Trump's Dream Of Venezuela Oil Riches May Be Just An Expensive Fantasy

The following is part of a post by economist Paul Krugman: 

During his triumphalist press conference after the abduction of Nicolás Maduro, Trump never used the word “democracy.” He did, however, say “oil” 27 times, declaring, “We’re going to take back the oil that, frankly, we should have taken back a long time ago.”

Even so, whatever it is we’re doing in Venezuela isn’t really a war for oil. It is, instead, a war for oil fantasies. The vast wealth Trump imagines is waiting there to be taken doesn’t exist.

You may have heard that Venezuela has the world’s largest oil reserves — 300 billion barrels. You probably don’t know that Venezuela’s reported oil reserves tripled while Hugo Chavez was president. This increase, from roughly 100 billion to 300 billion barrels, didn’t reflect major new discoveries or exploration. Instead, it reflected the Chavez government’s decision to reclassify the country’s Orinoco Belt heavy oil as “proved” — oil that can be recovered with reasonable certainty under existing economic and operating conditions. (see chart above)

As Torsten Slok of Apollo, who recently made this point, notes, “Much of the oil is extra-heavy, which has low recovery and a high cost to produce.” This suggests that Venezuela’s claims to have immense usable oil reserves were politically motivated hype.

This view is supported by the fact that the huge increase in Venezuela’s reported oil reserves wasn’t followed by a surge in production. On the contrary, Venezuelan oil production soon plunged.

Plunging production was associated with a steady degradation of Venezuela’s oil infrastructure, which would take years and many billions of dollars in investment to restore. Given these costs as well as political instability, major oil companies clearly aren’t enthusiastic about the idea of sinking money into Venezuela.

On Monday Trump suggested that he might reimburse oil companies for investment in the nation he claims — with no basis in reality — to control, reimbursing them for their outlays there. That is, we’ve gone in a matter of days from big talk about huge money-making opportunities to a proposal to, in effect, subsidize oil-industry investments in Venezuela at U.S. taxpayers’ expense. . . .

At a deeper level, Trump’s apparent belief that oil in the ground is a precious asset is decades out of date.

Oil prices are low mainly because of increased supply due to fracking, and the potential for more fracking is likely to keep them low for the foreseeable future. The breakeven price of fracked oil — the price at which it’s just profitable to drill a new well — is around $62 a barrel in the most important U.S. producing regions. While global oil prices fluctuate, they tend to return to that breakeven price after a few years.

And $62 a barrel wouldn’t be high enough to make investing in the Orinoco Belt, where the estimated breakeven is more than $80, profitable even if there were no political risks.

In short, Trump’s belief that he has captured a lucrative prize in Venezuela’s oil fields would be an unrealistic fantasy even if he really were in control of a nation that is, in practice, still controlled by the same thugs who controlled it before Maduro was abducted.