The US is gobbling up Venezuelan oil, but will it lower fuel prices?

When United States President Donald Trump announced “the biggest oil deal in world history” with Venezuela on August 28, he claimed it would “more than double” US oil reserves and “substantially lower gas prices for all Americans”.

Venezuela is home to the world’s largest proven oil reserves – an estimated 303 billion barrels, or about 17 percent of the global total, according to the US Energy Information Administration. But the country’s oil is heavy, sour crude and extracting and refining it is costly.

While US Gulf Coast refineries are able to process this type of oil from Venezuela, analysts have warned that, in reality, Washington’s deal with Caracas will not lower crude prices in the US in the near term.

What is in the US-Venezuela oil deal, and will it lower fuel prices in the US – or elsewhere?

What’s in the new oil deal between the US and Venezuela?

Last week, the Trump administration announced a deal that would give the US control of more than 65 billion barrels of Venezuela’s proven oil reserves. That is more than one-fifth of all of Venezuela’s known oil.

To do this, a White House fact sheet has revealed, the US is creating a private joint venture with North American Blue Energy Partners (NABEP), which is owned by billionaire Venezuelan businessman Alejandro Betancourt, an ex-ally of Hugo Chavez, the former socialist president.

NABEP is already the second-largest operator in Venezuela after US oil giant Chevron, which is also expected to expand its oil operations in Venezuela.

The deal will give the Pentagon’s Office of Strategic Capital a 35 percent stake in NABEP, which will “have reputable US auditors, lawyers, and advisors”, the White House said.

The White House said that “millions of barrels of new Venezuelan output will be processed through US refineries and pumped with American rigs and infrastructure, supporting billions in investment in the United States and thousands of jobs here at home”. The US will be guaranteed a right to buy 20 percent of the output at cost.

The joint venture with NABEP has capacity to produce about 200,000 barrels of crude oil per day, increasing US production as Iran’s blockade of the Strait of Hormuz has spiked global oil prices, including in the US.

Venezuela’s interim President Delcy Rodriguez welcomed the oil deal, which is also expected to add much-needed funds to the state’s treasury.

The creation of the joint venture will make it easier for NABEP to operate from Venezuela, which remains under US sanctions.

The US has been importing large amounts of Venezuelan oil since President Nicolas Maduro was captured in a US military operation in January this year. Maduro was flown to the US to stand trial on guns-and-drugs charges, while his vice president, Rodriguez, was left as interim leader. She has since facilitated US access to Venezuela’s oil industry and the US has lifted personal sanctions against her.

In August, US Under Secretary of Energy Kyle Haustveit said more than 500,000 barrels per day (bpd) is now moving from Venezuela to the US – some 40 percent of the country’s national output of 1.25 million bpd.

Have US crude prices fallen since the deal was announced?

According to analysts, US crude prices have actually risen since Trump announced the latest deal.

Johannes Rauball, a senior crude oil analyst at Kpler, the global trade intelligence agency, noted that before Washington’s agreement with Caracas, US West Texas Intermediate (WTI) crude was trading about $83-$86 per barrel, while Brent crude – the global benchmark for oil prices – was hovering between $85-$88 per barrel.

“Since then, prices have moved even higher – with WTI pushing past $90 and Brent topping $95 per barrel – driven up primarily by heightened geopolitical risks and acute Middle East supply disruptions around the Strait of Hormuz,” he told Al Jazeera.

On Thursday morning (06:00 GMT), WTI crude futures had climbed by 61 cents, or 0.7 percent, to $90.83.

Why aren’t US crude or gas prices coming down?

According to Rauball, while the US-Venezuela deal may improve supply and, therefore, market sentiment in the longer term, near-term prices are unlikely to be impacted because of the practical difficulties of extracting oil from the ground in Venezuela.

“It will take years for this deal to result in a meaningful ramp-up in production due to Venezuela’s severe physical bottlenecks and ageing infrastructure – most notably degraded pipeline gathering systems, insufficient electrical grid support, and a lack of specialised crude upgraders,” he said.

As far as US fuel prices are concerned, he added, US refiners are already operating at maximum capacity to meet demand both domestically and abroad, leaving little room to scale up further.

“While access to heavier Venezuelan crude supplies offers the specific feedstocks US Gulf Coast refiners require, it will not translate into near-term price relief at the pump given these refining throughput constraints and ongoing operational delays,” he said.

Tracy Shuchart, senior economist at futures trading platform NinjaTrader, wrote in a post on X on August 29: “Everyone cheering the Venezuela deal thinks a flood of cheap oil is about to hit and pull gas prices down. It isn’t.

