Shortly after launching a dramatic raid in which U.S. troops abducted Venezuelan leader Nicolas Maduro on Saturday, President Donald Trump justified his actions with a promise to revive Venezuela's moribund oil industry. The country has by far the world's largest declared crude oil reserves, accounting for nearly a fifth of the world's remaining proven crude oil reserves, but production has fallen sharply under Maduro, who has ruled the country since 2013.
“We're going to have our very large oil companies in the United States, the biggest in the world, invest billions of dollars, rebuild badly damaged infrastructure, oil infrastructure, and start making money for the country,” Trump said during a news conference at Mar-a-Lago where he announced Maduro's capture.
The intervention comes as key movements in the global oil industry continue to hamper the prospect of a widespread transition to renewable energy. For this reason, it is not clear that future markets can justify a surge in investment in Venezuela. For one, the country's extra-heavy crude oil is ideal for producing diesel and jet fuel, which are useful in industries that are difficult to decarbonize. That makes it less of a threat from the explosion of electric vehicles displacing gasoline-powered cars. On the other hand, the world is already experiencing an oil glut, and analysts expect demand to peak in the next decade. While there are buyers for the additional oil that could be produced from Venezuela (some of them on the U.S. Gulf Coast), experts say a full revival in the manner promised by Trump may not be possible.
“There is a guaranteed market for this, but the market is limited in size,” said Antoine Half, founder of climate and data analysis firm Kayrros and non-resident fellow at Columbia University’s Center for Global Energy Policy.
As electric vehicles and renewable energy continue to expand, the world appears to be approaching peak oil demand. While the exact timing of this peak is controversial—it could occur within four years or more than 15 years from now—almost all analysts agree that it will occur. At that point, there may no longer be enough demand to continue developing new oil fields, no matter how large they may be. And given that it will take many years just to update the infrastructure that will allow more oil production in Venezuela, investors may decide that the juice is not worth squeezing.
Additionally, in this notoriously volatile industry, the question of predicting future prices arises. Oil companies only make profits when world oil prices remain above a certain level. For example, for American companies extracting oil from Texas shale, this number is about 60 dollars per barrelwhich is close to the current base price. For Saudi Arabia this is closer to $90 per barrelbecause oil revenues cover almost all of the kingdom's government spending. In newer oil fields, such as offshore Guyana, it's only 30 dollars. There are already concerns that a global oil supply glut could cause prices to fall next year, making new fields less attractive to investors. If demand stabilizes, rising prices for Venezuelan oil will cause prices to fall even further. Because Venezuela is an OPEC member, it will have to coordinate production with Saudi Arabia and other major producers, which would likely prevent Venezuela from flooding the market.
Even so, there will likely be long-term demand for the particular type of oil that Venezuela produces. This is because any energy transition will not occur at the same speed in all parts of the transport sector. The proliferation of electric vehicles will first replace cars and mopeds, which use lighter oil from reservoirs such as Texas shale fields. Larger vehicles such as airplanes and heavy trucks are more difficult to replace—they need more power than electric vehicle batteries can currently provide—and they rely on heavy oil, as in Venezuela. Report from oil trading company Vitol found that “the initial rate of decline [for diesel] it is expected to be slow compared to gasoline but will pick up pace from 2035.” Few other countries boast reserves as super-heavy as Venezuela, and those that do, such as Canada, have much higher production costs.
“These are the segments that are hard to cut,” Half said. “This is the part of oil demand that doesn't seem to be going away quickly.
At the turn of the century, Venezuela produced more than 3 million barrels of oil per day, but production has since fallen sharply. After Hugo Chavez's government nationalized major oil infrastructure in 2007, the United States imposed financial sanctions that forced Venezuela to sell its oil at huge discounts. Under Maduro's government, the state oil company has accumulated debt and seen an outflow of skilled workers. Pumps and pipelines failed, storage tanks collapsed, and production bottomed out at about 500,000 barrels per day. during the COVID-19 pandemic.
President Trump has promised that his aggressive foray into Venezuela will lead to a revival of the industry, and he has reportedly called on U.S. oil producers to help him in that effort. Speaking after Maduro's raid, he promised that American companies would return to Venezuela and help export oil to other countries. Given how inefficient the state-owned oil sector has become, analysts believe it will be easy to revive. some production in the short term while attracting foreign investment and lifting sanctions.
“We assume there are a lot of wells that just need major workovers,” said Adrian Lara, lead Latin American oil industry analyst at research firm Wood Mackenzie. in a summary published last month before Maduro's takeover. “You can increase production through operating expenses [operational expenditure]without the need for new capital investments [capital expenditure]In other words, it is more of an adjustment than a full influx of new investment.
In the short term, there is demand. Oil in the vast Orinoco belt is very heavy and viscous, like molasses, unlike US shale oil, which is about as thin as vinegar. This makes it more expensive and carbon-intensive to produce, but also makes it well suited for processing into truck diesel and other uses such as asphalt. There are several refineries along the US Gulf Coast built to process this type of heavy oil, and these refineries are operating below their capacity. Venezuela now exports most of its oil to China, which is also likely to buy more oil for its own refineries. Industry expert who spoke to the Wall Street Journal said access to these reserves could be a “game changer” in terms of increasing profits for Gulf Coast refineries.
“There's a lot of demand for heavy oil around the world right now,” said Robert Auers, refined fuels market analyst at energy consultancy RBN Energy. “Even if Venezuelan production becomes very strong again, the global market could easily absorb it.”
But a grand revival like the one Trump has promised will be much more challenging, given that it will take decades to realize. Energy analysis firm Rystad Energy predicts that returning to pre-Maduro levels would require an investment of $110 billion, an investment that would not bear fruit for a decade or more. Even Chevron, the only U.S. oil producer operating in the country, would need to invest about $7 billion to add another 500,000 barrels, according to a former executive who spoke to The New York Times.
Climate pollution caused by this oil may also play a role in its market appeal. Currently, heavy oil production in the Orinoco Belt is among the most carbon-intensive in the world, partly due to the enormous amount methane flare up in the process. As governments continue to pursue Paris Agreement goals, albeit sporadically, they may shy away from such deposits where possible and instead import low-carbon barrels. (The European Union has already committed to do so.) Many experts believe oil majors will hesitate before taking the plunge into exploiting a resource that is much more difficult to handle than oil in U.S. shale fields or the Middle East.
And this is all in addition to the political uncertainty that followed Trump's attempt to topple Maduro. It remains unclear what form Venezuela's new government will take. Given that other producers such as Exxon lost billions of dollars when the Chavez government nationalized their assets, it is far from clear that these oil companies will be willing to invest amid ongoing political instability. Previous US interventions have shown similar dynamics: oil production in Libya has still not recovered since the fall of Muammar Gaddafi's regime in 2011, and oil production in Iraq took nearly a decade after the 2003 US invasion to recover.
“I don’t believe there will be significant growth in the short term,” said Rudolf Elias, chairman of the supervisory board of Staatsolie, Suriname’s state oil company, which has an offshore oil project in waters east of Venezuela. “It will be years before the industry revives… then it is dirty oil, heavy, so it will not be first in line.”
