US-Venezuela Gas

CASE NUMBER: 6
CASE MNEMONIC: VENEZ
CASE NAME: US-Venezuela Gas Import Dispute

1. Issue

The Clean Air Act Amendments of 1990 (P.L. 101-549) required the use of reformulated gas (RFG) that met standards set under Environmental Protection Agency's Clean Air Act (CAA), starting on January 1, 1995. The Environmental Protection Agency (EPA) published new standards, in which foreign refiners must increase the oxygen content and reduce the aromatic level in order to achieve cleaner reformulated gasoline (RFG). The acceptable RFG standards are 2 percent oxygen, no lead, or other heavy metals, and 1 percent benzine. In addition, RFG is also subject to performance standard tests that proscribes a 15 percent improvement in air quality in 1995, and 25 percent improvement by 2000. Venezuela and Brazil complained to the GATT that such base lines were discriminatory to foreign producers. In early 1996, the WTO determined that the law did discriminate against Venezuela and Brazil.

2. Measure: Regulatory Standard

In the GATT case, Petroleos de Venezuela (PDVSA), the Venezuelan National oil company, contended that the EPA's reformulated gasoline regulation did not apply to domestic reformulated gasoline and thus was discriminatory. EPA guidelines indicated that domestic refiners had to decrease their gasoline emissions by 15 percent from their individual 1990 bases. Foreign reformulated gasoline had to decrease its emissions by 15 percent from the 1990 average U.S. baseline, regardless of the foreign country baseline. Petroleos de Venezuelan filed a complaint with the WTO and indicated that the U.S. violated Article III that established the principal of non-discrimination if the product does not harm humans, animals, and the environment.

3. Exporter and Importer: VENEZUELA and USA

The petroleum industry is particularly important to Venezuela because a large amount of the country's output comes directly from it. In 1992, the industry accounted for one-fifth of Venezuela's gross national product (GNP), two-thirds of the central government's revenues, and four-fifths of their export earnings. The net inflow of foreign exchange was $12 billion. Venezuela's industry produced an average of 2.334 million barrels per day of crude petroleum and 37,000 barrels per day of condensates that year. The total amount of petroleum exports from Venezuela averaged 2.1 million barrels per day in 1992. Some reports have concluded that the petroleum industry generated half of the 10.4 percent growth rate posted by the Venezuelan economy in 1991.1

However, the United States is the largest importer of Venezuelan oil -- purchasing at least 65 percent of the Venezuelan oil exports. In fact, Venezuela overtook Saudi Arabia as the top exporter of petroleum to the U.S. in first five months of 1995. From January to May 1995, Venezuela exported 1.43 million barrels per day of petroleum to the United States, but Saudi Arabia only exported 1.34 million barrels per day to the United States during that same period.2 This rise in U.S. dependency on Venezuelan petroleum is in part due American importers' concern about price hikes in Mexico and Middle Eastern countries since 1994.3

Congress passed a bill in September, 1994 that overruled the EPA's decision and forced Venezuelan-refined gas to meet the same reformulation standards as U.S. companies. Officials of Venezuela's state-owned oil company objected and filed a complaint with the Secretariat of the General Agreement on Trade and Tariffs (GATT), claiming that the U.S. was using environmental rules to gain an unfair and discriminatory trade advantage. Petroleos de Venezuela (PDVSA) estimated that the law may cost Venezuela $150 million in lost sales to the United States.

4. Trade Impacts

Venezuela's gasoline exports to the United States have been on the decline in the 1990s. They rose from $721.3 million in 1989 to $821.2 million in 1990, where they peaked. In 1991, Venezuelan exports collapsed to $440 million and the following year rose to $503.9 million. After this brief upsurge, imports continued to fall, equaling $214.2 million in 1994. The U.S. regulation on RFG was applied in 1995 (see Figure 8).

