Beneath the drama of America’s moves in Venezuela lies a glut of oil that is both easing and complicating President Donald Trump’s efforts to remake that South American nation’s economy.
The global flood helps the president because the U.S. removal last week of Venezuela’s leader – which has raised questions about whether that action was legal – has caused barely a ripple in oversupplied oil markets. But low oil prices caused by that oversupply make it harder for Mr. Trump to convince American oil companies to set up shop in Venezuela and spend the billions of dollars needed to rebuild its energy infrastructure.
When Mr. Trump announced on Wednesday a deal with Venezuela to sell 30 million to 50 million barrels of oil to the United States, already depressed world oil prices fell. On Friday, Mr. Trump is expected to meet with the heads of major American oil companies to try to convince them to invest in Venezuela. It’s not clear they’ll go along.
Why We Wrote This
Following the U.S takeover of Venezuela, President Trump wants American companies to produce oil from that South American country’s vast reserves. But the cost, and the political instability caused by the U.S. intervention, make companies wary.
The problem is twofold. Venezuelan crude is heavy and sour, meaning it’s more expensive to refine and causes higher emissions than the light, sweet crude produced in the U.S. With prices so low, the incentive to invest heavily in oil production is diminished. The president appears to recognize this. In recent days, he has floated the idea of subsidizing companies to return to Venezuela, which three decades ago was a major supplier to the U.S.
The second problem is political. Will a nation whose leader was whisked away in a military operation to face drug charges in the U.S. accept such blatant American intervention? On Wednesday, U.S. Energy Secretary Chris Wright said the American government would sell Venezuelan oil directly and indefinitely and then send the money back “to benefit the Venezuelan people.”
Or will it welcome U.S.-driven leadership changes and the prospect of American investment revitalizing a severely deteriorated economy? It’s too early to tell, energy analysts say.
“Companies won’t commit to employing people on the ground without improved security and won’t invest until the political and legislative environment has stabilized,” Wood Mackenzie, a Scottish energy analysis firm, concluded in a Jan. 6 report on Venezuela.
The one exception is Chevron Corp., the only U.S. company allowed to operate in the sanction-ridden country and one that accounts for about a quarter of Venezuela’s production. And it is in the best position to take advantage of any changes in the nation’s oil industry.
With outside help and investment, energy analysts say, Venezuelan production could rebound modestly from about 800,000 barrels per day in November to perhaps 1 million to 1.2 million later this year. Belgian tracking and analytics firm Kpler estimates the rebound process would take three months.
But that level of production is a far cry from the 2 million barrels per day that Venezuela produced in 2016, a year before the U.S. began a series of sanctions on the country, or the 3 million per day it produced in its heyday as a major supplier to the U.S. Years of mismanagement, underinvestment, and U.S. sanctions have all served to slash the country’s oil production by more than two-thirds since the early 2000s.
To return to that level would take $100 billion or more as well as years of restoring severely deteriorated energy infrastructure, according to estimates by energy analysis firms. Norway-based Rystad Energy pegs the cost at $183 billion or more and says it would take until 2040 to achieve.
Long term, Venezuela retains some natural advantages as a U.S. supplier. It’s geographically close to American refiners along the Gulf of Mexico. Some of those, such as San Antonio-based Valero, are already processing, through Chevron, Venezuela’s heavy-grade oil. These refiners have the capacity to process more. The prospect of a nearby supply of cheap oil is tempting for U.S. oil companies.
Such hopes for a rebound depend on Venezuelans agreeing to go along with the Trump administration’s plans. With President Nicolás Maduro in U.S. custody, Venezuela’s interim leader, Delcy Rodríguez, the vice president in Mr. Maduro’s government, has sent mixed signals. She condemned the U.S. military operation that captured Mr. Maduro, but she has also said her country was willing to “work jointly on an agenda of cooperation, aimed at shared development.”
On Wednesday, the White House threatened military action if Venezuela did not go along. “The president, of course, reserves the right to use the United States military if necessary,” White House press secretary Karoline Leavitt told reporters.
Rebuilding Venezuela’s economy begins with reviving the oil industry. It accounts for more than 90% of Venezuela’s exports and a big share of government revenues, Luisa Palacios, an adjunct senior research scholar at Columbia University’s Center on Global Energy Policy, said in a recent blog post.
Oil production began to decline after the late President Hugo Chávez forced foreign companies to give up majority control of Venezuelan oil operations. It then collapsed under his successor, Mr. Maduro, leaving the nation’s economy in a fragile state. U.S. investment could begin to help improve its prospects.
Ideologically, however, the nation has aligned itself with U.S. foes, such as Cuba, Iran, and China. Venezuela is also a founding member of OPEC, which is actively committed to reducing oil supplies to boost prices.
The current oversupply is likely to last through 2027, according to a Sunday posting by Bank of America Securities. If major oil companies begin to revive Venezuela’s oil production, “we think it would lead to longer oversupply of oil” and hold down prices for even longer than forecast.
