How Trump's Venezuela Gambit Exposes The Fiction Of Oil Scarcity

A strange meeting took place in Vienna, Austria, on the night of 11 October 1973, to set a new international oil price. It would rewrite the rules of the global oil game for the next half century.

On one side were the heads of the five largest oil majors, formally representing the interests of the West; and on the other side, founder delegates from the Oil Producing and Exporting Countries (OPEC): Venezuela, Saudi Arabia, Iran, Iraq, and Kuwait.

In the Middle East, the 1973 Arab-Israeli Yom Kippur war was raging, as furiously as the Arabs were raging against American military and political support to Israel. Talks in Vienna collapsed shortly after midnight. When the disappointed oil executives asked what would happen next, they were curtly told to "listen to the radio".

And sure enough, two days later, the radio solemnly announced that OPEC had raised the international oil price by 66 per cent; and that an oil embargo was now in effect on those countries which supported Israel.

This was the first oil shock, registered by one cartel of sovereign nations who produced 80 per cent of the world's oil, to counter another, much older cartel of largely-American oil companies, and their governments.

The failed meeting in Vienna marked the rise of OPEC as an identity-agnostic body with global heft (neither Venezuela nor Iran were Arab states), a gradual, irreversible, terminal decline of the oil majors' ability to dictate terms to OPEC nations, a weakening of the vice-like grip America had hitherto exerted over oil-exporting states, and, germane to our times, the first instance of a shortage of oil being "manufactured" in the midst of a glut.

This is truly ironic since OPEC was birthed in 1960 to counter a prevailing global oil glut, at a time when the concept of an international oil price was in tatters.

The tipping point was when the Soviet Union offered heavily discounted crude oil to India in 1959. This was an ignominy the West simply could not bear since all three major refineries in India then were owned and operated by major Western oil companies: Exxon (then called Esso/Standard Oil) and Burmah Shell in Mumbai, and Caltex in Vishakhapatnam.

The Middle East couldn't countenance this either because the oil to these refineries was, hitherto, sourced primarily from their region; and because a Soviet discount made it that much more difficult for Middle Eastern exporters to balance their budgets. So, the oil price had to be "set".

As a consequence of this tectonic shift in 1973, and accentuated later by the end of the Cold War, four further developments in oil dynamics evolved earlier this century.

First, America lost its traditional ability to set the international oil price sometime during the presidency of Barack Obama. Second, OPEC evolved into OPEC+ when ten non-OPEC oil producers, led primarily by a resurgent Russia, joined hands. Third, America, followed by Canada in relatively less limited measure, took advantage of advances in technology to open up vast, new, highly lucrative oil plays in North America, called tight sands, or more colloquially, "shale oil". And fourth, a number of countries, led by America, Qatar, and Australia, learnt to monetise gas exports in large volumes through its liquefaction and transport by ships, what we call Liquified Natural Gas (LNG).

Intriguingly, though, the parallels of half a century ago with our present times are remarkably close. And it is in this background that we must study American President Donald Trump's decision to invade the Venezuelan capital of Caracas, capture their president Nicolas Maduro, and take him back to America.

Historically, world crude oil consumption growth had always maintained a healthy, steady, rising trend. However, two major developments within the past two decades have impacted the old trend.

As the chart below shows, the first hit to consumption was supplied by the Global Financial Crisis of 2008, when both oil prices and purchases fell dramatically.

While consumption growth did recover within three years of the 2008 crisis, the trend was hit once again by the 2020 pandemic. Unfortunately, oil consumption growth didn't recover satisfactorily following the deep slump of 2020.

As on date, growth in demand has nearly plateaued since 2023, and current consumption levels are well below what they should have been presently if the pre-pandemic trend had continued.

The reasons for this growth stagnation are varied, and include large economies yet to recover from the battering they received during the pandemic, consequent sluggish retail demand by consumers (doubly hit during this period in many affluent regions by soaring inflation), a flood of electric vehicular alternatives, and severe disruptions in oil trade caused by Western sanctions on Russia since early 2022, when the war with Ukraine began.

The cumulative result of this long period was a new oil glut. There was more oil available for purchase on global markets than was being consumed.

Yet, throughout the tumult of the past two decades, three factors remained constant.

One, America continued to ramp up its domestic crude oil production from shale plays.

Two, a sinister policy of taking the bulk of oil production from selected exporters off the market, through regime change (colour revolutions) or designer domestic chaos, was followed ruthlessly without let up.

And three, the international oil price was kept at inflated levels to permit the expensive extraction of shale oil to be profitable for American operators.

