How Will Prospective Venezuelan Oil Production Affect the U.S. Petroleum Market?

D onald Trump’s stated intent to have U.S. oil companies repair Venezuela’s crippled oil production infrastructure and to “take the oil” as “reimbursement for the damages caused us by [Venezuela]” is only one obvious sign that Venezuelan oil output eventually is going to increase. Venezuelan oil output declined precipitously from 3.2 million barrels per day in 2000 to just 900,000 barrels per day in 2024, a clear indicator of the potential for expanded output. But another signal that Venezuela’s oil output is set to spike is the fact that the country’s proven oil reserves, at 300 billion barrels, is among the largest in the world.

Venezuelan crude oil is somewhat heavier and higher in sulfur than West Texas Intermediate (WTI) crude oil, but they are direct competitors in the U.S. market, with both refined primarily in Gulf Coast refineries. The prospect of a sharp increase in Venezuelan output, even if years away, ought to put downward pressure on the near-term price of WTI. This is because market forces can be predicted to increase WTI output in the near term in order to capture higher prices now in the expectation of lower prices in the future, thus smoothing price fluctuations.

But futures prices for WTI have barely changed since Maduro’s capture last weekend. That suggests a market expectation that the Trump administration will attempt to shield U.S. oil producers from the downward price effects of its Venezuela policies. Such a move would be consistent both with Trump’s agenda on domestic energy production (“energy dominance”) and with the fact that the U.S. oil patch has been among the strongest supporters of Trump and his energy policies.

One option for Trump might be a new or expanded tax subsidy for domestic oil production. But that would require action by Congress, a time-consuming process fraught with the uncertainties attendant upon the congressional bargaining process. Such uncertainties could also put at risk other parts of the Trump policy agenda.

If there is one thing that we know about Trump, it is his overwhelming preference for the easiest route toward his goals. A new tariff on imported crude oil and refined products would be the obvious solution to protect domestic oil producers, to be justified on deeply dubious “energy security” grounds. “Energy security,” commonly defined as a pursuit of self-sufficiency in energy supplies, is little more than a slogan because no nation can limit U.S. access to foreign oil. The 1973 Arab oil “embargo” had virtually no effect at all; the U.S. purchased oil in the international market at the same (higher) prices as all other countries. The infamous gasoline lines and market chaos were created by the price and allocation controls, as was the case in 1979, when there was no embargo.

To Trump, such a tariff might seem simple, straightforward, and “beautiful,” but that would be a delusion, as it would create a two-price system in the petroleum market, with higher prices in the U.S. and lower ones overseas. The upshot would be intense political pressure from innumerable special interests demanding carveouts and exemptions from the tariffs because such subventions would be highly valuable. But the economic distortions of carveouts would be substantial: Consider for example the implications for competition if existing importers receive favors that new importers are denied. The evolving complexity of such a two-tiered pricing system would be staggering, as was the case during 1959–1973 when the U.S. imposed physical limits (quotas) on the amount of foreign petroleum that could be imported. This was, of course, a system with many similarities to a tariff.

The comedic highlight of the oil import quota program resulted from the “national security” rationale. Crude oil from Canada was not plausibly “insecure,” and so a complex “overland” exemption from the quota restrictions was implemented. That made officials in Mexico, and their allies at the State Department, extremely unhappy: Most Mexican oil at the time arrived by ocean tanker. But an exemption for Mexican oil would have also been problematic because it would have increased pressures to grant a similar exemption for Venezuelan oil.

And so a solution was contrived: The Brownsville U-Turn, an arrangement under which Mexican oil was shipped by ocean tanker to Brownsville, Texas, pumped into trucks that then drove into Mexico, made a U-turn, and then returned to the U.S., thus qualifying the Mexican oil for the same “overland” exemption. The Brownsville U-Turn was one of the small joys of life in a world in which ill-thought government policies inexorably lead private interests to seek special treatment. The ensuing adverse effects, whether intended or not, metastasize; big government becomes bigger still.

Trump may believe that he knows better than market forces how the Venezuelan oil sector ought to evolve. He may believe that by protecting U.S. oil producers, he is doing them and the American economy a big favor, as if the resulting distortions will not yield adverse effects. He may believe that Congress and a future administration will not find ways to capture the gains of oil protectionism for their own constituencies. But he would be wrong on all counts.