Venezuela’s operation is about more than cheap oil

The initiative to remove Nicolas Maduro could have more economic importance than many commentators realize. While oil prices may not dip immediately, the resulting supply shock that might significantly impact the U.S. economy could eventually ease.

Amid all the discussions about “hitting the jackpot” with oil, it’s crucial to remember one thing: there isn’t a shortage of oil right now. The current average price of regular gasoline in the U.S. stands at $2.82 per gallon, while Brent crude is about $61.15 per barrel. That’s fairly low by today’s standards. So, when people say Venezuela could lower prices instantly, that’s more of a marketing angle than an analysis.

Despite President Trump’s assertions, Venezuela won’t just fade into economic irrelevance. The situation is unfolding through a different avenue.

Oil shock tax mechanism

Rising oil prices don’t systematically harm the economy in a straightforward way. The U.S. can handle ordinary price fluctuations. However, when demand adjustments lag, it leads to rapid price spikes and confusion. Sure, people still commute, trucks still move goods, and airlines continue to operate. But those price shocks can quickly trigger inflation concerns and create policy dilemmas.

So, what are the real risks? It’s the volatility and those sudden spikes that put pressure on decision-makers. They face tough choices: either acknowledge the inflation issues, risking expectations spiraling out of control, or tighten policies to maintain credibility, potentially leading to economic slowdowns. The lessons from the 1970s show what happens if the Fed misjudges: prolonged stagflation with unemployment soaring. On the flip side, the early ’80s revealed the tough toll required to correct those mistakes: a nasty recession. Things have calmed down since, but the pattern persists — shocks lead to inflationary pressures that force the Fed to react more aggressively than they might want.

When viewed this way, the Venezuelan dilemma isn’t just about how many barrels can be produced in the near future or figuring out reserve volumes. Sure, Venezuela boasts impressive reserves on paper. The real question is whether it can become a reliable and investable source—something that involves a market operating under enforceable contracts, which we hope expands and becomes trustworthy.

This perception alters risk pricing. Reserve capacity feels less transparent than before. Sure, shale production is meeting demands, but it isn’t on a crisis timeline. OPEC+ can manage production, but so can its member nations. Thus, the market reacts to every fluctuation as if it were a permanent situation. If investors can visualize genuine reactions, they won’t panic as easily. This dynamic suggests increased supplies from the Western Hemisphere could balance out what’s happening in Russia and the Persian Gulf.

Plus, the physical distance between the Persian Gulf and Venezuela could soften the impact of regional disruptions. If trouble arises in the Middle East, it’s reassuring that vast reserves exist closer to home. Production from the U.S. and Canada is already making oil prices less vulnerable to instability in Iran. With Venezuela positioned as a stable and friendly nation, it can enhance energy security.

None of this demands that Venezuela operates like an oil powerhouse overnight. The reality is complex. Much of its crude is heavy, and there’s a pressing need to upgrade aging infrastructure, which will take tens of billions. Most importantly, there needs to be an institutional mindset that views private investment as a sustainable commitment, rather than a fleeting favor. In the short term, Venezuela’s economic outlook likely hinges on its military leadership’s motivations. Embracing the new reality of Donroism is crucial.

The institutional aspect also ties into timing. Even with a “successful” reset, it’s unlikely Venezuela would suddenly pump millions of barrels per day. A more realistic expectation would be a gradual production recovery, perhaps just hundreds of thousands of barrels per day each year. This gradual increase makes sense over time, but it won’t lead to an immediate price drop.

Conversely, the short-term pricing scenario could take a surprising turn. One subtle but impactful possibility is that U.S. actions in Venezuela might prompt defensive measures in other regions, especially China, which would be inclined to interpret geopolitical unrest as a reason to boost its strategic oil reserves. Even with adequate market supply, the desire to stockpile could push oil prices upward. This is the reality we’re in right now. There’s plenty of oil available, but geopolitical tensions always require a bit of insurance.

Now, consider what this signifies. If China chooses to ramp up its purchases, it will bolster the fundamental outlook. The Chinese government is stockpiling oil due to the same concerns driving a fear premium in the market: the supply structure is precarious. When real disruptions, like Middle Eastern flare-ups or sudden OPEC production decreases, happen, there are no dependable swing producers to soothe market nerves. China’s accumulation signifies Venezuela’s vulnerabilities but could ultimately counterbalance those weaknesses. Markets don’t need Venezuela to flood the market with oil. What they require is for Venezuela to be a nation that can be trusted. In future crises, the focus must shift from “How high will oil prices go?” to “How quickly can we adjust supplies?”

Price stability is also good for U.S. production.

There’s a common temptation, especially among U.S. producers, to view increased foreign supply as a negative, particularly since lower prices can squeeze profit margins. This, however, is a short-sighted and sector-specific perspective. The backbone of the U.S. economy consists of households facing declining real incomes, businesses encountering unexpected cost increases, and central banks striving to manage inflation to prevent it from spiraling into a persistent issue. The oil crisis initially harmed the economy as a whole. Even producers themselves would prefer a stable environment where capital can be invested predictably. Boom-and-bust cycles lead to overinvestment during highs and liquidation during lows. Volatility functions as a hidden tax.

Discussions about “cheap oil” miss the mark. Thanks to President Trump’s strategies and the American response to the Democratic Party’s negative stance on fossil fuels, we’ve arrived at a stage of affordable oil. The broader benefit is fewer instances in which disruptions to supply lead to inflation spikes, which can trigger a confidence crisis and a recession—essentially, the perfect storm that transforms a manageable economic downturn into something far worse.

Consider the revived Venezuela as a safety feature—like a seatbelt or airbags. You don’t invest in them to enhance the ride, but rather to be prepared for conflicts ahead, which can be tedious. It’s a dichotomy between fear and catastrophe. A Venezuelan oil sector capable of attracting investments, securing contracts, and consistently increasing supply over time acts as an unexciting protective measure that minimizes the chances of the next geopolitical crisis resulting in inflationary pressures or recession-inducing responses.

Ultimately, we want Venezuela to serve as a buffer stock for global oil supplies. The removal of Maduro was merely the first step toward achieving that goal.