What U.S.-Venezuela Oil Deal Is – And Is Not

What the U.S.-Venezuela Deal Is Not About

First, let’s specify what this deal is not about. Trump’s deal with the Rodriguez government is not about today. It is not about near-term impacts to lower oil and gasoline prices. It is not about replacing the millions of barrels of crude coming in from an increasingly China-friendly Canada each day with immediate supplies from a more friendly Venezuelan government. Oil prices are not immediately going to plummet to $60 per barrel as a result of this deal, nor are gasoline prices at the pump going to fall to levels seen prior to March 1 next week.

A high percentage of the acreage involved in the deal is greenfield acreage that will likely take 7 to 10 years to bring into production. Not 7 to 10 days – 7 to 10 years. Much of the remaining acreage consists of brownfield developments that were allowed to dilapidate into disrepair under the governments of Hugo Chavez and Nicolas Maduro. These assets will take time and billions of dollars in capital investments to turn into first or enhanced production.

What it is about: Simply put, the U.S.-Venezuela oil deal is a long-term play. It’s about replacing domestic production and imports from unfriendly governments with volumes from a geopolitically significant asset in another country that will reportedly remain under U.S. control for 100 years. The term of the lease is significant because history tells us it will take decades to fully develop and produce these underground resources.

Strategic Motivations Behind The U.S.-Venezuela Deal

Oil flows from the Middle East seem to have recovered to levels needed to keep the global market in some semblance of balance for now, though real challenges remain to return to a real, enduring balance. The U.S. cannot continue draining its Strategic Petroleum Reserve indefinitely, after all. The domestic refining industry cannot sustain operating at 96% capacity for much longer before downtime for periodic maintenance and safety inspections must take place.

But, with Goldman Sachs and others agreeing in recent days that the U.S. estimates of crude now making its way onto the market are likely accurate, and the U.S. naval blockade working as intended to deny Iran’s ability to export, hope exists that the worst is now behind us. Those realities, along with moves by other Persian Gulf exporting nations to rapidly develop alternative routes for getting their crude out onto the open market put increasing pressure on Iran’s civilian government to look for a way out of this mess.

The Trump Administration knows that the impacts on the American economy from the closing of the Strait of Hormuz could have been worse – much worse. The U.S. has been able to avoid some of the terrible impacts the crisis has wrought on other nations thanks to its high degree of energy security. But President Trump and his key advisors also know that America will not always lead the world in production of both oil and natural gas. The giant shale resource plays driving U.S. production today will eventually peak and start to decline. Absent new domestic discoveries of the scale and accessibility needed to replace them, overall production could not be sustained.

The decline will not be coming as soon as the industry critics claim nor as far out into the future as the optimists believe: But it will come. That’s just how this industry works – it is its normal cycle.

Deteriorating Relations With Canada Also Factor In

This is where America’s increasingly tense relationship with the Mark Carney-led government in Ottawa comes in. Even though the U.S. produces upwards of 20 million barrels of crude oil and petroleum liquids each day, it is not enough to satisfy its daily consumption. That, plus the persistent shortage of refining capacity to process the millions of barrels of light, sweet crude coming out of the Permian Basin and other major shale plays means millions of those barrels must be exported each day to find a refinery home.

Those exported barrels must be offset by imports from other countries, and, as I noted in a recent piece here, most of those imports have in recent years derived from Canadian crude produced in Alberta. The heavy crude produced from Canada’s oil sands is exactly the grade many Midwestern and Gulf Coast refineries were tooled to process and its export into the U.S. has provided a major revenue stream into a Canadian economy which has otherwise ranked near the bottom among OECD countries in economic growth since 2015.

That easy trading outlet between a pair of bordering nations whose governments remained on friendly terms until recently eased pressures on Canada’s central government to permit the building of fully domestic east-west pipelines and other major infrastructure related to the oil sands. That lack of investment in domestic infrastructure has in turn helped enable governments led by Carney and his predecessor, Justin Trudeau, to pursue their virtue signaling net-zero by 2050 goals. It has been the essence of a mutually beneficial arrangement for both countries.

But now, with Carney’s heavily signaled turn towards China and Trump’s aggressive trade and tariff policies, that friendly relationship has become fraught. As the discussion in Canada increasingly turns to a new focus on seeking alternative routes for the Albertan crude, the deal with Venezuela enables the White House to point to a potential long-term replacement.

Competition With China, Russia Key To The U.S.-Venezuela Deal

The U.S. competition with China for global geopolitical leverage and hegemony is also a major consideration here. Under Maduro, Venezuela and its oil sector had come under increasing Chinese influence and control, with Russia also making inroads into the sector. Trump has made no secret of his intent to halt the advancing influence by both adversary nations into not only Venezuela, but throughout the Western hemisphere. Every action the Administration has taken related towards Venezuela this year reflects that overarching goal.

Friday’s announced deal provides a firm U.S. foothold into the country, one which will in all likelihood include a significant U.S. security presence in-country that will serve to deter further advances by those other countries. Such a presence seems an inevitable outcome if the U.S. hopes to attract major investment by risk-averse companies like ExxonMobil back into the Venezuelan oil patch.

Bottom line, this is a long-term play designed to bolster U.S. and Western Hemisphere energy security for the next quarter century and beyond. American drivers will ultimately benefit but should not expect to see the U.S.-Venezuela oil deal’s impacts reflected at the gas pump any time soon.