Erik Katovich, assistant professor of agricultural and resource economics, discusses the perceived benefits and real costs of the Trump administration's military intervention in Venezuela
One of the stated goals of the Trump administration's military intervention in Venezuela is to gain control of the country's vast oil reserves. But will foreign policy actions like these actually influence global oil markets and everyday energy prices? To unpack the economics behind it all, UConn Today asked Erik Katovich, assistant professor in the Department of Agricultural and Resource Economics, to explain what Americans should really understand about Venezuela, oil markets, and gas prices.
Why does Venezuela matter to the U.S. energy market in the first place?
The popular conception that Venezuela is this big oil superpower is misleading. Venezuela possesses the world's largest proven oil reserves - about 17% of the global total. It also possesses the world's ninth largest natural gas reserves. However, currently, Venezuela's oil production is less than 1 million barrels per day, or around 1% of the world total, making it a minor producer without much ability to affect global prices. Natural gas exports are non-existent.
Venezuela lacks the infrastructure and technology to capture, transport, and export this gas, so it's either burned locally for electricity generation or flared off. Because of this, Venezuela's large reserves cannot be feasibly transformed into significant oil or gas exports within the next few years.
How do U.S. sanctions on Venezuela actually work, and how do they ripple through global oil markets?
The U.S. government has imposed a variety of sanctions on Venezuela, starting with bans on weapons sales in 2006, targeted sanctions of government officials in 2014 and 2017, and finally an oil embargo in 2019. Under this embargo, countries and companies cannot purchase Venezuelan oil without risking significant financial and legal penalties from the U.S. Importers based in places that do not comply with U,S, sanctions (like China) continue to purchase Venezuelan oil.
The embargo has been damaging for PDVSA, Venezuela's state-owned oil and gas company, causing it to lose much needed revenues and making it more difficult to export its products or access loans or oilfield technologies.
Globally, these sanctions have had only muted effects, considering Venezuela's small share of global production and given that the country still manages to export to China and other destinations using "shadow fleet" tankers.
How long would it take for foreign policy decisions like this to show up in consumer gas prices?
Trump has talked about ramping up Venezuelan production to bring world oil prices down to $50/barrel, from the current $61 or so. This is not feasible in the short term and very unlikely even in the long term.
Venezuela's oil requires significantly higher refining costs and specialized refining chemicals and equipment that are not currently available at scale. The country also lacks adequate oil fields and transportation/storage infrastructure. Estimates show that it could require upwards of $110 billion to recuperate this infrastructure and ramp up production.
Venezuela currently produces around 1 million barrels of oil a day and could perhaps see modest increases (maybe up to 1.1 or 1.2 million per day) over the next year, and maybe up to 2-3 million barrels per day within the next 5-10 years. If companies are willing to make massive investments, which is unlikely, it would take between 5-10 years to see a significant increase to 2-3 million barrels per day. In comparison, the US currently produces nearly 14 million barrels of oil per day, the most of any country in world history.
Venezuela's economy is currently devastated by years of recession and therefore consumes very little oil and gas domestically (e.g., not much industry, transportation, or consumption). If the economy recovers, it will start to consume more oil and gas internally, meaning it will export less. Thus, domestic economic growth associated with Venezuela's recovery could easily absorb most or all of any production increase that is achieved.
How do oil producers factor into this equation?
Major oil companies are hesitant to invest in Venezuela. Several companies previously had their assets expropriated, or seized by the Venezuelan government, and they would need to be confident that this wouldn't happen again. Given the current high level of political uncertainty in Venezuela, these companies are going to be very cautious about sinking tens of billions of dollars into the country. There are also risks associated with environmental damage, armed groups, and corruption. ExxonMobil has been developing massive offshore oil fields next door in Guyana, which it sees as a safer bet, so it isn't desperate for new fields.
Given everything explained above, events in Venezuela are unlikely to have significant effects on consumer gasoline prices or natural gas prices in the U.S.
Who benefits economically from restrictions on Venezuelan oil and who bears the cost?
Restrictions on Venezuelan oil primarily harm people in Venezuela. Oil revenues fund government expenditures, supporting investments in infrastructure, schools, hospitals, food imports, etc. Of course, oil revenues can also be diverted or siphoned off through corruption or used to finance military expenditures or conflict. How oil revenues are invested depends on the institutions and politics of decision-makers there.
It is important to emphasize that Venezuela's oil should belong to the Venezuelan people, and these valuable natural resources will hopefully be recuperated and developed in a sustainable way to support the recovery of the Venezuelan economy - not stolen for the enrichment of others.
What economic lesson should readers take away from the Venezuela situation?
Oil production is not like turning on a tap. It requires significant long-term investments and predictable policies. Venezuelan oil production will take years to increase, meaning world oil and gas prices will largely remain unaffected for now.
Another big aspect that hasn't come up yet is the ongoing energy transition away from fossil fuels. It is unclear how quickly the world economy will evolve away from using fossil fuels, but it is likely that total global demand has more or less peaked and will gradually fall in the decades to come as transportation shifts toward electric vehicles and electricity generation shifts towards renewables. Investing billions in a challenging and risky institutional context like Venezuela at this moment of uncertainty about the future of global oil demand is a high-risk bet.
And one final point to close: the recuperation of Venezuela's oil industry and reinvestment of oil revenues into sustainable economic development there would be an important step toward rebuilding Venezuela's economy - improving people's livelihoods and reducing pressure to migrate to the U.S. This would be a win-win for the entire region. In contrast, treating Venezuela's natural resources like something that can be seized and strip-mined will backfire, provoking further instability and out-migration.
