Havana’s Potential Geo-Political Bombshell

Cuban Oil: Havana’s Potential Geo-Political Bombshell

As the Obama administration slowly inches towards normalizing its relations with Cuba, pressure is mounting on the new president to lift the decades-old, and universally acknowledged, anachronistic embargo. A relic of the Cold War, the Cuban embargo witnessed the loss of its stated purpose years ago and is now gratuitously hobbling the diplomacy of Cuba and the United States. At the same time, Cuba is struggling to pay for necessary imports and provide energy sources for its people. A lift of the “blockade”, as many Cubans call the embargo, would give Havana the opportunity to repay some of its debts and afford everyday necessities, as well as discourage refugees from illegally flooding into the U.S. Normalized relations would give the U.S. access to Cuban oil exploration and drilling, and allow the U.S. to implement environmental regulations aimed at protecting the Florida coast from potential oil spills. Enhanced trade with Cuba could generate up to $1.9 billion for the U.S.’s cash-strapped economy, and the image of the U.S. in Latin America undoubtedly would encounter a much-needed boost. Very few deny that both nations would benefit from a lift of the embargo and trade normalization.

Cuban Offshore Oil
Desperate to end U.S. dependence on oil from the Middle East, United States’ officials are certainly aware of Cuba’s oil-producing potential. In its 2004 assessment, the U.S. Geological Survey found that Cuba has 5 billion barrels of crude oil off its northern shores; Havana claims it has 20 billion . Five billion barrels would put Cuba on par with Colombia or Ecuador, while 20 billion barrels would make Cuba’s oil capacity comparable to that of the United States’ and place it among the top 15 oil reserves nations in the world. Either way, Cuba’s oil is attracting the attention of oil companies from around the globe. At the moment, Spain’s Repsol, Brazil’s Petrobras, and Norway’s StatoilHydro are overseeing exploratory drilling in the Gulf of Mexico. India, Malaysia, Vietnam, and Venezuela also have signed deals with Cuba.

Havana has publicly stated that it welcomes American investment, but U.S. companies are incapable of proceeding without an official go-ahead from Washington. As Juan Fleites, vice president of Havana’s state oil company Cubapetroleo, said, “We are open to U.S. oil companies interested in exploration, production and services.” U.S. oil tycoons have shown definite interest, but Kurt Glaubitz, a spokesman for Chevron, explained, “Until trade barriers are removed, Chevron is unable to do business in Cuba. Companies like us would have to see a change in U.S. policy before we evaluate whether there’s interest.” The aforementioned foreign companies already have contracted for 21 of the 59 offshore Cuban drilling blocks, and another 23 blocks are currently under negotiation by other foreign nations, including Russia and China.

A U.S. Stake in Cuban Oil?
It is not too late for the U.S. to develop a stake in Cuba’s nascent oil output. It takes between three and five years to develop oil reserves, and as of yet, there has been no major oil discovery off the island. Repsol struck oil in 2004, but not enough to sell commercially. Several other foreign firms are currently using seismic testing, which assesses the oil content of potential deposits, after which they will probably begin exploring in 2010 or 2011. The exploration manager for Cubapetroleo, Rafael Tenreyro Pérez, has called the incoming results from seismic testing in Cuba’s reserves “very encouraging.”

After lifting the embargo, U.S. oil companies could most likely work out an arrangement whereby the U.S. would exchange its reserves with nearby holdings of foreign companies, allowing the U.S. access to Cuba’s oil even after all of the contracts have been signed. This could appreciably save transportation costs, because U.S. companies wouldn’t have to go halfway around the world in search of oil refineries, with Cuba only 90 miles away.

U.S. oil equipment and service companies like Halliburton, however, already have lost the opportunity to build refineries, pipelines, and ports, sacrificing tens of millions of dollars in revenue. U.S. companies’ oil contracts are not just significant for their own potential profits, but also for American consumers’ access to reasonably priced neighboring oil. With oil prices recovering from a December low of $32.40 a barrel back to around $70 a barrel, access to more oil sources could become a matter of serious import.

