Low-Energy Fridays: How will the capture of Venezuela’s Maduro impact energy markets?

This week’s Low-Energy Fridays requires a caveat: While the situation in Venezuela following the U.S. capture of dictator Nicolás Maduro is evolving and uncertain, the next weeks and months will determine the long-term impacts of this action on energy markets.

Although various justifications for this action are up for debate (e.g., “narcoterrorism,” oil), it’s worth understanding why Venezuela is so significant to U.S. energy markets. At surface level, one could point to the country’s massive oil reserves; however, the fact that specific grades of Venezuelan oil are in high demand in the United States is what’s most important.

Viewed through an oil refining 101 lens, it’s important to remember that crude oil is a composite of various hydrocarbons and substances rather than a uniform product that can be turned into something else. The oil refining process begins with distillation, which separates the crude oil into its various components to be further refined into different products. While there are methods of producing more or less of one petroleum product over another from the same input, oil is generally an amalgamation of petroleum products that refiners separate into something usable.

Because the geologic conditions for crude oil production vary throughout the world, it tends to fall into an array of grades along two key spectrums: sweet versus sour (i.e., sulfur content) and heavy versus light (i.e., gravity, or density relative to water). The primary type produced in the United States is light and sweet, which produces the most gasoline and is the most sought-after. Heavy, sour oil produces less gasoline, is harder to work with, and is less sought-after in general.

One might assume this means Venezuela’s heavy, sour oil is less important to U.S. refiners, but ironically, the opposite is true. Because most U.S. refineries were built prior to the oil boom in the mid-2000s, larger upfront capital investments in refineries capable of processing the cheaper heavy oil rather than the more expensive light oil seemed the economical choice. Because the refining process involves moving oil as fluids, refineries need its consistency to reach a suitable “gravity” in order to operate efficiently. As a result, U.S. refineries typically require at least some amount of heavy crude oil within their refining process so that they don’t lose efficiency.

While it may seem bizarre, this arrangement is economically optimal under normal conditions, especially with the lifting of the oil export ban in 2015. U.S. oil producers can export their more valuable product, refiners import cheaper product, and, thanks to past capital investments, turn it into something more valuable.

Typically, Canada has been the largest source of heavy oil for the United States (and a major consumer of U.S. petroleum exports), while Venezuela has been an on-again off-again supplier to U.S. refiners. Their national oil company, Petróleos de Venezuela, S.A., was put under sanction in 2019, prohibiting U.S. imports of Venezuelan oil. Much of that shortfall was backfilled by Russia until its invasion of Ukraine in 2022, at which point then-President Joe Biden lifted sanctions on Venezuelan oil and some imports resumed. President Donald J. Trump then restored earlier prohibitions on oil imports when he took office for the second time.

Returning to recent events, it’s hard to know what the long-term effects of the capture of Venezuela’s dictator will mean for global energy markets just yet. If Venezuela manages a peaceful transition to democracy and returns formerly nationalized assets to American energy companies (and if America lifts existing sanctions), then investor confidence would increase. Should that happen, increased investment in Venezuelan oil production could temper the prices of petroleum products. Alternatively, if Venezuela does not transition to a democracy and sanctions remain in effect, then the increase in political uncertainty would have a deleterious effect on markets. Another unknown is how the Trump administration will handle negotiations with the interim Venezuelan government, including the oil transfer that could create near-term boosts for U.S. refiners but may not inspire the investments needed for long-term productivity gains.

There’s also a global angle to consider. Venezuela has a history of subsidizing oil-poor nations as a mechanism for trading political influence. Notably, Cuba—a nation with a long history of energy scarcity —has been a major recipient of these subsidies. With fewer energy options, some importers of Venezuelan oil may have to choose between finding an alternative supplier (e.g., Russia) and cultivating a warmer relationship with the United States as an energy source.

All that is to say that while Venezuela is significant to the energy industry, we must see how events unfold before determining how serious the long-term impact on oil markets will be. The mere presence of increased risk will likely manifest as a price increase on petroleum products in the near term.

Additionally, if history is any guide, we know that the post-operation handling of military interventions tends to impact outcomes more significantly than immediate tactical victories. Until we know whether Venezuela will smoothly transition to a democracy, investors may find it too risky to invest heavily in boosting Venezuelan oil production.