Ever since President Trump ordered the first strike on a boat offshore Venezuela, speculation about a direct intervention in the South American country with a view to regime change has been rife. Much of that has focused on oil, for obvious reasons. For those very same reasons, a U.S. regime change in Venezuela would have far-reaching implications.
Venezuela has the largest proven reserves of crude oil in the world. Most of those reserves are heavy crude, for which U.S. Gulf Coast refineries are calibrated. This fact made life temporarily harder for refiners during President Trump’s first term, when he first started stepping up sanctions on Venezuela—originally in place since 2005. Canadian heavy replaced Venezuelan crude in greater volumes amid the sanctions, and now, the Canadian oil industry would be among those affected by the potential regime change in Caracas.
The most immediate impact of such a move on the part of the Trump administration would, of course, be a price jump. Venezuela has seen its oil production and exports shrink considerably since the start of the U.S. sanction offensive, although in the past couple of years, there has been some recovery in both. The latest export figures, for November, showed a daily average of around 900,000 barrels, which Reuters said was the third-highest for this year.
Wood Mackenzie says Venezuela’s total oil production stands at 900,000 barrels daily this year. That is down from as much as 3 million barrels around 20 years ago and 2 million barrels daily in 2017. Sanctions and years of mismanagement have both contributed to the current state of affairs, but some U.S. observers believe a change in government would also change Venezuela’s oil fortunes with U.S. producers returning to its oilfields.
This means that after the initial price shock, international benchmarks are set for a further slump, assuming that a regime change would also result in the lifting of sanctions once a friendlier government is installed in Caracas. This is a hypothetical development, but one that pretty much everyone acknowledges as likely. Wood Mackenzie’s Ed Crooks even cited Treasury Secretary Scott Bessent as referring to such a development indirectly in the context of the Trump administration’s efforts to keep oil affordable.
“I think there’s a very good chance that if something happens with Russia-Ukraine, if something happens down in Venezuela, that we could really see oil prices go down even more,” Bessent said on Fox News. “Oil and gasoline prices are down substantially under President Trump. And really the key to affordability is lower energy [prices].”
If that “something” happens, it will have repercussions for the Canadian oil industry as well. Energy analyst David Blackmon noted this in a recent podcast, saying the return of more Venezuelan crude to Gulf Coast refineries will affect demand for Canadian crude, and it would not affect it favorably. In such a hypothetical context, it would be a smart thing for the Canadian government to expand the access of Canadian crude to markets other than the United States, such as China.
Venezuela has oil reserves of over 300 billion barrels. This is 20% of the global total and certainly a prize worth coveting. However, getting to that prize would involve an oil price shock that would be inconsistent with “the key to affordability” as expressed by Secretary Bessent. The situation certainly remains interesting, keeping analysts on their toes, unsure what the endgame of the Trump admininistration is—and as a consequence what the U.S. president would ultimately choose to do with regard to Venezuela. All of this adds a new vector of uncertainty to oil markets.
By Irina Slav for Oilprice.com