OPEC+ didn't complain because a higher-than-rational oil price was heartily welcome anytime. A chart below tells the story:

The turning point was 2011, precisely the period when American shale oil production really took off. In one fell swoop, Libya, Syria, and Yemen descended into chaos, and the screws started to be turned on Venezuela. Effectively, 5 million barrels of oil per day was taken off the market.

A large portion of this shortage was covered by America, whose oil exports rose to around 3 million barrels per day by 2021, and then further to 4 million barrels per day by late 2022, when shortages caused by sanctions on Russia started to have a serious impact.

Between 2011 and 2024, the percentage of oil produced by America rose steeply from under 10 per cent to over 20 per cent. And, as a third chart below shows, it wasn't just middling exporters like Syria or Venezuela which fell victim to "glut geopolitics", but the large producers as well: Saudi Arabia, Russia, and Iran, who collectively supply about a quarter of the world's demand.

A chart below shows how America gained market share not just by taking sovereign producers off the market, but by eating into the market share of the big three exporters as well.

Note how the Saudi percentage of global production (yellow line) declines from 2014. Note how Iran's (orange line) curve dips from 2011, revives briefly courtesy the 2015 nuclear deal, and then dips again. The bulk of Iran's export revival in recent years is thanks to China, and this has offset India's ceasing of Iranian oil imports from around 2018-19.

But that's not even half the story.

The real story is what the chart above would look like if the vice-like grip of Western glut geopolitics were ever removed. Simply put, the facts are these: Iran has the reserves and the infrastructure to double oil output. Saudi Arabia can increase production by 50 per cent, and even double that if it so chooses. Even Iraq, with a reserves-to-production ratio of 100 years at its present production rate of slightly under 5 million barrels per day, too could significantly ramp up oil output if it were allowed to.

The bottom line is that Saudi Arabia, Iran, Russia, and Iraq can supply a little less than half the world's crude oil demand for the next decade or two, if favourable geopolitical conditions were to exist. And all of that could happen at a fraction of the cost it takes to profitably produce a barrel of American shale oil.

Now, having reviewed the lay of the oil patch, the question to be asked is this: can the Donald Trump version of glut geopolitics work? Can America create and maintain a fiction of oil scarcity in an environment defined by the reality of oversupply and feeble demand growth?

In this century, American presidents starting with George W Bush learnt that increased exploration and development activity in the petroleum sector could do more to boost the economy than anything else.

New, large-volume drilling and production of both oil and gas from shale plays provided large-scale employment, generated revenues, and exports of shale oil and gas was a brilliant lever for reducing trade deficits. All they had to ensure was a steady, growing export market share, a whittling down of competitors, and a high, profitable international oil price. Just the investments in LNG terminals alone would keep them in clover for a long time to come.

But the results were patchy.

Obama benefited the most. Trump, in his first term, took matters forward by getting India and China to start buying American oil and gas. Biden tried to take these developments to the next logical level by seeking to establish his country as the primary energy provider to Europe.

As Swarajya correctly predicted in 2021 itself, it was a major gamble doomed to fail from the start, not least because of Biden's policy myopia and self-contradiction, of needing to placate his Democratic Party's powerful environmental lobby by vilifying the oil companies. You cannot run with the hares and hunt with the hounds at the same time.

Trump, in his second term, signalled a forceful recovery from Biden's cluelessness in his inauguration speech by invoking the oilman's mantra: "Drill baby drill".

Unfortunately for him, the oil industry failed to respond enthusiastically, and the domestic onshore oil rig count, the strongest barometer of activity in the American oil sector, declined to record lows instead of rising. As a result, there is no way America will be able to maintain present levels of oil production from shales if the replenishment drilling rate does not double, at the very least, very soon.

Yet again, unfortunately for Trump, this is where the proverbial you-know-what hits the fan, for a number of reasons.

One, a major change in the past half century, propelled by increasing oil supplies, the growth of Asia, and weakening demand, is that where once global clout rested with the major oil-exporting nations, that same clout is now commanded by major importer nations. China and India are today the two largest oil importers on the planet. They set the rules, in their national interests; and they are able to do so because they are both huge economies with powerful militaries.

Two, for much of the post-War era, Saudi Arabia has dutifully maintained its key role as a swing producer, cutting production to maintain supply and price stability whenever needed. But that sustained altruism has not earned them adequate gratitude from the West. Instead, they are still viewed in those quarters as little more than a giant market for goods and services, and as "them pesky Ay-rabs who should do as they are told, if they know what's good for them".

Well, there is breaking news: such a condescending attitude, stemming from a deeply colonial mindset, is approaching its shelf life soon.

