How U.S. Venezuela operation will impact global oil markets

1. Venezuela is a leader in reserves (17% of global reserves), not in flows (1% of global production). Oil reserves do not equal market control. Even if you count Venezuelan, Guyanese, and American reserves in one basket, the market is determined by flows, not reserves. 

"What matters is not the volume of oil in the ground, but how many barrels per day can be extracted stably and cheaply. Venezuela has chronic problems with this, and no change in political configuration will transform reserves into market leverage."

2. The problem is that Venezuelan oil is mostly heavy and extra-heavy. This is a narrow market segment with a limited number of refineries, high costs, and weak supply flexibility. There is a lot of heavy oil in the world (Canada, Venezuela, Mexico, partially the Middle East). At the same time, demand for it is growing slowly, and sometimes falling, because: 

• refineries are expensive to modernize (and now a single drone is enough to knock one out); 
• it's easier to work with light oil;
• electrification and declining demand for fuel oil hit precisely the "heavy" fractions. Using it even for "fine-tuning" the global oil price is about as realistic as regulating electricity prices through 19th-century coal prices. Not to mention any more substantial impact on the global market.

Source

About the author: Viacheslav Butko, economic advisor to the Kyiv Security Forum, managing partner of the Thomson&French investment project.

The editorial board does not always share the opinions expressed by blog authors.