Despite the capture of Venezuelan President Nicolás Maduro and his wife Cilia Flores, Donald Trump’s intervention in the country has so far been relatively light: that is: it didn’t generate a huge bill. The United States has no troops on the ground, is not deploying major resources and has already reportedly concluded a $2 billion oil deal.
As such, markets have been fairly indifferent to this action, even though it raises geopolitical tensions. Their reasoning is probably that an apparent victory for the world’s largest economy is good news for everyone, particularly if it occurs without much conflict and without much cost.
On this last point, a problem has emerged: President Trump has now suggested that the United States may end up repaying “the enormous amount of money” that oil companies had to spend to rebuild Venezuela’s infrastructure.
The reason behind the United States’ interest in accessing Venezuela’s oil industry is clear: according to self-reported figures, the country claims to have the largest oil reserves in the world, estimated at around 300 billion barrels. These have not been audited, and as Apollo’s Torsten Sløk wrote in a note to clients: “Venezuela’s self-declared crude oil reserves tripled from around 100 billion barrels in the early 2000s to 300 billion barrels in the late 2000s due to the reclassification of Orinoco Belt heavy oil as ‘proved.’
“Much of the oil is extra-heavy, with low recovery and high production cost. There has been no significant new discovery or increase in production to justify a tripling of reserves through exploration alone.”
That said, the opportunity for America to diversify its oil supplies, and potentially divert its stocks away from its economic rival China, may still be too good to pass up.
Previously, President Trump had said that major American oil companies would be the ones to put their hands in their pockets to build the infrastructure necessary to access this proverbial gold mine.
But speaking to NBC News Earlier this week, he said that even if Venezuela’s oil industry could grow and operate over the next 18 months, “it would be a lot of money.” He added: “A lot of money will have to be spent, and the oil companies will spend it, and they will then be reimbursed by us or through revenue. »
The president declined to speculate on how much the oil companies would spend (and how much the U.S. government might have to pay as a result), saying only that it would be a “substantial” sum “but they would do very well.”
Count the cost
Before suggesting that the U.S. government might end up footing the bill for rebuilding Venezuela’s oil infrastructure, analysts opined that the move would do little to move the economic needle. As Michael Pearce, chief U.S. economist at Oxford Economics, wrote in a note to clients Monday: “The U.S. attack on Venezuela this weekend significantly increases uncertainty about the future of its political regime, but the impacts on global oil prices and geopolitical tensions appear limited. Therefore, we will not change our baseline forecast for the U.S. economy.”
He noted that trade and financial ties between nations are much more restricted today than before, after decades of sanctions and political pressure. U.S. exports to Venezuela accounted for just $3.6 billion over the past 12 months, less than 0.2% of total exports, while imports are similarly small and banking sector exposure is low.
But other economists are already looking nervously to the long term, wondering whether tensions will escalate and the United States will be forced to employ a heavier (and more costly) hand, with consequences for the large U.S. budget deficit. Figures like Paul Donovan at UBS said earlier this week that this would be a major concern for investors.
Desmond Lachman, a senior fellow at the American Enterprise Institute, said the same thing: “My problem is that the budget deficit is so bad to begin with, and Venezuela is definitely not going to make it better. If anything, Venezuela is just making it worse, so I think we really have a big budget problem.”
This story was originally featured on Fortune.com
