When Oil Sanctions Meet Dark Shipping

In recent years, oil export sanctions have become a central tool of U.S. foreign policy, targeting major producers including Russia, Iran, and, until very recently Venezuela. These sanctions were designed to limit oil revenues, apply economic pressure, and create geopolitical leverage. But their real-world effects have proven more complex than many anticipated.

A growing “shadow fleet” of oil tankers now operates alongside the conventional global shipping system. These vessels, often older and operating with opaque ownership and shifting registrations, transport sanctioned oil through networks designed to evade restrictions. Despite extensive sanctions, large volumes of this oil continue to reach global markets.

In this episode, Penn economist Jesús Fernández-Villaverde examines how oil sanctions have contributed to the rise of dark shipping, and have become a lever in global great power competition. Drawing on new research funded by the Kleinman Center, he explains how shadow oil flows reshape global markets, influence prices and industrial activity, and generate unintended outcomes.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone. Today, there are effectively two parallel fleets of oil tankers moving crude oil around the world. One is the conventional fleet, operating under established maritime rules with transparent ownership, registration, and routing. The other is a growing shadow fleet of tankers whose ship names and registrations frequently change, whose locations are sometimes concealed, and which operate largely outside the norms that govern international shipping. These vessels are often older, and they are used by oil- producing countries that face restrictions on their ability to export crude through conventional channels. Prominently, that includes countries such as Russia and Iran, and until very recently, a heavily sanctioned Venezuela— all major oil producers whose energy sectors have faced extensive U.S. sanctions, along with additional restrictions imposed by the European Union and aligned partners.

However, despite these restrictions, large volumes of sanctioned oil continue to reach willing buyers around the world through shadow shipping networks. On today’s podcast, I’ll be speaking with a geo-economist who, together with a group of co-researchers, has examined how oil sanctions have contributed to the rise of this shadow fleet. Their research shows that dark shipments account for a surprisingly large share of the global oil trade. It also shows that this reshaping of oil flows has important and often unintended economic consequences that may not always be fully appreciated by policy makers.

Jesus Fernandez Villaverde is a Professor of Economics at the University of Pennsylvania. He is a co-author of a recent paper titled Charting the Uncharted: The Unintended Consequences of Oil Sanctions and Dark Shipping, which examines the scale of the shadow fleet and its implications for oil supply, energy costs, and global industrial activity. Jesus, welcome back to the podcast.

Jesus Fernandez Villaverde: Thank you. Thank you for having me here again.

Stone: So the past few weeks have been very eventful in the sphere of the global oil tanker trade. The U.S. has moved to more aggressively block what’s known as “shadow” or “dark” shipments of Iranian oil. The Trump administration has set the stage to potentially sanction any country that exports oil to Cuba. And all of this follows the U.S. taking control of oil shipments from Venezuela following the ouster of Nicolas Maduro in early January, just a month ago.

And behind this is the fact that the U.S. has, for some time, used oil export sanctions as a key foreign policy tool against its oil producing adversaries. In your research, which we’re going to be discussing today, you find that the impact of sanctions extends well beyond the sanctioned countries themselves, and has led to a broader set of unintended global economic consequences that impact a number of countries, including the US. So to start us out, at a high level, what is the concern that you’re exploring here, and why is clarity around the consequences that we’ll be talking about lacking, and you believe, so necessary?

Villaverde: There are two main issues over here. Issue number one is measurement. How big is the dark fleet, and how much oil does it transport? If the dark ship is not very big and the amount of oil it transports is not very large, then the second question, which is what are the global consequences, will not be very relevant. So the very first thing that we do in the paper is try to measure how big this dark fleet is. And we can talk later exactly about how we do it. But the conclusion that we get is this is very large. We are going to be talking about something between 25 to 45% of the oil traded by sea is actually traded by these dark oil takers.

Then the second important question that we want to analyze is, what is the global effect of all this oil exported in these dark ships in the global economy? And the point that we want to emphasize is that if this oil continues flowing through international trade, this is going to affect everyone.

Let me give you a very concrete example. Let’s suppose that the U.S. successfully stops oil coming from Iran to Europe, but it doesn’t stop oil going from Iran to China, and China uses that oil to produce a good that is later exported to Europe. When a European consumer buys that Chinese good, it’s implicitly buying Iranian oil. It’s just that, instead of buying the oil in crude form, it is buying the oil in the form of the widget it has been manufactured with. And my concern when I started this research agenda was that most economists were missing that you have this global linkage of oil and international trade through the whole global economy.

Stone: And as I think we’re going to get into a little bit later, there is an economic impact of that flow through of the Iranian oil to the Chinese production, to the products and the price of those products, I would imagine, elsewhere. Before we get to that, I just want to make sure we define clearly, what is dark shipping and how does it operate?

Villaverde: As you were mentioning, a number of countries, mainly the US, the European Union, the United Kingdom, Japan, and other countries, which I will loosely call the Western powers, have imposed sanctions and restrictions on several countries. Russia, Iran, and until very recently, Venezuela. Not all countries have imposed those restrictions. For instance, China is one of those countries.

