THE ECONOMIST: Donald Trump’s great Venezuelan oil gamble

Just hours after America captured Nicolás Maduro, Venezuela’s dictator, in a night-time raid on January 3, President Donald Trump clarified his motivation. “The oil business in Venezuela has been a bust, a total bust for a long period of time,” he said. “We are going to have our very large United States oil companies … spend billions of dollars, fix the badly broken infrastructure … and start making money for the country.”

The declaration had the sweet taste of revenge. Eighteen years ago, under Hugo Chávez, Venezuela nationalised assets belonging to American and other Western companies; claims worth a combined $US60 billion ($90b) have been filed against it and PDVSA, the national oil company, in American and international tribunals. On December 16 Mr Trump had demanded that Venezuela return “all of the oil, land and other assets that they previously stole from us”.

But the President wants more than retribution. Decades of underinvestment and mismanagement have caused Venezuela’s oil production to fall by two-thirds since the late 2000s, to around 1 million barrels a day (b/d). Restoring idle capacity, the thinking goes, would make Venezuela rich while lining American pockets. Better still, Venezuela sits on some 300 billion barrels of oil — a fifth of the world’s reserves — implying production might rise further still, and for a while. The heavy, sour crude that the country harbours is precisely the type of which American refineries are chronically short, at a time when America’s relations with Canada, a supplier of the stuff, are strained.

What, then, is not to like about Mr Trump’s lunge for petroleum? Quite a lot, it turns out.

In the immediate term, Venezuela’s crude output is more likely to fall than rebound. In December America declared a blockade on Venezuelan shipments ferried by blacklisted tankers; it then seized one of them.

Exports have since cratered and the volume of Venezuelan crude floating on idle tankers has hit multi-year highs. Venezuela is also short of naphtha — a dilutant it needs to make its super-gloopy crude transportable — which is no longer coming through from Russia. Unless the blockade is lifted, which depends on political and military developments, Venezuela’s production will have to be curtailed further, to perhaps less than 700,000 b/d.

Output might recover in a few months if there is a smooth political transition and American sanctions on Venezuela, blockade included, are lifted (a big “if”). Basic maintenance and repairs might push the country’s crude output to 1.2m b/d by the end of 2026, estimates Kpler, a data firm.

That would still be some way short of the country’s maximum potential output, however, and leave it a little behind Libya, the world’s 18th-largest producer. To pump more, Venezuela would need to overcome three problems: a dire need for funds, a shortage of labour and a saturated global market.

Rystad Energy, a consultancy, estimates that $US110bn in capital expenditure on exploration and production alone would be required to bring the country’s output back to where it was 15 years ago — twice the amount America’s oil majors combined invested worldwide in 2024.

Mr Trump seems to think those firms would rush to sign big cheques. Chevron, which is already present in Venezuela and exporting some 200,000 b/d to America under a sanctions waiver, may well expand its operations. But others have not forgotten the pains of the past.

The success of Mr Trump’s plans is hardly guaranteed. He will depart the White House in just over three years, and may lose interest before then. So far American majors have remained silent on the President’s call to arms. Nor are global commodity traders “in the starting blocks”, says Jean-François Lambert, a consultant. Banks and insurers, which would be needed to finance and secure shipments, would be even slower to return.

Even if enough oil firms could be convinced to cough up, it is doubtful that Venezuela’s oil industry could keep pace. In recent years it has suffered a huge brain drain. Tens of thousands of skilled workers, from engineers to geologists, have left the country. PDVSA is now largely run by the armed forces. To form viable joint ventures with Western firms, the 70,000-strong company would have to be reformed wholesale. It may not be able to serve as a viable partner for many years.

Whatever extra oil Venezuela can pump will flow into a saturated market. The International Energy Agency, an official forecaster, expects global crude supply to outstrip demand until at least the end of the decade, because of strong production in countries like Brazil, Guyana and, indeed, America, as well as tepid growth in demand.

Many analysts expect surpluses to lower global oil prices towards $US50 a barrel, and possibly below, this year and next — under the breakeven price for most existing Venezuelan fields with decent reserves. New projects are often even less competitive.

In its most optimistic scenario, Kpler forecasts that Venezuela’s oil output might rise to between 1.7m and 1.8m b/d by 2028. That could still cause a notable rejigging of trade flows. American refiners are likely to snap up some extra barrels: they imported 500,000 more a day in the early 2010s.

Cuba, which has long bought from Venezuela on favourable terms, will turn to Mexico and Russia for help. China’s “teapot” refineries, which used to buy most of Venezuelan supplies at a discount, may be cut out of the trade; perhaps its state-owned oil firms will reduce their local footprint, too.

All this could benefit America commercially and geopolitically, but only at the margin. Anything more drastic, such as bringing Venezuelan output back to 2.5m-3m b/d — its level in the late 2010s, and about as much as Kuwait, the world’s eighth-largest producer, pumps today — looks like a long-term project, reckons Jorge León of Rystad Energy. Mr Trump’s snatching of Mr Maduro was spectacular and swift. The economic reward from it will be neither.