Crude reality: oil price impact from US strike on Venezuela likely brief

The US airstrike on Venezuela, coupled with the arrest of its president Nicolas Maduro and his wife, has indeed shocked the world. The most significant impact on the financial markets is likely to be on oil prices, given that Venezuela holds the largest proven crude oil reserves globally. According to data from the Organization of the Petroleum Exporting Countries, Venezuela possesses approximately 303 billion barrels of proven oil reserves, surpassing Saudi Arabia – the second largest with about 267 billion barrels – by over 30 billion barrels.

However, Venezuela is one of the most corrupt countries in the world. Owing to systemic collapse and the impact of international sanctions, Venezuela’s oil industry has remained largely isolated from the global market for an extended period. Consequently, Venezuela’s crude oil production has plummeted from 3 million barrels per day in 1990 to around 1 million barrels per day today.

At a press conference following the airstrike, US President Donald Trump explicitly stated that American oil companies would return to Venezuela and invest billions of dollars to help restore the country’s oil infrastructure. Nevertheless, the facilities of Venezuela’s state oil company, PDVSA, have suffered from prolonged neglect, and there has been a continuous loss of technical talent. Therefore, even if there is a peaceful transfer of power and substantial investment in repairs, it is estimated that it would take at least five years before Venezuela’s oil production could see a significant increase.

It is also important to note that China is Venezuela’s largest creditor and oil purchaser. China has provided approximately US$60 billion (HK$468 billion) in financing through “oil-for-loan” agreements. Hence, whether the United States can successfully control Venezuela’s oil facilities and whether China will attempt to obstruct such efforts are critical considerations.

In short, the impact of the US airstrike on oil prices may be very short-lived given there are numerous long-term challenges to address. These include whether the US can assertively intervene in Venezuela’s political situation and prevent a prolonged civil conflict. Drawing from the experiences of the US in Iraq and Libya, overthrowing a regime is not particularly difficult, but rebuilding the local economy is the real challenge. While an increase in Venezuela’s oil exports is conceivable, it is unlikely to be realized in the short term.

Andrew Wong is a veteran independent commentator