So let me then define sanctioning entities, which are basically the Western powers, and non- sanctioning entities, like China. The dark fleet consists of all oil tankers that evade the restrictions imposed by the sanctioning entities. Now you will be saying, then, what is the situation for an oil tanker that is owned by a Chinese company that is importing oil from Russia to China? Russia, of course, is not a sanctioning entity by definition. China is not a sanctioning entity. What about this oil tanker? Well, most likely that oil tanker is still using insurance issued by the United Kingdom, by Lloyds of London, or some other similar company. From that perspective, that oil tanker, even if it is trading between Russia and China, is still violating the sanctions imposed by the United Kingdom.

Stone: Through the insurance.

Villaverde: Through the insurance, and through many other type of services in the world economy that you need to actually operate a ship. But the main one is the insurance. So in that sense, the dark fleet or dark vessel is any type of oil tanker that, through its activity, is violating any type of restriction imposed by a sanctioning entity. And these restrictions can be trade, insurance, ownership, financial movement of payments, et cetera. Then the question is, how are they doing this? Well, there is a wide range of practices. Some practices are just, I ignore the sanction and I go on with my business as usual. But more importantly, they are trying to hide what they are doing.

Stone: So they can maintain the insurance? I’m not sure if I follow the insurance connection here.

Villaverde: Exactly, so they can keep their insurance. So it’s very difficult. Let me give you a very concrete example. Russia exports a lot of oil through the Black Sea and the Bosphorus Strait. The Bosphorus Strait, for those listeners who don’t have the geography on the top of their head, is in Istanbul. Just the separation between Europe and Asia. And what happens over there is that, because of an international treaty, Turkey cannot stop ships going through the Strait. But Turkey can verify, and it does verify, that you satisfy all legal requirements to operate a vessel. And one of them, of course, is the insurance.

Stone: And I would imagine the insurance is very important in the case of an oil tanker, because, for example, if there is a spill, insurance would cover that cost.

Villaverde: Exactly. But it is a little bit like driving without insurance. Okay? So imagine that you are driving in the highway, and the police stops you. It may be just a routine search. Maybe, I don’t know, you didn’t stop enough seconds in a stop sign. Maybe you were speeding a little bit. And what may be just a warning by the police officer, “Hey, you did a rolling stop. You only stop a couple of seconds. You should have stopped a little bit longer. Be careful next time.” If the police realizes you don’t have insurance, suddenly it escalates into a serious situation.

So it’s a little bit the same thing for ships. Okay? So imagine that you get into a harbor and there is some problem with the paperwork. You can get away with, yes, a small fine. And suddenly you don’t have insurance. That escalates into something very, very important. So that’s the type of situation where you really care about this thing.

And then, although it happens a little bit less often, you arrive to a harbor, you start unloading your oil. And when you are going to be paid, it turns out to be the case your paperwork is not correct. Well, the payment can be seized by the Central Bank of that country. And you not only did your trip for nothing, you actually lose millions and millions of dollars. And that’s why it’s so important that you can pretend you are not breaking any rule.

Stone: So you’re pretending to be somebody you’re not as a ship.

Villaverde: Exactly.

Stone: Because you basically want to obscure the fact that you’re carrying oil that is from a sanctioned country such as a Russia, Iran, or —

Villaverde: Let me give you maybe another comparison that will be a little bit easier to understand. You are 17, and you want to buy some beer to go with your friends to a party, and you get a fake ID. That’s basically what they are doing. They want to transport the beer. In this case, it’s the dark oil. And they cannot do it legally, because you are 17. So you get a fake ID. That’s basically what they are trying to do.

Stone: Well, they also — I believe these ships will turn off their identification system so they can’t be tracked.

Villaverde: Exactly. So let me tell you basically what is going on. So the International Maritime Organization mandates that every ship over some very minimum size needs to have an automatic identification system transceiver. This transceiver sends a signal to a satellite every two seconds with the location of the ship and the heading and the speed and a lot of other information. The reason why these transceivers are so important is because they broadcast your location to nearby ships. Extremely important to avoid collisions in high seas. Okay. By the way, these transceivers are not very expensive. You can get one on Amazon for $800.

Stone: Oh, wow. Okay, all right. Very common technology,

Villaverde: Very common technology. So in fact, I went with my dear wife to the Chesapeake Bay. And I don’t know, someone told us, “Why don’t you take a class in introduction to sailing?” And we thought that that could be fun. And that’s the first thing they told us. They said, “Okay, this is a transceiver. And even if this is a very, very small sailing ship, you really want to have one, because you want to avoid bumping into someone else.” So not only is it mandated, it’s something you want to do on your own. Okay? It really makes sense. It’s not very expensive. It makes a lot of sense. And it’s mandated.

And what these dark ships do is they try to manipulate this transceiver. And this can be done in several ways. The one that is perhaps the easiest to understand is that they shut it down. It’s very similar data set. We are going to see this ship, and then all of the sudden, the signal from the satellite disappears. And then four hours later, we get the signal back. Then the question is, you know, what were you doing during those four hours?

Stone: Were you taking on a cargo in a place that you shouldn’t have been?

