Venezuela's Oil Fantasies: A Case Study in the New Energy Economics

The strategic calculus for the U.S. operation in Venezuela rests on a fundamental economic disconnect. According to Nobel laureate economist , this is not a war for oil, but a war for "oil fantasies". His analysis cuts to the heart of the matter: the vast wealth President Trump envisions simply does not exist in a form that can be profitably extracted and sold in today's market. This is a miscalculation rooted in a discredited narrative of oil abundance.

The foundation of that narrative is Venezuela's claimed 300 billion barrels of proven reserves. Krugman points out this figure is not the result of major new discoveries, but a government reclassification of heavy oil under . This technical adjustment inflates the number but does nothing to change the physical reality of the resource. . The oil is overwhelmingly extra-heavy crude from the Orinoco Belt, which is notoriously difficult and expensive to extract and refine. Its economic value is inherently discounted.

This sets up a stark price mismatch. The breakeven cost for U.S. shale oil, which has reshaped global supply, . This is the level at which new U.S. production is profitable and tends to anchor global price expectations. In contrast, . , the market is signaling that the current price environment cannot support the costly extraction of Venezuela's reserves. Any attempt to develop them would likely require significant subsidies, a shift Krugman notes in the administration's messaging from promises of profit to potential reimbursement for oil companies.

The bottom line is one of structural irrelevance. The promised windfall is a fantasy because the resource itself, in its current form, cannot generate economic returns at prevailing prices. The operation, therefore, appears less like a calculated economic move and more like a gamble on a narrative that the market has already rejected.

The Production and Market Reality Check

The administration's vision for Venezuela's oil is a plan built on sand. It demands a state that has never been able to translate its reserve claims into consistent output, and it seeks to force a geopolitical pivot that is economically and politically untenable.

The disconnect between Venezuela's massive reserve claims and its actual production is a critical flaw. The country's oil output has never kept pace with its massive reserves, a gap that Krugman argues reinforces the view that these claims are largely fictional. This isn't a simple underperformance; it's a structural failure. The Orinoco Belt's extra-heavy crude is expensive to extract and refine, selling at a discount. The physical reality of maintaining and scaling production in a state with a collapsed infrastructure is a monumental, costly task that no government has successfully managed in recent decades.

The administration's demand for Venezuela to cut ties with China, Iran, Russia, and Cuba is a non-starter. This is not a negotiation between equals. The Trump administration has framed this as a condition for economic survival, but the targeted state is a client of those very allies. The U.S. is asking Caracas to abandon its primary sources of investment, technology, and political support, which have been crucial for its survival. This demand ignores the geopolitical calculus that has driven Venezuela's foreign policy for years. For a state reliant on those partners for economic lifelines, severing these ties is not a viable option.

Finally, the plan to control and sell 30-50 million barrels of sanctioned oil faces significant legal and market hurdles. The administration's stated intent to sell tens of millions of barrels of its oil that has already been extracted and control the proceeds is legally ambiguous. The U.S. lacks a clear legal basis to seize and sell another nation's oil reserves, especially when the proceeds are to be controlled by the President personally. More fundamentally, the market itself presents a barrier. The global oil market is already grappling with oversupply concerns, and the recent political upheaval in Latin America is seen as a potential source of downside pressure on the commodity. Introducing a large, politically motivated supply of discounted Venezuelan heavy oil would likely depress prices further, undermining the very economic rationale the administration is pursuing.

The bottom line is that the administration's demands are disconnected from both the physical realities of Venezuelan oil and the geopolitical dependencies that define its survival. The plan to monetize these reserves faces a perfect storm of production constraints, political infeasibility, and market resistance.

Financial and Geopolitical Implications

The administration's approach carries severe financial and geopolitical risks that far outweigh any speculative gains. The promise to reimburse U.S. oil companies for investments in Venezuela is a classic case of political fantasy lacking any legal or financial foundation. As economist Paul Krugman noted, this proposal is "without basis in reality" and amounts to a plan to "subsidize oil-industry investments in Venezuela at U.S. taxpayers' expense". There is no existing legal mechanism to compel such payments, and the entire premise rests on the unproven assumption that a profitable Venezuelan oil sector will emerge. This creates a direct fiscal liability with no corresponding asset, a recipe for political and economic backlash.

