The impact of the US attack on Venezuelan oil prices (1945900)
There has been a frenzy about the possible consequences of Maduro’s capture by US intelligence and military forces. There is no question that these events are closely related to Venezuela’s oil wealth. Although the political climate in Venezuela is fluid, its role as a major oil producer has become more certain.
Venezuela is home to one of the largest proven reserves of oil in the entire world. 300 billion barrels is the number that’s often thrown about, which is more than Saudi Arabia or any other country.
It’s always important to take caution when relying on numbers that come from outside the Organisation for Economic Cooperation and Development. The OECD statistics clearly differentiate between proven, probable, and possible reserves, and they require consistency throughout time.
The oil that is economically extracted from the earth using the current technology constitutes proven reserves. The Venezuelan reserve estimate dates back to 2008, and is not constant.
Oil reserves also increase as oil prices rise. The reason is that higher profits allow for the extraction of additional oil, which would otherwise be left in the ground.
The natural gas pressure in the well makes it easy to start production. This pressure will decrease over time and you may need to use additional measures, such as water and gas injection. These are costly.
The international price of oil was around US$140 per barrel (PS104). Most Venezuelan crude oil is currently selling at about US$35 per barrel, a US$25 price discount from the Brent benchmark. The current oil reserves are likely to be less than 100 billion barrels, despite all other factors being the same.
Venezuelan oil: a problem?
Venezuelan crude oil tends to be heavy and tar-like, with a high sulphur content. Production and transport are therefore very costly. The heavy oil must first be diluted by naphtha or gas oil (a liquid hydrocarbon), and the sulphur removed with expensive hydrogen during processing.
This oil can only be processed by refineries that are very advanced, such as those on the Gulf Coast of the United States and in India, Middle East or China. Venezuelan crude oil sells at a huge discount compared to other grades. This is not a coincidence.
American oil companies began their operations in Venezuela nearly a century before, and the US became the biggest foreign investor by the 1960s. According to the majority of countries of the Organization of the Petroleum Exporting Countries, the Venezuelan Oil Industry was nationalized in 1971. It became the oil monopoly of the country: Petroleos de Venezuela SA.
Venezuelan oil production suffered for decades from political mismanagement and US sanctions. The lack of investment has led to a drop in production from three million barrels per day in early 2000s, to less than one mbd in last year’s figures (see graph below). The decline in production was most noticeable under the Maduro government, when PDVSA was used as a cash-cow by the ruling party. They invested little to nothing into the industry.
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What can international law teach us about US seizing an oil tanker near the Venezuelan coast?
A relatively modest increase in Venezuela’s oil production would need billions in investment due to the current state of its oil industry. Even with stable politics, a significant increase in oil production would take years of funding.
The events in Venezuela are unlikely to have a significant impact on the oil markets around the world. Initial reaction called for a drop in the price of oil. The global oil market has a surplus of crude right now, and the loss of Venezuelan imports would only have a small impact on prices.
Venezuelan Oil Production:
Venezuela’s crude oil production since 1965.
The author provides (no reuse).
On the whole, the future of the oil and gas industry is positive (barring civil wars or other conflicts). By increasing the supply, additional barrels coming from Venezuela will only complicate things for Opec producers and others. Oil prices fell again when US President Donald Trump announced that he would seize as much as 50 million barrels Venezuelan oil.
The claims that these events will hurt China are overblown. China, along with India, has been one of the largest buyers of Venezuelan crude oil. However it only represents 5% of Chinese imports. Canada, another heavy oil producer, has been moving its exports to China from the US for some time. The trend will likely continue.
In general, there’s little reason to “take over” the Venezuelan petroleum industry. The US could have simply lifted Trump’s sanctions in 2019, and allowed their oil companies to buy Venezuelan crude oil.
The oil market is worried about the political implications of the US’s legally questionable action. The oil market is concerned about the long-term political consequences of this legally dubious US action.
Trump’s next move is still a mystery, but the US actions could also legitimize Russia’s invasion in Ukraine. The energy market was already roiled by this. Oil markets are already tense enough. They don’t need any more.