Villaverde: Exactly. And I’m going to tell you how we verify that that’s what is going on. Okay? But there are other possibilities that you can do. So what some ships do is the following. This transceiver is very small. Again, the listener who is interested, just go to Amazon and put “automatic identification system transceiver.” It’s like a GPS unit. You remember those GPS units that people used to have in the cars?

Stone: Yeah, I still use one.

Villaverde: You still have one. Okay, okay, well then you know what I mean. So they are a little bit bigger than that, but not much bigger. So what you can do is the following. You can take the transceiver, and let’s say that a small boat, a small service boat, comes to your site, and you give the transceiver to that boat. And then you go and do whatever you need to do while the small boat continues with the transceiver, sending the signal, pretending it was you. And then whenever you finish doing your nefarious activity, the service boat comes back and gives you the transceiver back to you.

Stone: The ship is trying to hide its location and its activity, such as taking on crude illicit shipments, from its insurers as well as the sanctioning countries, such as, in this case, the U.S. or countries of the EU?

Villaverde: Yes.

Stone: That’s essentially what’s going on here. And I think one other question that may be getting a little ahead of ourselves here, but I just want to ask it— these ships ply in international waters, so how much, actually, could a sanctioning country do about it? I mean, if it’s an oil tanker on the high seas, I think there are a lot of rules you can’t just go ahead and just board that ship and take its cargoes.

Villaverde: Exactly. So things that you can very easily do, you can make them lose their insurance again. Again, big time. So this is a little bit — you know, coming back to the metaphors I’m using all the time, or the comparisons I’m using all the time, I stop you because you were driving under the influence, and I take out your driver’s license. Now, of course, you can still drive without a driver’s license. But if I stop you again, this becomes a very serious deal. So I can take out your insurance.

Second, the owner can be subject to financial sanctions. So you have some assets. Your company —imagine that this oil tanker is owned by Stone Oil Tanker Incorporated. And I go and I seize all the assets of Stone Oil Tankers Incorporated. All those type of things belong to a very wide range of sanctions that, or penalties, that a sanctioning entity can impose. That falls short of, actually, the U.S. Coast Guard or the U.S. Navy seizing this vessel in high seas in international waters. And at the end of the day, you probably care more about your financial assets and your financial holdings than about the vessel itself, which, as we document in the paper, tend to be old and a little bit close to be written off anyway.

Stone: So does that imply, then, that these ships may be owned by companies that may not be as above board and may not be flying standard national flags?

Villaverde: Exactly. So that’s why later, when I try to tell you how we measure the dark sea fleet, we can just not go and search for ownership.

Stone: And that’s what I want to ask you about. So again, the first part of the research, then, is to really quantify how much dark shipping is taking place. And that goes into the second part of the research, also, that we’ll talk about. Depending on the size of that dark fleet, then we can start to understand its global economic impact. But tell us about the challenges, then — I think you started to talk about it — of actually tracking this fleet and quantifying it.

Villaverde: Exactly. So, first problem. These oil tanker companies are extremely obscure. You basically have — you find a tanker and it’s owned by a shell corporation incorporated in the Cayman Islands. And even if you could get information about this company in the Cayman Islands, it turns out to be the case that is owned by another shell corporation in the Bahamas. And then even if you were able to find that information, it turns out to be the case that is owned by another shell corporation, incorporated in Jersey. And, you know, people spend good money, and there are very good lawyers trying to build layer after layer of corporations and entities to make this very difficult to trace.

Second. Can you use the data from Russia? Well, no. Of course, the Russians are not the ones. You cannot go to the Russian National Institute of Statistics and check, you know, “illegal exports.” And the other way around. You cannot go to China or other countries that import this oil and check, “oil imported from Russia.” They just don’t want to report it. So you need to do something else.

And what we did is try to precisely look at the satellite information that I was mentioning before. Now the satellite information not only is broadcasted to nearby ships. Remember, basically the idea is, you send a signal of where you are, so all the ships nearby know where you are. But it also gets downloaded into a public database. So what we were able to do was to get into that database. It’s public, okay. This was not Tom Cruise in Mission Impossible, hacking into a computer at the CIA. But we did a query to this database and we downloaded the data.

It’s an enormous amount of data, okay? So it’s 330 million observations, extremely complex data structures. And we have pretty much all the oil tankers in the planet since 2017. So we have everything. It’s not a sample, it’s the whole population of oil tankers. And then we design a machine learning algorithm to identify trips that violated sanctions.

Now this is where it gets a little bit technical, but I’m going to try to give you the intuition. We look for telltales of nefarious activity. Let me give you an example. You are sending the signal to the satellite. You are pinging the satellite. And then suddenly, the signal drops. And 24 hours later, the signal comes back in. So we look and we analyze, where were you when that drop happened? If you were in high seas, very far away from another oil tanker, very far away from any hardware, we say these things happen from time to time.

Stone: You fill in that time gap.

Villaverde: Yeah. Fine, whatever. We just interpolate. Who knows, maybe someone spilled coffee on the transceiver and the transceiver didn’t work for 24 hours. But if it happens to be the case that during those 24 hours, you were close enough, let’s say, to a refinery in Venezuela, and you had time —and what the algorithm computes is, do you have time from your last known location to get to the refinery, load oil, and be back in the new location in 24 hours, yes or no? And if the answer is yes, we say you are suspicious men.

