Attack on Venezuela
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Early Saturday morning, we got news that the US launched air strikes on Venezuelan military sites and captured Nicolas Maduro alive. They then took over control of the massive oil reserves in Venezuela, which makes up a whopping 20% of the world’s reserves, larger than Saudi Arabia or Iran.
A lot of people think this is just about accessing vast oil reserves. The reality is that the physical oil infrastructure in Venezuela is in a state of disrepair. Pipelines haven’t been maintained in 50 years. Restarting production will take at least 5-10 years and require billions in investment from US oil majors.
The oil majors like Exxon and Conoco have massive legal claims against Venezuela. They lost billions of dollars when oil assets were expropriated by Hugo Chavez in 2007. Even if they can settle these claims quickly (Trump has said the oil revenues will go toward paying for the military exercise and settlements), companies will think twice about committing new capital to a country that is currently a conflict zone.
With oil prices at $57/barrel and global oversupply risks looming, private companies will understandably shy away from investing. This means Venezuela’s oil production is unlikely to ramp up quickly, despite Trump’s intentions.
So if not for oil, what was the point of the incursion?
We explained in last week’s note Trump’s motives and how it affects relations with China. China illegally buys oil from Venezuela via “shadow tankers”. That oil is difficult to track, and very cheap because of sanctions. That stream will now get diverted to US Gulf Coast refineries who benefit from the lower shipping cost and higher quality yield.
Ever since sanctions on Venezuela in 2019, US refiners have been buying expensive “heavy” crude oil from Canada and the Middle East. So now they switch over to cheaper Venezuelan imports. China, having lost their Venezuelan supply, will just switch over to the expensive Canadian and Middle East imports. It’s called musical chairs — the oil swaps owners, but everyone still gets their oil.
Except the geopolitical leverage has shifted. When China imports from Canada and the Middle East, those two shipping lanes are heavily controlled by the US. China’s biggest fear is the fact that the US Navy can block the narrow Malacca Strait in a war, cutting off their supply of Middle Eastern oil. 80% of China’s oil comes through Malacca.
To be clear, Malacca has always been a known issue for China. Losing Venezuela (which was about 6% of their oil) just forces China to be more dependent on the very shipping lanes the US already controls. It limits their strategic and military options, for example if they wanted to invade Taiwan.
Does it stop China from getting oil? No. But it makes their energy more expensive, harder to refine, and easier for the US to cut off in a potential conflict. And by taking control of Venezuela, the US removes a pro-China, pro-Russia, pro-Iran military foothold in the Western Hemisphere.
Oh, and we’d be remiss not to mention that Canada would lose some leverage if the US no longer needs their heavy oil. This will impact the upcoming USMCA renegotiations in July of this year.
That’s it. The whole thing is a geopolitical play that cleverly hits three birds with one stone. The oil is secondary.
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