Iran Looks to Venezuela as it Scrambles for Allies

Iranian President Mahmoud Ahmadinejad’s five-day tour of Latin American countries comes at a time of rising tensions with the United States and growing international isolation. The US State Department described Iran’s search for friends as “desperate,” while US Treasury Secretary Timothy Geithner is expected to ratchet up the pressure in a visit to China and Japan.

This satellite image shows the Strait of Hormuz, between the Persian Gulf and the Gulf of Oman. The Strait of Hormuz runs between Iran and United Arab Emirates.
StockTrek | Photodisc | Getty Images
This satellite image shows the Strait of Hormuz, between the Persian Gulf and the Gulf of Oman. The Strait of Hormuz runs between Iran and United Arab Emirates.

With stops also planned in Cuba, Nicaragua and Ecuador, the honor guard and an elaborate red carpet reception for Ahmadinejad in Caracas reinforce what is already well-known: Venezuela has long been a friend and an ally of Iran. The two countries have not only supported each other in their hawkish stance on oil prices within OPEC and anti-US rhetoric, but also in bilateral economic relations.

With an output of 3 million barrels per day, of which 2.4 million are exported, Venezuela does enjoy some leverage. Much of the exported oil goes to the United States, to the tune of almost 1 million barrels per day. The US has already imposed limited sanctions on Venezuela’s state-owned oil company PDVSA for sending Iran reformate — a component of high-octane gasoline — with little effect.

Hugo Chavez has threatened in the past to halt US-bound oil exports, largely in reaction to what he described as the threat of a US invasion to gain control of the country’s oil reserves. However, the Venezuelan president has never given the order, in part because like Iran, the government depends on oil exports for the majority of its revenue. Venezuela holds the largest proven crude oil reserves, 296.5 billion barrels as of 2010.

Market observers have, for the most part, focused on the permutations and ramifications of a closure of the Strait of Hormuz. That in turn has caused some to speculate whether Venezuela would come to the aid of Iran, and decide to turn off the taps.

“I think it’s very unlikely that Venezuela would halt its own exports in solidarity with Iran. It would be very difficult to get some of the wells going again,” Bill Farren-Price, CEO of Petroleum Policy Intelligence, told CNBC.

In its latest report, Morgan Stanley believes that a “limited impact” scenario of a Strait of Hormuz closure would see a total loss of 10 million barrels per day for three weeks. That, however, could be replaced by a release from strategic petroleum reserves (SPR).

Should the situation deteriorate further, a coordinated action from the International Energy Agency (IEA) could contribute as much as 14 million barrels per day, according to Reuters. The Strait of Hormuz sees through more than 15 million barrels per day of crude oil, close to 20 percent of global demand.

An additional withdrawal of more than 2 million barrels per day from Venezuela would then be more than IEA reserves could cope with.

Given what’s at stake, the prospect of a Strait of Hormuz disruption alone is one the international community at large, including Iran, may not be willing to risk in an already volatile and vulnerable global economy. But as the parallel scramble for friends and allies picks up, the chances of achieving a diplomatic resolution show little to no signs of improving.

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