But now — this is the beautiful thing. Since we know to which harbor you arrived during those 24 hours, and we know more or less the time and when you did it — you know, these are big ships. They go at the speed they go. And you had to spend so many hours loading oil. I can ask for a satellite photograph of that harbor at that particular moment, and I can check if the ship was at the harbor at that moment. Do you see how beautiful that is?

Stone: Yep.

Villaverde: Why? Because the problem is, of course, I could just ask for photographs all the time. But — well, first of all, each photograph costs around $10, and I don’t have the budget to ask for millions and millions of photographs. And even if I had the budget, how do I handle millions and millions of photographs? But now I’m only asking for a photograph of a very specific harbor at a very specific time. And then we are going to have the photograph of an oil tanker. And before you ask, you say, “How can you tell this is, in fact, the tanker?” Well, it turns out to be the case that all these tankers have a very clear profile that you can check against the catalog of tankers in the world, So we can actually identify that tanker.

Stone: So the goal of the sanctions is to remove oil from the market, with the specific intention of causing economic damage or hardship to the sanctioned countries. So you pointed out a little bit earlier that the scale of dark shipping is quite large. Tell us a little bit more about that scale. What you’ve discovered from the research and you’ve shown in the paper. And also, to what extent have sanctions removed oil from the market, and to what extent has dark shipping actually maybe offset that?

Villaverde: Let me give you a couple of statistics that are very easy to remember. There are around 2500 oil tankers in the world. Around 1/5 of them, a little bit more than 500, are dark ships. Now, some of them are not always dark ships. Some of them do runs that are legal, and some of them do runs that are illegal. But roughly one of each five tankers operating in the planet at any given time is violating sections in terms of the oil transported. Again, this changes, but it’s between 30 to 40% of all the oil exported by sea in the planet.

Stone: So a third of the oil trade is illicit.

Villaverde: Yes. So we are talking about a big amount of money. Let’s imagine just for a second that this 1/3 of the oil disappears. That overnight, we start enforcing the sanctions perfectly. The price of oil in the world market will skyrocket. It will go to $200, $250. Because you are basically taking out a massive amount of oil from the market. That will generate huge inflation in the United States, that will generate huge inflation in the European Union.

So in practice, we cannot do that. We cannot do that because the voters in Europe, the voters in the US, the voters in Canada are going to hate it. They are going to say, “Look, fine. The Iranians are not very nice people. The Russians are not very nice people. But I just don’t want to pay so much for my heating. I don’t want to pay so much for my gas in the car in the morning.”

So my interpretation of what is happening is the following. The U.S. is aware that in real life, you cannot take all this oil from the world market. But you can make it sufficiently difficult and costly that it ends up hurting Iran and Russia. Nonetheless, how does this thing go? Well, let’s suppose that I convince most of the big buyers of oil in the planet, like the European Union, that they cannot buy Iranian oil. Now I cannot convince the Chinese. The Chinese are going to say, “Look, these are the U.S. and the European Union’s foreign policy.”

Stone: It’s not illicit oil to them.

Villaverde: “It’s not illicit oil to us. And we don’t we don’t necessarily agree. Okay, why are we going to stop importing oil from Russia because Russia has invaded Ukraine? That’s a business between Russia and Ukraine. We don’t have any beef in that dispute.” But the Chinese suddenly understand that now they have a lot of market power. Why? Because they can go to Russia, and they can tell Russia, “Hey guys, I’m the only one who now can buy your oil, because the Europeans don’t want your oil anymore. And yes, I’m going to still buy your oil, but I’m going to give you a $10 a barrel haircut.” And what are the Russians going to do?

Stone: So the end effect here is Russia’s selling the oil at a lower cost. I would assume the shipping rates may be high as well, because the shippers are taking on a certain amount of risk here. Russia receives less oil revenue, and China gets oil more cheaply.

Villaverde: Exactly. So that’s basically what is happening. So let’s suppose — so first of all, we don’t know exact numbers. Okay? This is information — we don’t have access at all. But let me give you what my educated guess is.

So let’s suppose that the price of oil in some moment in our sample is $60 a barrel. Russia, without sanctions, will be selling this oil, in fact, at $60. And it needs to pay, let’s say, $3 to the shipping company. Gets a revenue of $57. After the sanction, it needs to sell the oil at $50, because it needs to give a $10 haircut to China, and it needs to pay the shipping company $8, because of the risk for the shipping company of being involved in this activity. So instead of $57 per barrel, Russia gets $42. So the U.S. and the European Union get part of what we want, which is Russia’s revenue goes from $57 per barrel to $42 per barrel. They have had nearly a 25% decrease in the revenue.

Who is the big winner of all this? China. Because China now is getting oil at $10 cheaper. But what our argument is, is that China is not just going to sit on that oil. China is going to use that oil to manufacture products, which in part, are going to be export to the U.S. and to Europe. And because China is using cheaper oil, these manufactured products are also going to be cheaper. And because China is exporting more and having cheaper energy, it is also going to import more from the U.S. and the European Union. So the big winner is China, but the European Union and the U.S. also win a little bit.

