When Trump's big Venezuela oil grab runs smack into reality

Within hours of U.S. military strikes on Venezuela and the capture of its leader, Nicolas Maduro, President Trump proclaimed that “very large United States oil companies would go in, spend billions of dollars, fix the badly broken infrastructure, and start making money for the country.”

Indeed, at no point during this exercise has there been any attempt to deny that control of Venezuela’s oil (or “our oil” as Trump once described it) is a major force motivating administration actions.

One irony here is that even as the White House is proudly embracing fossil-fuel imperialism in global oil, the markets are vastly different. Back in the 1970's and again in the early 2000's, the U.S. was the world’s biggest oil importer, leading to vicious spirals of higher crude prices and a weaker dollar as oil exporters feared they were being paid in a rapidly depreciating currency and sought other assets.

However, the U.S. is now the world’s biggest producer, and the world is sufficiently awash in oil so much that the price of benchmark Brent Crude was close to five-year lows late last week at about $60 a barrel. Conversely, the spike in oil prices to $120 per barrel right after the Russian invasion of Ukraine in 2022 saw the dollar strengthen dramatically against the yen and especially the euro. Markets reasoned that besides geopolitics, greater self sufficiency in energy also favored the U.S. over its developed market peers.

In other words, the U.S. geoeconomic position in energy has come a long way since the early 2000s and already has many of the attributes that control over Venezuelan oil would supposedly bolster.

Meanwhile, the combination of supply-demand dynamics in global oil markets and the scale of investment required to restore Venezuela’s oil production has made major oil companies wary about the opportunities supposedly being handed to them. They are unsure about the economics of sinking tens of billions of dollars over several years to restore dilapidated drilling infrastructure in a country that might have the world’s largest oil reserves, but this oil is also expensive to extract and process.

One report has suggested that the administration is telling oil companies that if they want compensation for assets nationalized by Venezuela, they will have to commit to making substantial investments in restoring the country’s oil infrastructure. In effect, private U.S. oil majors are being asked to act in Venezuela more like the state-owned-enterprises elsewhere that play a huge part in global oil production, often disregarding near-term profitability in the service of maintaining or expanding production for political, fiscal, or geopolitical goals.

But it is unclear how much tolerance Wall Street would have for such a posture from energy firms, particularly after the shale industry’s cumulative losses in the 2010s ran close to half a trillion dollars. In this decade, financial markets have been looking for “capital discipline” from oil companies.

More broadly, it seems as though the geopolitical and economic goals of the administration might not be entirely consistent, particularly when it comes to domestic and foreign oil markets. It rejoices over low gasoline prices, and hopes that the overthrow of Maduro in Venezuela will eventually lead to increased production anchored by American companies in that country. At the same time, the White House wants domestic U.S. oil production to rise as well, as expressed by the “drill, baby drill” slogan.

However, good prices for consumers are not necessarily the same thing as good prices for commercially motivated producers, who may react by curtailing investment, i.e., by planning to drill less rather than more. For such producers, the critical threshold is the “break even price,” which has been estimated at an average of about $60 per barrel for American shale. All this is occurring against a backdrop of global oil supply growing faster than demand, with the International Energy Agency projecting global supply increases of 3 million barrels a day in 2025 and a further 2.4 million in 2026, against demand increases of only 830,000 barrels in 2025 and 860,000 in 2026.

The events in Venezuela also suggest other issues that stem from the widely remarked centrality of the Western Hemisphere in the administration’s National Security Strategy. One of the administration’s goals is to install friendly regimes in resource-rich countries (the latter is a description that applies to much of Latin America) to enable both privileged American use of resources and the ability to deny those to competitors.

But this is where issues of the political economy of South America may come into play. The region has in the last few decades seen democratic alternation between left and right wing populisms in several countries, spurred by popular discontent at long-term economic disappointment punctuated by intermittent financial crises. This is arguably in good part a result of excessive reliance on commodity exports (something undoubtedly true of Venezuela, where oil is practically the only export), and the boom-bust cycles associated with the sector.

Electoral cycles in the region currently appear to favor the right (or parties more congenial to Washington), as seen in Bolivia, but there is little guarantee of a structural break in this political pattern as long as the structure of South American economies does not move beyond a dependence on commodity exports. Thus, it is possible that even a “successful” removal of Maduro does not deliver the economic and political transformation needed for the longer-term stability that American investors seek. And the Trump administration’s approach to Venezuela (and the region at large) seems to show little recognition of this.

The economic motivations behind the military intervention in Venezuela thus seem contradictory, grounded in a misunderstanding of America’s role in global energy markets, and oblivious to a central problem of political economy in South America — the continent’s commodity dependence.