In the early hours of Saturday the 3rd of January, by the orders of the US President Donald Trump, the US forces carried out “Operation Absolute Resolve” which captured and extracted the Venezuelan President Nicolás Maduro and his wife. While the airstrike in the city of Caracas became a shock to the world, tensions between the US and the South American country has been on the rise since last September where during the past few months, events including the seizure of Venezuelan oil tankers which claimed to carry sanctioned oil, an attack on a dock in Venezuela that claimed to have “drugs were loaded to boats” and a naval blockage on all sanctioned oil tankers near the country’s coast, took place.
What really went down?
The US claims that Venezuelan President Nicolás Maduro is complicit with armed criminal gangs smuggling drugs into the U.S. and the Trump administration has officially named two international terrorist organization that are linked to the Maduro regime. Following the events that transpired over the weekend, President Trump announced that the US will run the country until a safe, proper and judicious transition is set up in the country. Trump confirmed that a team has been designated to run Venezuela, with key figures such as Secretary of State Marco Rubio engaging with Delcy Rodríguez, the previous executive vice president who became the interim president following the events that unfurled in Saturday. However, if Delcy Rodríguez does not comply with the Trump administration, Trump issued a not-so-veiled threat against the new leader of Venezuela.
Venezuela and its oil reserves?
While the politics of the situation in Venezuela is woven with corruption, political allegations and many political grey areas, one that is certain is the importance of the country when it comes to its oil reserves with Venezuela being recognized as having the world’s largest proven oil reserve at approximately 303 billion barrels. This places the country ahead of Saudi Arabia, Iran, Canada and Iraq making the country a top player in the oil industry. For much of the 20th century, petroleum exports generated the majority of government revenue and foreign exchange. The state-owned oil company PDVSA was once regarded as one of the most capable national oil firms globally, producing over 3 million barrels per day at its peak. However, more recently, due to decades of economic turmoil, corruption together with the high cost and technical complexity to extract and refine the untapped oil, the country’s oil production remains far below its potential.
In the press conference following the attack, President Trump also announced that as a part of the takeover, major US oil companies would move to Venezuela to refurbish badly degraded oil infrastructure and for US oil companies to recommence oil extraction. Despite these comments, it is still too early to say, how these events would play out. According to Reuters, the country is unlikely to see any meaningful boost to the crude output for few years as any company that might want to invest in Venezuela must deal with a number of issues including administrative issues, security concerns, dilapidated infrastructure and even the legality of the US operations which captured President Maduro in the first place. The country would also have to reform its laws to allow for larger foreign investment by US oil companies as the country nationalized the industry in the 1970s.
How would markets react to this?
During the short term, there could potentially be a temporary spike in oil prices due to geopolitical risk premiums and supply uncertainty. According to Economic Times, markets could expect a gap-up opening for crude oil. This was visible today during the early Asian trade where oil prices rose reversing initial losses. However, Venezuela oil export has been limited following US sanctions on the county over the past few months and with Trump extending the US oil embargo on Venezuela, it would indicate very little change in the oil market following the events of Saturday. In addition, Petróleos de Venezuela, S.A, the state-owned oil and gas company of Venezuela and its key oil facilities were not affected from the US attacks and oil production and refining operations were normal after the strike.
While it might be too early to forecast a medium to long-term outlook on the oil industry, if the US and private companies successfully restore Venezuela oil output, global oil supply could potentially increase thus lowering oil prices over the long term. However, due to a number of issues, stated earlier, it is difficult to say whether or not, these foreign investments from private oil companies would flow into the country and if they do, how long it would take for Venezuela oil production to influence the global oil market.
What does this mean to Sri Lanka and the greater South Asian region?
Given Venezuela’s limited economic influence over the South Asian region, the impact on the region’s stock market would remain mostly contained. There could however be some spill-over effect depending on how the rest of the world would react to the situation. This is especially true for those countries that have various trade and oil deals with Venezuela and countries like Russia, China and other Latin American countries that align with the South American nation. However, given more pressing priorities for Russia and China including the war in Ukraine for Moscow and China’s domestic economic challenges and its tension with Taiwan, it is less likely that both countries would directly engage on the issue at least during the short term. In this case, it is far less likely for there to be some serious long-term impact to the South Asian region and its economy.