The U.S. Won’t ‘Get’ Venezuelan Oil

As the U.S. ratchets up political pressure on the Maduro regime, up to and threatening land action ostensibly aimed at narcotics factories, some observers are claiming that the primary goal of the Administration is to somehow acquire Venezuela’s massive oil resources, or at least access to them. No doubt, Venezuela is oil-rich, with 300 billion barrels of reserves (mostly heavy Orinoco oil), and no doubt politicians in Washington, in and out of the government, are aware of this. The suggestion by Venezuelan president Maduro that the U.S. could receive a “dominant stake” in his country’s oil and mineral wealth fits this narrative well, although the U.S. has not accepted the offer. Venezuela’s Maduro Offered the U.S. His Nation’s Riches to Avoid Conflict – The New York Times

Stepping back, it must be said that the Maduro regime is not legitimate, having announced its own victory (without supporting evidence) in an election universally considered to have been fraudulent. The government is despotic, suppressing free speech often violently, and has all but destroyed the domestic economy through clientelism, kleptocracy and socialist policies. The Administration rightly seeks regime change for its own self, beyond any economic incentives.

The economic devastation is the result of Maduro’s predecessor Hugo Chavez nationalizing large swathes of the economy, putting much of it under military control, thinking he could order inflation to recede by fiat. Currency controls added injury to injury by allowing for massive amounts of corruption as companies and/or individuals offer favors in return for foreign exchange at subsidized rates. Millions have fled the country, fleeing political oppression but also the economic calamity that has ensued. The past several U.S. administrations have attempted to negotiate political reform and removal of the existing regime, so far without success.

In many ways the picture resembles Saddam Hussein’s Iraq and there is every possibility that regime change would be welcomed by the vast majority of Venezuelans, aside from those benefitting from the existing situation. Unlike Iraq, the political schism in Venezuela is not sectarian but more class-based such that a new government should not face the kind of uprising seen in post-Hussein Iraq.

If the U.S. does manage to remove Maduro, will we ‘get’ Venezuelan oil? If by ‘get,’ it is meant be able to buy the stuff, yeah, that won’t be a problem. The end of Hussein’s regime did not mean that the U.S. ‘got’ Iraqi oil; we can now buy all the Iraqi oil we want, just as we can buy from other nations. In 2024, the U.S. imported 260 tb/d from Iraq, presumably by companies seeking to take advantage of quality differentials, but not oil that was somehow acquired because of our role in ending the Hussein regime.

Any conceivable post-Maduro regime would certainly be willing to sell its heavy crudes to U.S. refiners which are designed to optimize products from low-quality oils. Service companies like Halliburton would presumably be happy to perform the repair work needed to restore Venezuela’s ailing crude fields, especially given that the U.S. market for oil field services is currently anemic.

But the idea that Venezuela might transfer ownership of oil reserves to the United States or American oil companies more specifically will not fly. No government wanting to look legitimate would want to leave itself open to nationalist opposition by appearing to give away the nation’s heritage. More likely, the government will invite the foreign industry to bid on projects to redevelop existing fields which have fallen into disrepair from lack of funds and trained personnel. This is similar to what happened in Iraq which after a variety of delays, largely due to disputes between political blocs, not only restored production to pre-war levels but has been setting new records.

Without a doubt, many are eager to exploit the opportunities that a post-Maduro Venezuela will offer, but most will also be wary of the political risks involved. Even if the new regime is stable, that might not be immediately apparent. And if the new government decides to rewrite its petroleum legislation and redesign contracts for operators, that would create additional delays (as happened in Iraq). Optimally, the new regime would revert to the apertura reforms of the mid-1990s, especially as that would make room for private sector investment from Venezuelans, many of whom have extensive experience in operating the country’s oil fields but fled the Chavez regime.

Did the U.S. benefit from the increased oil supply from post-Hussein Iraq? In the sense that global markets were better supplied and thus prices more moderate, yes, although the impact would have to be considered moderate. After all, while Iraq has managed to increase production by 2 mb/d from pre-war levels, U.S. shale oil production is now 9 mb/d.

A new Venezuelan regime with a more investment-friendly political climate and laws could repeat the success of the 1990s, when a supposedly mature resource base nonetheless saw production increase by a million barrels a day in five years. Coming at a time when oil markets are largely saturated and demand is growing tepidly, that has the potential to trigger another price was, as in 1998. Sadly, it seems more likely that a new government will be so divided and uncertain that it finds it hard to take even the most obvious, economically rational steps.

Two decades ago, I opined that Iraq with its desperate need of revenue and huge oil resources would surely move to restore and then increase production after the second Gulf War, but I grossly underestimated the ability of politicians to stall and squabble. Venezuela shouldn’t have the degree of dissension that the post-Hussein Iraqi government did, but relying on politicians to act promptly and intelligently is not always wise.

The best possible outcome for everyone seems to be a peaceful regime change with economic and political reforms, including petroleum regulation similar to the 1990s-era reforms that allow for the rehabilitation of the nation’s oil industry. Not only would the country benefit from the resulting oil revenue, but the global economy would prosper from the additional supply. Sadly, it is also possible that the current regime could retain power to the detriment of everyone but those in power.