An American-led visceral rupture with Russia over Ukraine marks the beginning of the end of the old colonial era. Saudi Arabia has about three decades in which to prepare itself for a post-oil age. And for that, Saudi Arabia will be increasingly forced to make strategic choices in collaboration with those large nations whose interests align with the Saudis.

After all, Crown Prince Mohammed Bin Salman doesn't refer to Prime Minister Modi as his brother without due reason. In which case, the time may not be far when Saudi Arabia is forced to open the oil taps and cut prices (it has already declared discounts for selected Asian partners).

Three, India is very definitely a fly in the American ointment. Once again, discounted Russian crude sales to India are making mayhem in the international markets. But the question is, how far can Trump push India using the threat of tariffs before India finally stops caring?

Four, Trump's decision to dramatically abduct the Venezuelan President and then take control of the routing of Venezuelan oil exports is a serious conflict of interest with China.

Until the abduction, China used to offtake anywhere between 65-85 per cent of Venezuelan crude, which amounts to around 7-10 per cent of total Chinese oil imports. That is a significant figure which, from a strategic standpoint, China simply cannot afford to be beholden to American sufferance under any circumstances.

They will have to act and react since a strategic pact between Venezuela and China was signed only very recently.

Now add on America's threats towards Iran. Almost all of Iran's crude oil output goes to China. In addition, while neither government will confirm or deny this, it is an open secret that over a million barrels of low-grade Iranian oil is shipped daily to a large number of Chinese teapot refineries. These are relatively tiny plants which refine this crude at attractive profit margins, to the extent that, collectively, they offer a healthy internal competition to China's mega grassroots refineries.

Thus, from a Chinese standpoint, American actions on Venezuela, and the threats on Iran, smack of rank mercantilism, quite literally with the old colonial gunboat diplomacy to boot.

To them, irrespective of whatever flowery vocabulary American diplomats may invoke, approximately a fifth of Chinese oil imports now runs the risk of being subject to a blockade. And Beijing will not take this lying down.

Five, the abduction of Maduro was, in one sense, an act of desperation by Trump to try and get the American oil companies to play along. A sop: "Here, I'm giving you a whole country to go play in and make money from".

The cherry on top was provided by American Energy Secretary Chris Wright. He declared at a recent Goldman Sachs press conference that American companies would supply the necessary diluents for the extraction of heavy Venezuelan crude, along with American-made parts, services, and equipment to keep production going.

Apart from the fact that statements like these have the same foul odour as those that spread when large American oilfield services companies were awarded contracts in the Gulf before the Gulf Wars began, it also proves that Trump, frustrated with the lack of activity in the American domestic petroleum sector, is now forced to offer foreign oil fields to these same companies.

So much so that the CEO of Exxon bluntly stated that Venezuela was un-investable.

Trump's response was to churlishly declare that Exxon would find itself cut out of the Venezuela pie. That made no sense! Why would he warn a CEO who doesn't want to invest in Venezuela that his company would not be permitted to invest in Venezuela? What a ridiculous situation. If this doesn't prove the existence of a global oil glut, then nothing will.

To make matters worse, the days of easy shale oil are slowly winding to a close in America. The sweet spots are getting smaller and rarer.

The American rig count is down quite simply because oilmen know what the White House seems incapable of comprehending: that increasing domestic shale oil production runs the parallel risks of America being unable to maintain an adequately-high oil price, access to markets, and the definite possibility that the cost of extraction in requisite volumes might turn unprofitable, especially if oil prices were to decline by even a bit.

Six, and lastly, there is new oil and LNG coming on to the market (not to mention major stalled projects like the one in Yemen) from nations as varied as Guyana, Tanzania, Mozambique, and even potentially Uganda. How is America going to tackle this? Can it? It is doubtful.

Thus, in conclusion, we see that the absurdities of the present situation are mounting, making this grand plan untenable. A legitimate, representative international oil price hardly exists anymore, except on paper.

On one hand, the American Treasury Secretary openly says at Davos that China buys more Russian oil than India but tariffs were imposed only on India. On the other hand, Trump is faced with a Hobson's choice of either trying any which way to trim the trade deficit with India or securing his strategic QUAD grouping with India, Australia and Japan. But he can't have both at the same time.

What is to prevent India from resuming crude offtakes from Iran if pushed too hard? Where would America's India, Iran, and China policies be then?

Sadly, though, by his erratic actions, Trump is pushing his wonderful nation into a surreal era immune to criticism or mockery. The more he moralises about Venezuela, the more he sounds like a vuvuzela.

And these actions, in turn, may very well force the bonding together of countries to collectively contest this upheaval, including sworn enemies like India and China. It has happened before. It could happen again.