Stone: Because we have lower-cost goods that we import from China, and more trade. I think in the paper, you really emphasize this, particularly in the case of the EU. And I wonder if you could explain this a little bit more. Why does this phenomenon that you’ve just described increase the flow of imports and exports of goods to Europe? If we are looking at some global price impact as a result of dark shipping and these sanctions, is it a positive or negative impact over all? And to what extent do these knock on effects that you’ve been talking about either compensate for those or exaggerate those effects?

Villaverde: You need to understand that China and Europe, until very recently, were complementary in terms of the manufactures they produce. These things have changed a little bit over the last two or three years, but let’s try to explain this. China will produce a lot of relatively cheap goods. Okay? So you go to Walmart, you go to Costco, a lot of the stuff in Costco and Walmart is made in China. But to produce these very cheap products, for instance, it requires a lot of advanced machines, a lot of very sophisticated tool making machines. A lot of those are manufactured in Europe, which is very specialized. Especially countries like Germany or the Netherlands, it is very specialized in these very sophisticated machines.

So when China exports more to the US, it also needs more imports from Europe. So from the perspective of Europeans, this was a very good deal, because suddenly you can get imports from China more cheaply. You go to the local Walmart or the local Costco in Germany, and stuff over there is a little bit cheaper. But it’s also the case that the local German company is exporting more to China. The overall import price effect is a little bit ambiguous. In the case of the US, it is clearly lower inflation. Because a lot of what is exported to the U.S. or imported from the U.S. perspective is cheaper.

Stone: That’s an amazing outcome, because when we’re looking at sanctions on countries without the impact of dark shipping, that could lower the global supply of oil, increase oil prices, that is inflationary. But you’re saying the net effect, when you consider all these kind of follow on impacts, is actually a reduction in inflation.

Villaverde: Exactly. But it actually makes a lot of sense if you think about this from your Economics 101. In Economics 101, you learn that most products are sold at cost. So it costs me $20,000 to produce a car, and I sell a car with $20,000 plus a markup, which is whatever the competition level bears.

But oil is very different. Oil is not sold at marginal cost. Oil is sold at whatever price clears the market. The difference is what economists call rent. Now, this is not the rent like in the rent of your apartment. This is rent in terms of economics. Economic rent will be the precise but verbose name. So an economic rent is the difference between the actual price of oil and the cost of producing oil.

To give you an idea, in Saudi Arabia, producing oil is around three to $4 per barrel. But if the price of oil in the international market is $50, $45 is the economic rent that Saudi Arabia gets. On the other hand, in North Dakota, you see shale gas producing oil, maybe $45. So the economic rent is only $5. The difference between the $50 of the price and the $45 of the cost. Russia and Iran have a huge economic rents. What we are doing through sanctions is lowering the rents, because we are making it more difficult for them to sell that oil. And we are redistributing those economic rents between China, the European Union, and the United States.

And that’s what you need to understand. That the sanction basically is saying, this rent — you can think about rent as quote, unquote, “free money,” which is the difference between the price of oil and what it costs to produce oil. The thing is, how is the world economy going to share that rent? Well, sanctions basically means we are distributing that rent in a different way.

Stone: What kind of empirical evidence have you come across, or have you modeled, for the kinds of impacts — the trade flows with the EU, the lower costs, or the lower inflation in the United States? There’s a background to that, right?

Villaverde: Exactly. So the point is, remember what I was saying before. We used all these satellite data to compute how much oil is being exported violating sanctions. So once we have a time series for that, we can use the type of tools that economists use in these situations. And in particular we are going to use — and again, I know that many of your listeners may not be familiar with them. Let me tell you their name, and then I’ll give you a little bit of the intuition. It’s something called “a local projection” and a “structural vector autoregression,” which are things that sound very fancy, but are basically the tools that contemporary economies and  economists today, good universities like Penn, use to learn about the dynamic causal effects.

There are two words here that are doing a lot of the heavy lifting. “Dynamic.” We are going to look at the dynamic effects over time. We are going to impose the sanction in January 2019, and we are going to see how this sanction has effects over the next two, three years. And the effects are going to be different at different horizons. And part of the reason, as you can imagine, is because the dark fleet doesn’t show up overnight. If you impose a sanction on January 1, it’s not that on January 2, the dark fleet is operating. It takes a little bit of time.

And also it’s going to take a little bit of time for other producers to change their own behavior. If suddenly, China is importing a lot of oil from Russia, they may buy less oil from Saudi Arabia, and Saudi Arabia is also going to change their behavior.

The second — and this is very important — is the word “causal.” Everyone takes Statistics. The first thing they tell you, “correlation is not causation.” Okay? You go out in the morning with an umbrella, and that is a very good predictor that it’s going to rain this afternoon, but the fact that you carry an umbrella is not causing the rain. So what you care about are the causal effects where you can actually say, “No, no, statistically, I learned that one is the cause of the other.” And these two techniques have been designed by economists precisely to tease out these causal effects. We apply these techniques. I promise, we do everything that is absolutely state of the art in terms of statistical methodology. And we can show that there is a causal effect from the sanctions into lower prices in the European Union, and a little bit of either low price or close to zero effect in the United States.

