Venezuela Will No Longer Accept Payment for Oil in U.S. Dollars

In Venezuela this week the government announced that it would no longer be accepting payments in U.S. dollars for the oil it sells. This is a huge shift from typical practices in the oil market.

The government is believed to have decided that PDVSA, its national oil company will now operate strictly in euros. The explanation most believe is it is a way for the government to circumvent the sanctions the U.S. government imposed on the country.

However, the ulterior motive might be Venezuela’s sales pitch to India, China and other large markets that the South American country are hoping to attract as new customers.

Nearly all transactions in the worldwide oil industry are made in dollars, maintaining a stable price gauge. Producers of oil whether in the U.S. or not, generally will use the dollar, because it is accepted universally for them to make their own purchases.

In addition, the dollar is looked at as reliable because of being backed by the complete credit of the U.S. government.

Only one other major, regular oil transaction that takes place without using U.S. dollars in the current market is the sale of crude by Russian companies to China.

Dating back to 2015, Russia agreed it would sell China its crude for the yuan as a way to placate a client with other options, namely oil from Saudi Arabia.

Venezuela is currently selling most of its oil to the U.S. market but that makes it more vulnerable to harsher sanctions.

In agreeing to use different currencies, Venezuela is hoping to attract major oil consumers such as India, China and others to buy their crude.

Those countries, as well as businesses in those countries, would prefer much more if they could pay for crude purchases in their own currencies as a way to avoid holding onto U.S. dollar reserves or lose money when converting their currency into dollars.

However, a big risk exists for Venezuela selling oil in any other currency besides the dollar. The current regime under President Nicolas Maduro needs lots of cash to purchase food as many people in the country are going without.

It also must pay so its oil industry can continue to run and it must pay military and police forces that help to maintain the regime’s power. Those goods and services cannot be purchased using Chinese yuan or a rupee from India.