Venezuela Strike: Oil Prices & Global Impact

The recent developments surrounding former Venezuelan president Nicolás Maduro, including reported capture by U.S. intelligence services and armed forces, have sparked debate regarding the future of the country’s substantial oil reserves. While the political situation in Venezuela remains unsettled, the nation’s position as an oil producer is comparatively clear.

Venezuela’s Oil Reserves

Venezuela holds some of the world’s largest proven oil reserves, frequently estimated at 300 billion barrels – surpassing reserves held by countries like Saudi Arabia. However, caution is advised when considering reserve figures originating outside the Organisation for Economic Cooperation and Development (OECD), as differing standards exist for classifying reserves as proved, probable, possible, or contingent.

Proven reserves represent oil that can be economically extracted using current technology, a figure that fluctuates with oil prices. Higher prices can justify the cost of extracting previously uneconomical oil. In 2008, international oil prices approached US$140 a barrel, but currently, Venezuelan oil sells at a US$25 discount to the Brent benchmark, around US$35 a barrel. Consequently, current proven reserves may be less than 100 billion barrels – less than a third of the commonly cited figure.

Challenges with Venezuelan Oil Production

Much of Venezuela’s oil is heavy and contains high sulphur content, making production and transportation expensive. This oil requires dilution with naphtha or gas oil and sulphur removal during processing, processes that require sophisticated refineries. Currently, only refineries on the US Gulf Coast, and some in India, the Middle East, and China, are equipped to process this type of oil, contributing to the significant discounts at which it is sold.

American oil companies began operations in Venezuela nearly a century ago, and by the 1960s, the U.S. was the largest foreign investor. In 1971, the Venezuelan oil industry was nationalized, becoming the state-owned monopoly Petróleos de Venezuela SA (PDVSA).

The Venezuelan oil industry has since faced decades of political mismanagement, purges, and U.S. sanctions. Lack of investment has led to a decline in production from over three million barrels a day in the early 2000s to below one million barrels a day last year. This decline accelerated during the Maduro regime, with PDVSA funds being diverted away from industry reinvestment.

Significant investment, potentially billions of dollars, would be required to even modestly increase oil production in Venezuela. A substantial increase would necessitate years of massive funding, even with a stable political climate.

The events in Venezuela are unlikely to have a significant immediate impact on the global oil market, which is currently oversupplied. Even a complete loss of Venezuelan exports would have only a minor effect on prices. Oil prices fell following initial reactions, and again after U.S. President Donald Trump vowed to seize up to 50 million barrels of Venezuelan oil.

Claims that these events would harm China appear overstated. While China, along with India, is a major buyer of Venezuelan oil, it accounts for no more than 5% of China’s total imports. Canada, another heavy oil producer, has been shifting its exports from the U.S. to China, a trend likely to continue.

There is limited economic rationale for a “takeover” of the Venezuelan oil industry. The U.S. could simply lift the sanctions imposed in 2019, allowing U.S. oil companies to purchase Venezuelan oil like other buyers.

The long-term political consequences of this action are causing concern in the oil market. President Trump’s growing appetite for military intervention, potentially including attacks on Iran, a major oil-producing nation, is a source of uncertainty. The action may also be used to legitimize Russia’s invasion of Ukraine, which has already destabilized energy markets. The oil market currently requires stability, not further uncertainty.