Stone: And dark shipping is the mechanism that makes this outcome possible.

Villaverde: Exactly.

Stone: Okay, so let me ask you this question here. Because it gets very interesting. One of the premises that you and I discussed earlier, prior to this podcast, was that policymakers may not completely understand the knock on effects of sanctions that we’ve been discussing. But it sounds like what ends up here is a situation where, for example, the United States, in imposing sanctions, gets to have its cake and eat it too. Impose the sanctions, potentially create an inflationary global economic environment, from which we are rescued by the phenomenon of dark shipping.

Villaverde: Yes.

Stone: So again, getting back to that central question of how much this whole ecosystem of impacts is understood, I want to more clearly understand your concern around that.

Villaverde: You remember a very famous TV show from the ‘60s, Get Smart?

Stone: It was a little bit before my time, but I kind of recall the tail end of that one. Yeah.

Villaverde: So Get Smart is this Super Agent 86, who is completely incompetent. And yet somehow, in every episode, he ends up being successful. That’s why it’s funny. So when I tell students about how economic policy and policy is done in general, I say, “Look, there are two models of the world. Model one is X Files. The truth is out there. There was a conspiracy in a smoke-filled room where everyone worked through all these knockout effects very carefully, and they say, “This is exactly what we are going to do, and it’s going to work great for us.” Model two of the world is Get Smart. Super Agent 86. We just bump into this outcome without really thinking very carefully about it.

My hypothesis is that we are in the Get Smart situation. It just happened to be the case that we bump into this situation that is more or less okay for the US, and is relatively successful in getting what we want. Now I may be wrong. Maybe in 50 years, when the files of the Department of State are open, we realize that they actually were smart enough to figure it all this. I don’t think so. But you know, it may be the case.

Stone: Well, it’s been very convenient.

Villaverde: It has been very convenient, exactly. But it may have been just a bit of random luck. The guy who says, “Oh, I’m not going to save for retirement. Whatever. I will figure out something.” And then the day before retirement, you buy a lot of ticket, and you win the big pot. Okay? And you have a great retirement plan. Well, fine. You were just lucky.

But the point I always try to make is even if we got relatively lucky, we may have been able to do more. So even if inflation went up a little bit, we may have been in a situation where we could have got the same results in terms of inflation, but hurt Russia more. So maybe we got a B, but we could have got an A. And that’s bad. We want to get an A. We don’t want to get a B.

Second, even if it worked in the short run, we don’t know this is going to work in the long run. And we want to be sure we accomplish our foreign policy goals. The reason I’m working so much into geoeconomics these days is because I’m convinced that the international system of relations is going to be extremely complex over the next 25, 50 years. And the U.S. faces an extremely challenging environment. And one needs to think carefully about what you do in that environment, including these knockout effects. And just saying, “Oh, so far, it worked okay because we were lucky,” is not very reassuring to me.

Stone: And is this, ,then going to be the purview of economists who have been trained to look at, again, this kind of stream of effects that maybe has not been so fully considered to date?

Villaverde: Exactly. So first of all, I don’t want to sound dismissive of many things that other academic fields have to bring. Okay? I’m very much happy to hear from people in other fields. In political science, in international relations, experts in energy, experts on environmental policy. All of those are great inputs. I’m saying something both more modest but also very powerful, which is, economics is a field where we are trained from the first day to think about these second, third, fourth order effects. And I think that by bringing to the table the second third, fourth order effects that sometimes are subtle, and you need to actually spend quite a bit of time figuring them out, we can help with other people’s inputs into making better policy for the United States. And that’s why I think there is a big role for economies to play in this activity.

And in one conversation we had last week, I used the example of how economies were very important during World War Two. Economies were very important, for instance, in terms of designing the economic policy during World War Two. Are we going to be sure we can produce the weapons that we need? Are we going to be sure that the U.S. is going to have enough food? Are we going to be able to do all the things we want to do to win the war?

And part of the success of the United States during World War Two, in comparison both with Japan and with Nazi Germany, is that neither Japan nor Nazi Germany ever sat down and thought carefully about these issues. So a lot of the production problems that Japan and Germany had — of course it was related with the U.S. bombing their factories, and it was related with the war. But a lot of it was also directly linked with the fact that they were not thinking about these issues.

The Japanese made — I teach a little bit of economics of World War Two at Penn. And the Japanese made fundamental mistakes, for instance, on their battleship program and their aircraft carrier program. They didn’t bring economists. When they were deciding how many aircraft carriers to make, they didn’t bring the economists and say, “What do you think?” They only brought admirals. And I’m not saying that economies should be the only ones deciding how many aircraft carriers you need to make. You need admirals to tell you about the military considerations. But you also need economists who will tell you, “Hey, you need that much steel, and you need to think about where this steel is going to come.”

So the Japanese admirals say, “I want so many aircraft carriers.” And then it turned out to be the case they didn’t have the dry docks to produce them. They didn’t have enough steel. And they ended up doing a terrible job at replenishing their losses after midway. However, the United States was very smart in that program. Of course, the U.S. had a lot of dry docks and a lot of workers. That was great. But it was also very important that the U.S. had economists talking with the admirals and having everyone’s opinion on the table. And that’s what I think the U.S. needs right now.

