional barrels per day to Cuba. Just five years ago, Venezuela was exporting about 120,000 barrels daily through Petrocaribe and about 100,000 barrels per day to Cuba. For Mexico, taking on the burden of Petrocaribe shipments would be an additional expense and may prove unpopular politically. Mexican state energy company Petroleos Mexicanos (Pemex) also likely would not be directly involved in this plan, since Mexico's 2013 energy reform intends for Pemex to focus on generating revenue for the state — and acting as energy patron to Latin America and the Caribbean would clash with that objective.

Instead, it's plausible the government would pay Pemex for oil and fuel at market prices and then deliver them to former Petrocaribe members. Petrocaribe customers frequently fell behind on their payments to Venezuela for the portion of purchases not paid up front. Although Mexico's public finances can absorb the expenses of late payments, these costs still are going to be a political concern, particularly if the Mexican government will be committing itself to supplying oil and fuel for several years.

Still, Mexico would benefit from gradually supplanting Venezuelan oil supplies. In the short term, offering to help the United States manage the regional economic impact of the Venezuelan crisis would give Mexico leverage in its ongoing renegotiation of NAFTA. Becoming an energy patron to Cuba and parts of Central America and the Caribbean also would dramatically expand Mexico's political influence.

Although Mexico jointly crafted an energy mechanism similar to Petrocaribe with Venezuela in 1980, the Latin American political landscape is much different today. Venezuela is on the decline, and Brazil not only is recovering from a damaging recession but is also too focused on its own domestic politics to entertain taking on a regional energy role. This leaves Mexico as the only country besides the United States capable of taking on the task of replacing Venezuela's oil shipments. If Mexico chooses to become the energy benefactor to Cuba and the 11 other Petrocaribe states now receiving oil under the program, Venezuela's decline will be a net gain for Mexico in terms of regional influence.

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