Venezuela matters again, but not for the reasons most people think

Follow the oil and the dollar, and the logic behind U.S. actions toward Venezuela becomes clear

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Strip away the rhetoric and U.S. action against Venezuela comes down to two things: heavy, sour crude and the defence of a dollar-dominated global oil trade.

Whether the action was legal or illegal is completely beyond the scope of this piece.

The U.S. is currently the world’s largest producer of oil, well ahead of Saudi Arabia, Russia and Canada. Most of that oil, thanks to the shale revolution, is light, sweet grade. Many U.S. refineries, however, are not configured to process it. They were built to refine heavy, sour crude.

Along the U.S. Gulf Coast in particular, refineries were upgraded over decades to handle cheaper heavy crude, which delivers higher margins once refined. Switching away from it quickly is neither easy nor cheap.

The U.S. needs heavy, sour crude to meet its domestic needs. Venezuela, which holds the world’s largest proven oil reserves, has this grade of oil in abundance. Through the 1990s and into the early 2000s, it was a major supplier of heavy crude to the U.S.

Not anymore.

Venezuela still has proven reserves of about 303 billion barrels of crude oil, well ahead of Saudi Arabia and others. But years of sanctions, neglect and crumbling infrastructure have left its oil industry unable to convert reserves into production. Output has fallen steadily. In recent months, it dropped to less than a million barrels per day—less than one per cent of total global output.

From a global perspective, that level of production barely registers.

There are few producers of the heavy, sour crude the U.S. requires. Russia is one, but its oil sector is under severe U.S. and Western sanctions.

That leaves Canada. With other major producers sidelined, Canada has become the largest supplier of heavy, sour crude to the U.S., accounting for almost 90 per cent of U.S. imports of this grade. Canada’s oil sands naturally produce heavy crude similar to Venezuelan blends, making it one of the few large-scale substitutes U.S. refineries can readily use.

That gives Canada leverage in its ongoing tariff negotiations with the U.S. But if, and it remains a big if, the Venezuelan oil industry regains momentum and gets back on its feet, as promised by Trump, that leverage would erode.

Rebuilding Venezuela’s oil industry, however, will not be easy. The damage runs deep, from decaying infrastructure to lost technical capacity. Restoring production will take time—five to 10 years, by most estimates—and a great deal of capital. Some media reports put the required investment at between $58 billion and $100 billion, or more.

The question is whether oil majors will be willing to move in quickly and commit that kind of money. Political stability is a prerequisite for large-scale investment, and Venezuela does not yet offer it.

The lesson from Iraq is instructive. Remember the “Mission Accomplished” banner? The U.S. eventually withdrew from Iraq without much success. Venezuela now sits at a similar crossroads. Even with Maduro removed, political stability is far from assured. It will take months, and possibly longer, before a clearer picture emerges. Until then, major investment in Venezuela’s oil sector remains uncertain.

That uncertainty buys Canada time. For now, it can maintain a strong share of the U.S. market for heavy, sour crude.

After pursuing a ‘regime change’ in Venezuela, the U.S. under Trump has also sent a message to states that resist U.S. demands.

Greenland, Iran, Cuba, perhaps even Canada, could be next. Who knows?

By targeting the left-leaning Maduro, Trump has also sent a signal to Russia and China that Washington will not tolerate challenges to the dollar-led global financial system.

In 2018, Venezuela announced it would free itself from the dollar and began accepting yuan, euros and rubles for its oil sales. Caracas also started building direct payment channels with China rather than relying on the U.S.-controlled SWIFT system. Most global oil transactions are still priced and settled in U.S. dollars, reinforcing demand for the currency and giving Washington enormous leverage through sanctions and financial controls.

Recent events suggest Washington is not prepared to accept any challenge to the dollar’s dominance. The U.S. appears willing to go to great lengths to protect its interests by preserving the dollar-led financial system.

There is precedent. In 2000, Saddam Hussein announced Iraq would sell oil in euros instead of U.S. dollars. By 2003, the U.S. had invaded Iraq, Saddam was removed and later executed, and Iraq subsequently switched back to U.S. dollars for its oil sales.

In 2009, Libya’s then-president, Muammar Gaddafi, proposed a gold-backed African currency—the “gold dinar”—for oil trade. Within two years, NATO bombed Libya and Gaddafi was murdered.

Now comes the Maduro episode.

All of this may be coincidence but the pattern is hard to ignore.

Toronto-based Rashid Husain Syed is a highly regarded analyst specializing in energy and politics, particularly in the Middle East. In addition to his contributions to local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. Organizations such as the Department of Energy in Washington and the International Energy Agency in Paris have sought his insights on global energy matters.