“Venezuela pumps about 1.2M bpd right now, up from just under a million. That gain came mostly from Chevron ramping up existing wells after sanctions were lifted, not from new drilling. The easy barrels are already back. The reserve number is a stock that will take decades to convert to flow,” she said.

What does this deal mean for global oil prices?

Iran’s closure of the strait, through which more than 20 percent of global oil and natural gas is shipped in peacetime, has upended global energy markets.

Shortly after the strait was closed in early March, the price of Brent crude oil rose above $100 per barrel. Before the war, it was trading at about $66 per barrel. On Thursday, Brent crude rose $1.03, or 1.1 percent, to $95.68 a barrel at 06:05 GMT.

According to Kpler’s Rauball, the immediate impact of the US-Venezuela oil deal on global crude prices remains “neutral” as current markets remain focused on short-term geopolitical supply shortages caused primarily by the closure of the Strait of Hormuz.

“Over the longer term, a successful ramp-up [of production] will gradually increase the overall availability of Venezuelan crude in the global market. This added volume will help increase crude supply globally over time, ultimately exerting persistent downward pressure on global oil prices further down the line,” he said.

But there are several reasons why an increased supply of Venezuelan oil ultimately cannot make up for the reduced supply of oil from Gulf producers which used to be shipped through the Strait of Hormuz.

Frederic Schneider, a nonresident senior fellow at the Middle East Council on Global Affairs, said: “The US-Israeli war on Iran took at least 10million barrels a day off the market through Hormuz. Venezuela cannot replace that, also partly because it is a different grade, namely, heavy, sour crude which competes with other heavy imports (mostly Canadian and some Mexican) rather than substituting for the lighter Gulf oil.”

Hamad Hussain, a climate and commodities economist at the United Kingdom-based firm Capital Economics, also told Al Jazeera that developing oilfields in Venezuela requires significant amounts of investment and time before more crude could be produced and sold to global markets.

“Even in the long term, the potential for political instability and high costs involved could make investors wary of committing to oilfield projects in Venezuela. This could hold back the extent to which oil supply in Venezuela increases and, in turn, limit the downward pressure on crude oil prices over the coming years,” he told Al Jazeera.

Furthermore, only a few countries have refineries capable of processing the very heavy oil which Venezuela produces. These are primarily the US, China and India.

“Refineries in Europe are geared towards refining lighter grades of crude, so there would be little interest in importing oil from Venezuela there,” Hussain said.

“The heaviness of Venezuelan crude would be a bigger problem for President Trump’s stated aim to refill the US Strategic Petroleum Reserve (SPR) with crude from Venezuela. This is because storing oil from Venezuela in the SPR could cause damage to the underground caverns.

Global crude prices will, therefore, also continue to depend heavily on how the US and Israel’s war on Iran, which has paralysed the Strait of Hormuz, plays out.

So who will really benefit from this deal?

US oil companies are likely to earn the biggest gains from this deal. After the deal was announced late on Friday, shares in Chevron, currently the only big US oil company active in Venezuela, rose 2.2 percent to $206.20 on the Dow Jones index of publicly listed companies.

On Tuesday, US Energy Secretary Chris Wright said several oil companies from the US and other countries are also expected to sign oil deals in Caracas this week, which will increase Venezuela’s crude oil production. These are expected to include Chevron, Italy’s Eni, India’s ONGC, Colombia’s GeoPark and the US’s GE Vernova.

Venezuelan oil production peaked above 3 million bpd in the late 1990s but plummeted after that due to lack of investment, mismanagement and US sanctions. In recent months it has been about 1.1 million to 1.2 million bpd, rising slightly since President Nicolas Maduro was abducted by US forces in January.

Wright claimed that gas prices will fall for US consumers as and when US oil companies increase their investments in Venezuela.

“The investment in these deals will massively grow available oil production, which will give downward pressure on oil prices, but the biggest kink right now in gasoline and diesel prices is refining capacity,” Wright told reporters in Venezuela, without giving any details about how refining capacity would be increased.

However, Schneider said he did not envisage many other oil companies rushing to invest in Venezuela’s oil industry. “The more fundamental problem is that the high-price shock earlier in the war has destroyed demand, which has put pressure on WTI,” he told Al Jazeera. “With a highly uncertain demand forecast and Gulf oil coming back online at some point, no company wants to put $100bn into a country as risky as Venezuela,” he added.