Has Trump landed a dud with his Venezuelan oil play?

By Ian Verrender, ABC

Analysis: There's been uproar and condemnation aplenty over America's sudden assault on the once enshrined concept of national sovereignty, overthrowing eight decades of rigidly enforced global order.

Almost 35 years ago, George Bush Senior ordered US troops to lead a 42-nation strong United Nations force into Kuwait to defend the gulf state against an invasion by Saddam Hussein's Iraq.

Ostensibly, the first Gulf War was all about protecting the concept of national sovereignty. In reality, it was all about oil.

Last weekend, Donald Trump jettisoned that lofty ideal, justifying the capture of Nicolás Maduro and his wife on the grounds that Venezuela and its leadership posed an existential threat to US security.

While debate rages over the legality and the potential fallout from America's incursion there's been a quiet acceptance that, once again, it was all about oil.

The US president has done little to persuade anyone otherwise.

In addition to waxing lyrical over his brilliantly executed military operation, he's boasted about the riches that he expects to flow from the Latin American country, money that he will personally control.

Venezuela's interim leaders would turn over 30 million to 50 million barrels of oil, he announced on Wednesday our time via social media, which the US would sell at market rates instead of the heavily discounted rate it has been offloading its energy.

"And that money will be controlled by me, as president of the United States of America, to ensure it is used to benefit the people of Venezuela and the United States!" he said.

The not-so-subtle subtext is clear. America will become the global energy powerhouse. It's already the world's biggest oil producer, and by pulling Venezuelan oil into its orbit it will be able to control global energy prices.

But scratch just a little beneath the surface of all the bluster and it becomes apparent that Trump's play for Venezuela's oil riches may not be all it's cracked up to be.

He may have just landed a dud.

No price control without oil flow

Even before the smoke had cleared over Caracas, global leaders, financial market types and the media quickly became fixated on oil.

Venezuela, we're consistently told, has the world's biggest oil reserves, bigger than Saudi Arabia's.

America's grab for control could deliver it the same kind of market power flexed by the Saudis and its OPEC allies back in the Seventies.

OPEC reshaped the global economy 50 years ago when it pushed through two massive price hikes, creating an inflation spike throughout the developed world.

That world no longer exists. We are now awash with oil, with prices currently sitting around half the levels of 15 years ago.

Controlling Venezuela's oil reserves would only deliver power if it was a major global supplier.

But it isn't. The country's corroding oil infrastructure is in disarray, it produces only around a third of what it once did, and its oil is largely unwanted because it is heavy, difficult to refine and loaded with sulphur which it is costly to extract.

Only a handful of high spec refineries on the US Gulf Coast along with new facilities in India, the Middle East and China can process it.

Why two thirds of Venezuela's oil may be missing

Even its much-vaunted proven reserves of 303 billion barrels - the world's biggest - is open to question.

Why? Because proven reserves are not static. They change constantly. That's because the definition is based upon the amount of oil that can be extracted economically using current technology.

So as the oil price shifts so too does the proven reserve. Higher prices make difficult-to-access resources a money making proposition. Lower prices have the opposite effect.

And that is where the problem lies.

According to Adi Imsirovic, a lecturer in energy systems at Oxford University, the number bandied about as Venezuela's proven reserves date back to 2008 when the price of oil was fetching $US140 (NZD$244) a barrel.

It's now under $US60 (NZD$104) a barrel. That's partly because the US has ramped up production under Donald Trump's "drill baby drill" policy, which has lifted US oil and gas production and exploration.

On top of that, Venezuelan oil cops a $US25 (NZD$43) discount, partly because of US sanctions but mostly because it is expensive to refine.

Oil demand forecast to slow, then crash

While oil is an essential ingredient in everything from foodstuffs to pharmaceuticals, its value primarily is determined by its demand as a fuel.

Overwhelmingly, it is used for transport, and according to the International Energy Agency more than 25 percent of total oil demand is used to power privately owned cars and vans.

While some politicians dismiss the impact of emissions on climate change, a revolution is currently underway among the world's biggest automobile manufacturers.

Almost all have shifted production away from internal combustion engines to either pure battery powered vehicles or hybrids.

While the transition has been slower than expected, it is clearly underway, led by China, which ultimately will result in a drastic drop in demand for oil, creating an even bigger glut of oil.

A study by Bloomberg New Energy Finance argues that electric vehicles already have dented fuel demand but will slash demand for petrol by 2040.

That would send prices even lower, and potentially erode out much of what remains of Venezuela's proven reserves.

As this graph from the IEA shows, the role of fossil fuels is set to decline sharply after 2030.

Some in the Trump administration believe the shift towards artificial intelligence and data storage will spawn a massive lift in demand for energy that will not be met by renewables.

But even if that comes to pass, it's more likely that coal, and not oil, would be used to fill the breach.

Venezuela's economy, meanwhile, has been plundered by the Maduro regime, particularly its oil income.

During his reign, profits have been siphoned off, Maduro's wife has become extraordinarily rich and the country's oil infrastructure has been left to decay.

How long it would take to get back up to speed is an open debate.

Donald Trump reckons it could be done in a little over a year. Others say it could take a decade and cost huge amounts of money.

For an industry already oversupplied and with demand forecast to drop sharply, that's a mighty big risk.

The US president, on the other hand, may not be looking that far ahead. He's here for a good time, not a long time.

-ABC