More critically, the operation risks deepening regional instability and provoking retaliatory actions. The U.S. has effectively declared a unilateral campaign against a sovereign state, capturing its president and threatening its institutions. This unilateral military action, regardless of its legal justification, is a profound affront to international norms. It invites predictable pushback from Venezuela's key allies, including China, Russia, and Iran, who have long provided critical investment and political cover. These nations are likely to view the strike as an existential threat to their own geopolitical interests, potentially leading to coordinated economic sanctions, diplomatic isolation of the U.S., or support for destabilizing activities in Latin America. The risk of a broader regional conflict is now materially elevated.

Perhaps the most immediate and dangerous flaw is the complete absence of a post-capture governance plan. The military operation succeeded in capturing Maduro, but it failed to dismantle the state apparatus he controlled. As one analysis noted, the administration's plan for governing Venezuela is either a "great secret" or "total improvisation". The interim leadership Trump claims to have secured, Vice President Delcy Rodríguez, has already rejected his authority, declaring Maduro the legitimate president. This creates a power vacuum where the old regime's loyalists-military officers, security chiefs, and party officials who have enriched themselves-still control the levers of power. The risk is not a democratic transition, but a continuation of the existing regime under a different name: "Madurism without Maduro." Without a credible, internationally backed plan to establish legitimate authority and rebuild institutions, the operation sets the stage for prolonged chaos and a likely resurgence of the very dictatorship it aimed to eliminate.

Catalysts, Scenarios, and Key Watchpoints

The success or failure of this gambit hinges on a series of forward-looking factors that will test the administration's political and economic calculus. The immediate post-capture period is a high-stakes race against time, where the establishment of credible authority and the management of Venezuela's oil will be the ultimate deciders.

The first and most critical watchpoint is the formation of a functional interim government. The administration's plan, as outlined, is to run Venezuela through Vice President Delcy Rodríguez as a U.S. caretaker. Yet, she has already rejected the authority of the captured Maduro, declaring him the legitimate president. This creates a dangerous power vacuum where the old regime's loyalists-military officers, security chiefs, and party officials-still control the levers of power. The scenario of "Madurism without Maduro" is a real and immediate risk. For the oil plan to work, this interim leadership must demonstrate not just loyalty to Washington but the administrative capacity to manage the state oil company, , and oversee production. Any sign of internal resistance or a breakdown in control would signal the plan's fundamental flaw.

Second, the actual production and cost dynamics of Venezuelan oil will provide the economic reality check. The administration's vision depends on selling tens of millions of barrels of already-extracted oil. The key variables are the volume that can be mobilized and the cost of bringing it to market. This is especially critical for the heavy crude from the Orinoco Belt, which requires expensive extraction and refining. The breakeven cost for this oil is , . If the interim government cannot secure a profitable sales agreement or if the logistical costs of moving the oil prove prohibitive, the promised revenue stream evaporates. The market will judge the quality and cost of this supply, and any attempt to force sales at a discount would likely depress prices further, undermining the entire economic rationale.

Finally, international reactions will be a major source of pressure and potential disruption. The U.S. demands that Venezuela cut ties with China, Iran, Russia, and Cuba are a direct challenge to the geopolitical alliances that have sustained the Maduro regime. The response from these key allies is a critical uncertainty. China and Russia, in particular, have significant investments and political stakes in Venezuela. Their reaction could range from diplomatic condemnation to coordinated economic sanctions or efforts to support a rival government. The administration's plan to control the proceeds from oil sales is legally ambiguous and could be seen as an act of economic aggression. Any move by these powers to circumvent U.S. demands-through alternative trade routes, financing, or political backing for a competing authority-would directly threaten the administration's control and its ability to monetize the captured reserves.

The bottom line is that the operation's outcome is not predetermined. It will be determined by the interplay of these three forces: the fragile legitimacy of the interim government, the harsh economics of Venezuelan heavy oil, and the geopolitical pushback from the region's established powers. The administration's initial military success is just the opening act. The real test begins now.