Stone: That’s very interesting because it leads into the next point that I wanted to ask you about. So you mentioned taking the example of World War Two, and then putting it into the context of early 2026. We have a new great power competition going on in this world, a new framework. And you said a couple of very interesting things. One, that you noted that China is an adversary, if you want to see it in that frame, that is unlike any adversary the U.S. has met before. It is more complete in more ways than the Soviet Union ever was. I’d like to hear your ideas on that.

But another point I just wanted to jump to here as well as, this runs through Venezuela, and what’s happening with Venezuela right now. It’s a very interesting case. So leading up to the Trump administration’s ouster of Nicolas Maduro about a month ago, the U.S. stepped up enforcement against the shadow tankers carrying Venezuelan crude. Some of those would have gone to China. And you’ve noted that there is a lever in there for the United States in its relationship with China. Again, noting you said that these are issues that we’re going to have to be aware of for the next generation at least.

So I’ve just thrown a lot at you, but I wonder if you could decipher that. China as a uniquely capable competitor to the United States, and Venezuela and Venezuelan crude being a potential lever that the United States can leverage as an upper hand in this geopolitical competition.

Villaverde: Exactly. So let me try to be concise, because there are really so much that I could say about both questions. The first one is, China is a full spectrum rival to the United States. What do I mean to be a full spectrum rival? The Soviet Union, it never produced a car that you wanted to buy. The Soviet Union produces crappy Ladas, who were just a knockout of Fiats. And the only reason any European ever bought a Lada was because they were sold at such a huge discount that people with low income, or who really wanted to save money, will buy a Lada.

These days, China produces great electric cars. They are not sold in the U.S. because of the tariffs, but in Europe, where I have driven a couple of them, they are really very, very good cars. China produces great electronic products, great phones, a lot of things. China is a great country in terms of research.

So for the very first time in its history, the U.S. has a rival power that can compete, not only militarily, but in pretty much any dimension that you can imagine. And this was not the case with the Soviet Union. The Soviet Union had a great military, but it could not really compete with the US. Perhaps in math and physics, because the Russians were very good at that. And that that completely changes the world. It means that if we thought that fighting, or the Cold War was difficult, this is going to be an order of magnitude harder. And the sooner the average U.S. voter and the average U.S. politician recognizes this, the better for everyone.

And by the way, this has nothing to do with whether or not you are Republican or Democrat. It has nothing to do about what you think about the Trump administration. China is there today, and China will be there in 2029, under the — let me joke — the Newsom Administration. So this is going to be exactly the same problem, whoever is at the White House.

Now, a very important component in this great power competition is going to be access to oil. It is not for the U.S. itself. Remember, the US, since a few years ago, is a net exporter of oil. So the U.S. produces more oil that it consumes. Okay? And this is a big difference with respect to the 1970s and 1980s. So it’s not about ensuring that there is enough gas in the gas station tomorrow. The problem is, many other countries still need access to that oil. So whoever controls that oil will indirectly control those countries.

Now, Venezuela is a big potential oil producer. It was a big oil producer in the past, went down a little bit because of everything that happened with PDVSA. But it has huge reserves of oil. So even if the world decarbonizes over the next 25 to 50 years, whoever controls Venezuelan oil has an enormous leverage in the international competition. And that’s what the United States understands. And what it says is, yes, maybe China doesn’t import a lot of oil right now, but it may potentially import oil from Venezuela in the future. Or even more importantly, then, if we control who gets the oil from Venezuela, that will indirectly affect China through these type of knockout effects that we were highlighting before.

So in a war like that, you basically have someone like Nicolas Maduro and a regime that is very hostile to the United States interest — and I will argue, to the interest of the European Union as well. And the United States reached the conclusion that this was not something that it wanted to allow. And that’s why the United States basically was able to make a show of force stopping a few of these oil tankers. Which I guess is very clear, we could have done five years ago, had we wanted to do. It was not very difficult. And kick out Maduro.

And now, of course, the issue is, what is going to happen with Venezuela? How is Venezuela going to evolve over the next year or so? The jury is still out. I have organized a couple of events at the Economics Department at Penn talking about the future of Venezuela. I have been looking at — I have a couple of papers on Venezuela. But the important thing, again, is not that the U.S. needs the oil from Venezuela. It’s that the U.S. understands that whoever controls the oil from Venezuela will have a big impact in the rest of the world.

And look, let’s not be naive over here. Someone will control that oil. Okay? We are not — the world of great power competition is not the world of your nice little club in a small, quaint town in New England, where everyone is very nice. And someone needs to control that all. And I guess that the current administration has basically said, “Look, we cannot let this to happen.” And to be 100% honest, I think that a Democratic administration will have probably reached roughly the same conclusion.

Stone: Okay, so clearly what we have here, Jesus, is a very complicated landscape. The United States, it sounds like what you’re saying is, sees control of Venezuelan oil as another lever it has in a global competition against a very formidable competitor, which is China. There are also implications of this domestically. And some U.S. oil producers have expressed concern around the impact of U.S. intervention in Venezuela and the potential impact of Venezuela crude on the U.S. market. Tell us a little bit about what’s going on there and what some of the concerns domestically may be.

