In a January Townhall column, I argued that the Venezuela operation was a win for America and a loss for China and Canada. Friday's announcement from the Trump administration of an oil deal with Venezuela confirms that assessment.
The agreement gives the U.S. a majority control of more than 65 billion barrels of proven reserves through a joint venture built around 17 strategic fields, with an initial production target north of 1.5 million barrels per day over a 25-year framework. On paper, it creates the second-largest private holder of proven reserves on the planet, behind only Saudi Aramco.
But Americans need to be realistic about their expectations: this won’t translate into lower gasoline or diesel prices anytime soon. Oil is an extremely investment-heavy industry with massive infrastructure, and Venezuela is a complete wreck after years of communists running it into the ground.
Decades of mismanagement left pumps, pipelines, storage tanks, upgraders, port facilities, and the electrical grid that powers all of it in a state of advanced decay. It’ll take billions of dollars and several years to repair, replace, and modernize that infrastructure. Anyone promising cheaper gasoline by Thanksgiving knows nothing about the oil industry.
But a journey of a thousand miles begins with a single step, and industry needed the guarantees of this deal to return to Venezuela. When the communists took over, they kicked out American oil companies, confiscating their physical and intellectual property, converting profitable private businesses to unprofitable state-run failures.
Firms that had poured billions of dollars into modernizing the industry effectively lost it all. Earlier this year, some of the largest names in American energy publicly called Venezuela “uninvestable” because of its track record on property rights, among other sins.
However, this agreement creates a very different calculus. A bilateral framework of this size, negotiated by the State and Defense Departments and running a quarter-century, amounts to an implied federal backstop against another round of confiscation. This reduces political risk and makes infrastructure projects profitable again.
Furthermore, that backstop doesn't just unlock capital in Venezuela, but here as well. Refiners on the Gulf of America can already run three to four million barrels a day of heavy crude, and many of those coking units were purpose-built for Venezuelan barrels in the first place. But absorbing a sustained new flow means fresh investment in docks, terminals, storage, and blending capacity along the coast.
Multi-billion-dollar pieces of equipment can’t be built on a whim. They require reasonably confident projections of the future. In this case, industry needs to be confident that Venezuelan crude will be arriving in greater volumes before deciding to upgrade Gulf facilities to handle additional imports. Trump’s new oil deal gives that confidence.
And more Venezuelan imports impacts Canada. Venezuelan heavy crude and Western Canadian Select are chemical cousins: both viscous, high in sulfur, and bound for the same complex refineries. Every marginal Venezuelan tanker unloading on the Gulf Coast can displace a Canadian one, and now at a discount.
Canada sends roughly 80 percent of its crude production to the US, but it now stands to be replaced by Venezuela in coming years — and that’s a key piece of leverage in the current trade dispute. Negotiations recently collapsed, followed by 50 percent tariffs on some Canadian exports, and Canadian retaliation scheduled for September 8 on some American exports.
However, Canadian Prime Minister Mark Carney’s negotiating position has been severely weakened because the clock is ticking on his quasi-monopoly on heavy crude oil.
Negotiators in both the U.S. and Canada now know that lower cost Venezuelan crude will very likely be arriving at U.S. shores in larger quantities in coming years, removing a key piece of leverage currently enjoyed by Canada. While there are no winners in a trade war, not everyone loses equally and these new dynamics in the oil market mean Canada stands to lose much more.
This increases the odds that the U.S. will get a fairer trade deal and that American exporters — from farmers to factories — will gain access to more Canadian consumer markets. By forcing Ottawa to reduce its tariff and non-tariff barriers, U.S. products will be able to compete on a more level playing field in Canada.
In less than a year, Venezuela has gone from selling oil to China to entering an oil deal with the US, weakening the former and strengthening the latter. The relief for American consumers won’t be instantaneous, but that’s what naysayers said about the fracking revolution, which eventually drove down gas and diesel prices for many years.
E.J. Antoni, Ph.D., is chief economist at the Heritage Foundation and a senior fellow at Unleash Prosperity.
Editor’s Note: Thanks to President Trump’s leadership and bold policies, America’s economy is back on track.
Help us continue to report on the president’s successes and combat the Democrats' lies about America's economic revival. Join Townhall VIP and use promo code FIGHT to receive 60% off your membership.
Join the Conversation
VIP members get the ability to comment on articles.