Desecration of Florida’s Coast?
Some are concerned about the possible environmental costs of drilling. Florida Senator Bill Nelson has warned that “an oil spill or other drilling accident would desecrate part of Florida’s unique environment and devastate its $50 billion tourism-driven economy.” The best way to ensure that such an event does not occur would be for the U.S. itself to take part in or monitor the extraction process. The problem is that Washington has no power over Havana’s extractive practices as long as Cuba is drilling only within its own territorial waters, so cooperation and joint project would be the best way to promote the safety of the drilling process. U.S. oil companies can be expected to take part in the excavation process as soon as the outdated embargo is superseded.

The Obama administration has said its recent modest opening of relations with Cuba was intended to “extend a hand to the Cuban people, in support of their desire to determine their own future.” If Washington truly wants to help, normalization of relations could lead to immediate improvements of the dismal economic situation on the island. Cuba received over 115,000 barrels a day of generously subsidized oil from Venezuela in 2008, and that number has since increased. Otherwise unable to afford oil, Havana profoundly needs this discount along with the doctors for oil swap; this points out Cuba’s inability to avoid its past mistakes. The disastrous economic fallout in Cuba after the collapse of the Soviet Union, and the consequent sudden loss of over $5 billion worth of yearly subsidies, should have taught Havana to be wary of overdependence on other countries’ generosity. Havana’s relationship with Caracas proves otherwise: Hugo Chávez provides the Castros with well over an estimated $2 billion worth of oil subsidies each year.

The Cuban Economy
Cuba’s reliance on other states is due to its long-suffering economy, which has significantly worsened in the past year due to the sudden fall in commodity prices. The price of nickel, Cuba’s largest source of revenue, has fallen to new lows. In 2007, nickel sold for as high as $27 a pound, but now the price undulates around $6. Tourism, another significant source of income for Cuba, is on the decline. Three devastating hurricanes ravaged the Cuban countryside and dealt a critical blow to Havana’s treasury in 2008, compounding its already substantial losses in revenue. Hurricanes Gustav, Ike, and Paloma cost Havana upwards of $10 billion, and destroyed Raul Castro’s hopes of boosting agricultural production in the near future to decrease Cuba’s dependence on expensive food imports. Cuba imports over 80 percent of its food, costing the island $2.5 billion a year.

Cuba’s economy also has been under assult by the world’s failing financial system. Havana previously had predicted a 6 percent growth in GDP in 2009, but has since had to adjust that number to 2 percent. Havana University, which tends to be more accurate than the government in its economic forecasts, predicts that growth will be closer to 1 percent. This year, Cimex, Cuba’s largest trading company, has had to delay payments for some previously purchased products, leading to an outcry from foreign companies. Some foreign diplomats have expressed concern that the island may be on the brink of insolvency, which would be disastrous not only to Cuba, but to every country which has invested in its economy.

In the Dark
Most recently, the cash crunch has translated into debilitating energy cuts. An unexpected 3 percent electricity increase in the first quarter of 2009, coupled with the knowledge that energy usage usually triples during the summer, has led Havana to implement drastic energy saving measures. Starting June 1, Havana once again began implementing residential blackouts, cutting the number of bus runs, and restricting business energy budgets. Provincial governments and state-run offices and factories have been mandated to reduce their energy consumption by 12 percent, with noncompliance resulting in forced electricity cuts. The retail sector and government offices are not permitted to turn on their air conditioning until 1:30pm, an uncomfortable proposition for an island that can easily reach temperatures in the high 80s before noon. Food allocations for free work lunches provided at state companies have been cut by 50 percent, and the Cuban government already has cut meat imports for the rest of the year. If the U.S. really does want to “extend a hand to the Cuban people,” now would be the time to consider normalizing trade so that Cuba can begin its recovery.