Villaverde: One thing that is important to know about Venezuelan oil is that it’s very heavy oil. It has very high content of sulfur. And it’s a very difficult oil to handle. And the United States is really, at this moment, the only country that can handle it efficiently. In that sense, there is a lot for the U.S. to gain, for U.S. corporations to gain, out of improving the flow of Venezuelan oil. This has impacts within the U.S. and within Venezuela. Within the US, some other oil producer states — like, let’s say, the Dakotas or Oklahoma — may be a little bit concerned that suddenly this Venezuelan oil is going to be a competitor with domestic produced oil. And the U.S. government needs to understand that this is a reasonable consideration or concern.

The second issue that I think is very important is, look. At the end of the day, the most successful long run strategy for the U.S. is that Venezuelans feel they are getting a fair deal. Controlling Venezuelan oil doesn’t imply being nasty with Venezuela, and doesn’t imply extracting all the economic rents I was mentioning before from Venezuela. Something that we learned from our experience after World War Two is that making Japan and Germany, and making Japanese and German voters feel that being an ally of the United States was the best possible deal for them, is a force for stability and for successful cooperation in the future.

And in that sense, you can be honest and say, “Look. The U.S. ‘control,’ quote, unquote, Japan and ‘control,’ quote unquote, Germany, during the whole Cold War.” So what the United States needs to do is to go to Venezuela and say, “Look. Your oil is very important in the world economy. And we cannot let this to be controlled by China or by Russia. But we are going to do it in a way where you are equal partners with us, and where this extra prosperity is going to be shared in an equitable way.” And this is actually not just a consideration of fairness, as important as fairness is, but also a very important, enlightened self interest.

Stone: I would say to that that there is obviously also a history of American involvement in Latin America that has not left a good taste in the mouth of many Latin American countries. I would argue, and I am far from expert on this, that the reality would be a little bit more complicated, I would imagine.

Villaverde: No, no, of course. Look, and get it right. Calibrate this policy in the right way will be extremely difficult. And you’re always going to have unhappy people. There was always 10% of Japanese that thought that the way the U.S. treated Japan after World War Two was unfair. I don’t think they have a very good case. But you know, you know how these things go. And there was also around 10% of Germans who thought that the way the U.S. treated Germany after World War Two was unfair. The other way around, there were people in the United States that thought that the U.S. should have punished Japan and Germany more than it did. So you are always going to have discontents in both sides of the relation.

But if I were sitting with Marco Rubio right now, I will tell him, “Mr. Secretary of State, let’s design this in a way that we can convince at least 60, 70% of Venezuelans that this is fair, this is a good deal for them. Because this is going to be good for the U.S. in the long run.” We want to be sure that in five years, there is not a party winning in the Venezuela election that wins a majority with an anti-U.S. platform. That’s going to be difficult. I’m not going to not going to claim this is an easy trick to pull, but I think we have a chance to do that.

Stone: So we’ve been talking about this context of great power competition, and the role of Venezuela at the center of that, at least at this point in time. But I want to go back to the issue of dark oil specifically. And want to note also that the oil that’s coming out of Venezuela at this point is no longer dark. The U.S. is controlling those shipments. But looking against specifically the dark oil ecosystem, this is, as you’ve noted, a major portion of global seaborne oil trade. And there is growing concern that this shadow fleet is becoming a durable parallel shipping ecosystem, one that could outlast any temporary crises that may exist. And it could weaken the rules-based maritime order. What are some of the implications of that? How seriously should we take that risk? How embedded is this parallel system now in the global shipping industry?

Villaverde: This is a very important consideration, and this is precisely why putting Venezuela back on the map as a clear operator, in opposition to dark operator, is so important. Because it means there would be many more millions of barrels in the world economy right now that we can use as a buffer to enforce more vigorously the sanctions against Iran and Russia, and try to reduce the size of this dark fleet. So if suddenly you have all the Venezuelan oil, now you can really go after Iran much more forcefully than in the past.

Stone: Dark fleet becomes smaller relative to the conventional fleet.

Villaverde: Exactly. And that’s why I think this will help us. But I fully agree with your concern that at the end of the day, having 25, 33% of the oil market in this type of underground operations is not good for the rule of law.

Stone: These are maybe not insured. They’re old ships, larger likelihood of mishaps, spills, et cetera, environmental implications from that as well.

Villaverde: Exactly.

Stone: So let me ask you a final question here, Jesus. And again, thank you. This has been a very wide ranging conversation, and it’s been very, very interesting. And I kind of want to wrap this one up. And I want to ask you — again, you expressed concern that the effects that we’ve been talking about here are not necessarily always fully understood by policymakers, and that they need to be. Stepping back, what would be the most single thing you’d want current and future policymakers to understand before using oil sanctions as a tool of foreign policy?

Villaverde: Any sanction that you impose is going to have second, third and fourth order knockout effects. Sit down and try to understand those.

Stone: Jesus, thank you very much for talking.

Villaverde: Thank you.