In September, 1993, PDVSA announced a five-year environmental protection plan that may cost about $800 million. The environmental measures, which are much more stringent than those of other Latin American countries, are required by Venezuela's Penal Environmental Law. The plan includes monetary allotments for atmospheric emissions control, treatment and disposal of solid and toxic waste, treatment of industrial waste water, treatment of oil-tainted residues, contingency plans for oil spills and other emergencies, and for environmental impact studies.4 Even after instituting these measures, Venezuela's environmental standards still fall below those of the United States.

The United States has been important to Venezuela as an importer of large quantities of its oil and as a supplier of the technology required to raise oil industry output. In 1958, foreign capital comprised 15 percent of total industrial investment (in all sectors).5 By 1977, about 50 percent of all large firms in Venezuela had some type of ties with U.S. private capital. Venezuela's dependency on U.S. capital has increased considerably since then.

5. Other Economic Impacts

Other economic impacts spill across national borders. PDVSA is currently participating in joint ventures in Illinois, Germany, and Sweden. Future joint projects may include agreements with Conoco of the United States and Itochu/Marvbeni of Japan.

What other economic impacts ensured? First, Venezuela threatened to stop buying petroleum equipment machinery from the United States; Venezuela buys $1 billion worth of equipment every year.6 Second, the expected loss caused by increases in the transportation costs was estimated to be $150 billion. Finally, the requirement for higher standards of RFG will cause Venezuela to lose 50,000 barrels per day of RFG exports. No doubt the gas can be sold to other customer's perhaps at some discount and with higher transaction and transportation costs.

Since higher standards cannot be achieved by foreign refiners, imports will be interrupted. Four percent of the U.S. consumption depends on the Venezuelan gasoline. Shortages may cause the gasoline prices to rise. Imported gasoline constitutes 20 percent of Northeast's consumption. As a result of this shortage, 10-15 cents of price increases are expected.7

PDVSA is investing $1 billion in its refineries to produce reformulated gasoline that will conform to the U.S. demands. Also, it will spend $500 million on refineries to control atmospheric pollutants, treat liquid effluent, and dispose of solid wastes. As a result, the Venezuelan price of one gallon of gasoline, $.73 per barrel, could be about twice the price of U.S. domestic refiners.

6. Environmental Impacts

The measure intends to clean the air of the United States, especially urban areas, often located in the industrial Northeast. In all, the impact will be marginal on air quality, given the many factors that impact it. However, it is an incremental step towards cleaner air quality.

The actual U.S. law included benefits to methane producers, mostly to corn growers located in the Midwest. Although methane energy is cleaner than gasoline in cars, the energy costs when combined with its agricultural production and conversion make it less cost effective. Thus, the overall environmental benefits are less clear, considering energy-conversion and land-use costs. In general, gas is much less carbon-emitting than other existing energy sources such as oil and coal.

Changes in composition are an anathema to trade discipline because it inherently involves multi-disciplinary objectives. Such changes are also dynamic and need to be coupled with changes in levels and types of energy use.

7. References

1. "Venezuela - Oil, Gas Industry Profile," 1994 National Trade Data Bank Market Reports, 16 February 1994.

2. "Venezuela in No. 1 Position; Oil Exports to the United States; Energy Information Administration Report." Oil Daily (45 (9 August 1995), 5.

3. Jareer Elass. "Cost-Conscious U.S. Importers Look Closer to Home for Cheaper Barrels." Oil Daily. 45 (8 March 1995), 1.

4. "Venezuelan Oil Company Announces Five-Year Environmental Plan." Environmental Watch Latin America. 3 (September 1993).

5. James F. Petras, Morris Morley, and Steven Smith. The Nationalization of Venezuelan Oil, (New York: Praeger Publishers, 1977), 17.

6. "Venezuela-U.S. Tensions Rise on RFG." Platt's Oilgram News 72/152, August 8, 1994, 1.

7. Arthur Gottschalk, "U.S. Oil Refiners Fight to Restrict Gasoline Imports," 1994, 8A Journal of Commerce.