It finally happened. The US government has finally decided to take on Venezuelan President Hugo Chávez, arguably the most irritating head of a Latin American country in history, but probably in the worst possible way: toothless sanctions that barely scathe the caudillo, but give him a treasure trove of ammunition to undermine US policies and consolidate his power.

Secretary of State Hillary Clinton included Petróleos de Venezuela SA (PDVSA), the oil mammoth that supplies the US with roughly 1 million barrels per day and owns CITGO, one of America’s biggest refiners and gasoline retailers, in the list of seven companies sanctioned Tuesday for supporting Iran’s energy sector.

PDVSA “delivered at least two cargoes of reformate to Iran between December 2010 and March 2011, worth approximately $50 million,” the statement says. Reformate is blended with gasoline to improve its quality. The sanctions also bar PDVSA from access to U.S. government contracts, financing through the Export-Import Bank, and export licenses. But the sanctions don’t apply to PDVSA subsidiaries and don’t “prohibit the export of crude oil to the United States.”

Chávez could not hide his glee in Twitter: “Sanctions … imposed by the imperialist gringo government? Welcome Mr. Obama! The real impact of the new gringo aggression is potentiating the patriotic and nationalist moral of Venezuela.”

Chávez is right. Ahead of next year’s presidential elections in Venezuela, perhaps the best chance for a democratic transition of power, the Obama administration handed its biggest antagonist in the hemisphere an ideological missile to rally support against big, bad Uncle Sam.

“The revolutionary government calls on all the Venezuelan people, laborers and especially the oil workers, to stay alert and mobilized in defence of our PDVSA and the sacred sovereignty of the homeland,” says a statement from the Foreign Affairs Ministry.

Toothless Sanctions

The sanctions against PDVSA come after months of congressional pressure to confront Chávez head on.

Why? Forget the ideological differences or Chávez’s constant efforts to undermine US policy in the region and globally. The Department of State has repeatedly accused Venezuelan officials of aiding Colombian terrorist designate group FARC, or Revolutionary Armed Forces of Colombia; a Spanish court is investigating Venezuelan government support and abating of Basque terrorist group ETA, and US authorities are investigating reports that Chávez’s friendly ties to Iran are translating to support for terrorist groups like Hezbollah and Hamas.

But ever since covert and overt US pressure on Caracas backfired at the beginning of George W Bush’s first administration, both the Bush and Obama administrations have stuck to ignoring Caribbean tongue-lashing. He constantly baits American policy-makers and reacting to his provocations is simply useless and to his benefit. So far, this is the best strategy that the US has come up with.

There is also the tiny issue that PDVSA is one of the world’s biggest energy companies both in terms of production and oil reserves. It is and will remain an influential player in global energy matters. The US imports between 9 and 10 percent of its oil from the country.

Full sanctions would require replacing heavy oil supplies that much of the US gulf oil refining capacity is geared for. Additionally, oil market prices could rise as a result, an unwelcome scenario in a still wobbly recovery. There would also be geopolitical consequences as numerous heavyweights invest in Venezuela, including many Americans.

Which makes it all the more baffling why the Obama administration is imposing toothless sanctions. A senior administration official quoted in a press briefing that followed the unexpected announcement said “the immediate practical impact of the sanctions will be minimal, but it would impact possible future cooperation by these entities with the United States.

“But I think more significantly,” the official went on, “these sanctions send a strong signal to companies around the world about the risks of dealing with Iran. So it serves as a signal, a deterrent, as much as it does as having a near-term, practical impact.”

Except they don’t. Iran will continue to provision itself with gasoline and additives, Chávez will be emboldened without actually enduring any significant sanctions, and both governments will benefit economically when oil prices increases if the standoff escalates.

Despite the talk, Venezuela can’t really react much. It is “undertaking a general assessment of the situation” and “reserves itself the most adequate answer to this imperialist aggression.” Chávez could decide to symbolically cut exports to its non subsidiaries, as Venezuelan Oil Minister Rafael Ramírez suggested would be considered in case the sanctions had any impact.

But PDVSA could run into more trouble down the line if it becomes harder to find spare parts for its oil industry. “What remains to be determined is the issue of export licenses, which is something they haven’t explained,” Ramírez said.

Other Politics

It could be that the decision to include PDVSA in the list, without really threatening energy supplies, answers more to other US politics.

There is no doubt that the US ultimately wants to target Iran’s lack of refining supply, one of its weaknesses. But $50 million worth of gasoline additive supply is not a game changer for Iran and Venezuela’s efforts to supply Iran with refined products are inconsequential.

“Venezuelan refining sector struggles to meet soaring domestic demand, suffers from a serious lack of maintenance and can barely keep up with its own production needs. Venezuela simply lacks both the excess capacity to supply Iran, and the financial stability to absorb opportunity costs of shipping gasoline halfway around the world,” said a note from Stratfor, the intelligence consultancy.

In fact, Obama might have fallen into a trap.

Or it could be that the Obama’s administration is trying to hush criticism for its policy toward Venezuela (which is basically the same inherited by the Bush administration). “That U.S. sanctions against PDVSA follow what some interest groups in Washington view as a missed opportunity to gain leverage over Chavez is no coincidence. Pressure has been building in Washington to enact sanctions against Chavez and his regime, including efforts to link the Venezuelan government to international militant organization Hezbollah,” Stratfor said.

Whatever the case, these sanctions are unwise. They don’t dent Iran’s refined product supply. They are not “a strong signal” to Venezuela. They strengthen Chávez ahead of elections. And they could result in higher oil prices that threaten US economic recovery and help Iran and Venezuela.

Thoughtless foreign policy and even worse energy policy by the Obama Administration. Why such cavalier attitude towards America’s oil supply, while strengthening a politician who without such slap on the wrist sanctions would look ridiculous?

Economides is Editor-in-Chief and Cala is South American correspondent of the Energy Tribune