The vast reserves of crude oil in Venezuela are set to be a pivotal element in the nation’s future economic landscape.

While oil futures remain inactive during the weekend, forecasting the immediate impact on oil prices is speculative. However, former President Donald Trump indicated that the United States would temporarily oversee the Venezuelan government.

“We’re planning to have our major U.S. oil companies—some of the largest in the world—invest billions of dollars to repair the severely damaged oil infrastructure,” Trump announced during a press briefing at Mar-a-Lago.

An overhaul led by the U.S. could significantly boost Venezuela’s role as a substantial oil supplier, opening the door for Western oil firms and providing a fresh avenue for production.

This development might also help stabilize global oil prices, although the potential for lower prices could deter some American companies from pursuing oil production further.

Even if international access were fully restored tomorrow, it could take years and incredible expense to bring Venezuelan oil production fully back online.

Venezuelan state-owned oil and natural gas company PDVSA says its pipelines haven’t been updated in 50 years, and the cost to update the infrastructure to return to peak production levels would cost $58 billion.

“For oil, this has the potential for a historic event,” said Phil Flynn, senior market analyst at the Price Futures Group.

“The Maduro regime and (former Venezuelan President) Hugo Chavez basically ransacked the Venezuelan oil industry.”

Control of Venezuela’s oil trove

Venezuela is home to the largest proven oil reserve on Earth, but its potential far outweighs its actual output: Venezuela produces only about 1 million barrels of oil per day – about 0.8 per cent of global crude production.

That’s less than half of what it produced before Maduro took control of the country in 2013 and less than a third of the 3.5 million barrels it was pumping before the Socialist regime took over.

International sanctions on the Venezuelan government and a deep economic crisis contributed to the decline of the country’s oil industry – but so did a lack of investment and maintenance, according to the EIA.

Venezuela’s energy infrastructure is deteriorating, and its capacity to produce oil has been greatly diminished over the years.

Venezuela simply doesn’t produce enough oil to make that big a difference.

Oil prices have been in check this year because of oversupply fears.

OPEC has ramped up production, but demand has fallen off a bit as the global economy continues to struggle with inflation and affordability after the post-pandemic price shock.

US oil briefly rose above $60 a barrel when the Trump administration began seizing oil from Venezuelan vessels, but it has since fallen to $57 a barrel again.

So the market’s reaction – if investors believe the strike is bad news for oil supply – will almost certainly be muted.

“Psychologically it might give it a bit of a boost, but Venezuela has oil that can be easily replaced by a combination of global producers,” Flynn said.

Venezuela’s oil potential

The kind of oil Venezuela is sitting on – heavy, sour crude – requires special equipment and a high level of technical prowess to produce.

International oil companies have the capability to extract and refine it, but they’ve been restricted from doing business in the country.

The United States, the world’s largest oil producer, has light, sweet crude, which is good for making gasoline but not much else.

Heavy, sour crude like the oil from Venezuela is crucial for certain products made in the refining process, including diesel, asphalt and fuels for factories and other heavy equipment.

Diesel is in tight supply around the world – in large part because of sanctions on Venezuelan oil.

Unlocking Venezuelan oil could be particularly beneficial to the United States: Venezuela is nearby and its oil is relatively cheap – a result of its sticky, sludgy texture that requires significant refining.

Most US refineries were constructed to process Venezuela’s heavy oil, and they’re significantly more efficient when they’re using Venezuelan oil compared to American oil, according to Flynn.

“If indeed this continues to go smoothly – and it looks like a masterful operation so far – and US companies are allowed to go back and rebuild the Venezuelan oil industry, it could be a game-changer for the global oil market,” Flynn said.

Trump called Venezuela’s oil business “a total bust”.

“They were pumping almost nothing by comparison to what they could have been pumping and what could have taken place,” Trump said.

“We’re going to have our very large United States oil companies – the biggest anywhere in the world – go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure, and start making money for the country,” he added.

It is unclear how energy prices will be impacted by the US intervention in Venezuela.

“It all hinges on whether Venezuela defies the recent history of US-led regime change efforts,” head of global commodity strategy at RBC Capital Markets Helima Croft said.

“President Trump signalled the US is back in ‘nation-building mode’, and that US companies will make the requisite investments to ensure the revival of the oil sector.

“I think we need far more details before we declare ‘Mission Accomplished’.”