Mitigating Migration
It is also in the interest of the U.S. to help Cuba pull itself out of its economic crisis, since a suffering Cuban population translates into a rapidly growing migratory population attempting to flee to Florida. This has been true since the “Special Period” in Cuba following the collapse of the Soviet Union, when there was a huge influx of immigrants into the United States. In the summer of 1994 alone, over 33,000 Cubans fled for Florida’s shores. This overwhelming number of refugees pushed the U.S., acting in concert with Cuba, to institute a quota of 20,000 Cuban immigrants per year. Of course, usually more than 20,000 Cubans attempt to enter the U.S. yearly, and it would be much less of a burden for the U.S. if fewer Cubans attempted to enter this country. Lifting the embargo could lead to an improved Cuban economy, fewer would-be migrants desperate to escape from economic problems, and less of an immigration problem in Florida.

Anachronistic Embargo
In 1962, the proclamation initiating the embargo stated its purpose was to “promote national and hemispheric security by isolating the present Government of Cuba and thereby reducing the threat posed by its alignment with the Communist powers.” With the end of the Cold War, the need to protect the U.S. from Communism disappeared along with the rationale for the Cuban embargo. The U.S. enthusiastically trades with Communist nations like China and Vietnam, so punishing Cuba for its form of government is clearly no longer a valid justification.

It also has been argued that the embargo has helped the Castros stay in power, not inhibited them. The Castros have turned the “blockade” into the scapegoat for all of Cuba’s economic woes. This accusation may not be entirely fair, especially as the U.S. is currently Cuba’s largest food exporter due to a loophole in the embargo. In 2000, President Bill Clinton signed a waiver allowing food and agricultural products to be sold to Cuba on humanitarian grounds, although much of what is sent is far from being humanitarian and is loaded with inhibiting red tape. The waiver includes goods like beer, soda, drink mixes, beauty products and kitchen cabinets, as well as staples like corn, poultry and wheat. The U.S. now earns upwards of $700 million annually from the Cuba trade. Some critics have argued that the best way to expose the inadequacies of Castro rule would be to lift the embargo, and thus respond to Havana’s claim that the U.S. is the cause of much of Cuban privation.

Further Steps
President Obama may have hoped that his recent overtures towards Cuba would temporarily satisfy his critics, but instead they have merely amplified calls for Washington to take more forthright steps. Ending restrictions on Cuban-American travel was done in a discriminatory fashion. In a democratic country, every American, irrespective of their background, should be able to travel wherever their neighbors travel; nationality or family relationships should not afford certain Americans special privileges, or the lack of them. The lift of restrictions on remittances was a step in the right direction, but it has yet to significantly affect Cuban finances. In fact, remittances to Cuba have not increased since they were lifted two months ago, according to the president of Cimex.

A rising tide of U.S public opinion is calling on Washington to lift the outdated and counterproductive embargo on Cuba, a move that would not only benefit the beleaguered Cuban population and be of value to the oil-needy United States, but also improve the tarnished image of the U.S. in Latin America. Right now, the House of Representatives is considering the “United States-Cuba Trade Normalization Act of 2009”, which recognizes that “Cuba is no longer a threat,” the embargo is “not fulfilling its purpose for which it was established,” and that “trade and commerce” are the best routes to democracy and human rights. This bill would lift the trade embargo and allow all Americans to travel to Cuba, both much needed changes. Representative William Delahunt, who is sponsoring the bill, has said he doesn’t expect a vote until November. Nevertheless, its prospects for passing are high.

Recently, Hillary Clinton stated, “We have to recognize that our country is not perfect either, that some of the difficulties that we had historically in forging strong and lasting relationships in our hemisphere are a result of us perhaps not listening, perhaps not paying enough attention.” The U.S. now has the chance to reject its historical arrogance in the region, and disprove Nicaraguan President Daniel Ortega’s claim that, when it comes to U.S. policy, “the president has changed, but not Latin American policy.” Congress should prioritize pushing the Trade Normalization Act through the House and the Senate to pave the way for advancements in the U.S. and Cuban economies, and to improve Washington’s still lagging image in Latin America.

This analysis was prepared by Research Associate Lily Fesler

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