Trump's Venezuela oil obsession doesn't make sense

In a post yesterday evening, President Trump announced not only a complete blockade of Venezuela but also insisted that the country return “oil, land, and other assets they previously stole from us.”

This is presumably a reference to serial episodes of the oil nationalization that began in 1976 and continued under Hugo Chavez in the 2000s. But this phenomenon is hardly confined to Venezuela. Stalwart U.S. allies have also nationalized the assets of foreign oil majors in the country, with Saudi Arabia for example completing the process by 1980. The universe of fossil-fuel companies is full of partially or wholly state-owned-enterprises (SOEs). Norway has one too in Equinor (formerly Statoil).

Be that as it may, Trump has made no secret of his hankering for foreign oilfields over the years. A recent story in the New York Times pointed to oil as a major motivator for his actions against Venezuela. And he was already talking about the U.S. taking Iraqi oil before his first election victory in 2016.

So he has long believed that seizing foreign oil assets would benefit the U.S. However, quite apart from the morality of the issue, it is unclear if such a step makes much economic sense.

The technological breakthrough of fracking, a revolution led by the U.S., led to an extraordinary shift in America’s oil trade balance over the last 2 decades. In 2005, two years after the second Gulf war ended, the U.S. imported 12.5 million barrels of oil and products per day (bpd); last year it exported almost 2.5 million bpd, a swing of 15 million bpd in American production, or almost 15% of all current global oil demand.

Another way of viewing this is by price — in summer 2008 (just before the Global Financial Crisis), a barrel of benchmark Brent crude oil cost more than 140 dollars a barrel; it now costs about 60 dollars a barrel. And indeed the President takes great pride in announcing how cheap gasoline prices are, which might be somewhat at odds with the idea that America needs to go to war (or enforce a blockade, the legal equivalent of war) to have more oil under its control.

A broader point is that while the years between the second Iraq War in 2003 and the Global Financial Crisis in 2008 saw heated concerns about Peak Oil supply, the concern now is that it is oil demand that might have peaked. The International Energy Agency (IEA) latest report projects that global oil supply will rise by 3 million bpd in 2025 and a further 2.4 million bpd in 2026 against demand increases of only 830,000 bpd and 860,000 bpd in 2026.

Beyond cyclical factors in global growth, a principal reason for this is the pace of EV adoption, particularly in China. Indeed, this summer the U.S. threatened to withdraw from the IEA (International Energy Agency) as it felt the organization was being far too conservative with its forecasts for global oil demand, and that such tepid forecasts could temper the animal spirits of the energy executives who were to deliver “energy dominance.”

It is against this backdrop that Venezuela’s estimated oil reserves of 300 billion barrels should be evaluated. This might be the largest block in the world (Saudi Arabia has about 267 billion barrels), but it is heavy crude that is expensive to extract and refine. It is also most suited for diesel but the world’s largest trucking fleet in China is reportedly transitioning to EVs much faster than expected.

To paraphrase Talleyrand (or Fouche), invading Venezuela for its oil might be worse than a crime; it could be a blunder.