Regime Change, Sour Crude, Petrodollars, and Restacking the World Order

The U.S. invasion of Venezuela and the capture of its president and first lady have dominated international news. As with most matters of such significance, many nuanced issues provide a framework for better understanding what is happening and why. In this column, I would like to focus on the more complex and less-reported aspects of the evolving situation.

The Oil

President Trump has dropped any pretense that oil was not the driving factor in his decision to abduct the president of a sovereign nation and move for regime change. Since then, much has been made of Venezuela’s oil reserves, the type of oil the country possesses, and what it could mean for both American and international interests.

Venezuela has more proven oil reserves than any other country in the world, including Saudi Arabia. What makes Venezuelan crude distinct is that it is almost exclusively of the heavy, sour variety. This denser, lower-gravity crude oil is more viscous, and it is often used to produce lower-value end products, such as asphalt and fuel oil. Its viscosity and high sulfur content make it more costly to refine into higher-value products such as jet fuel and gasoline.

In 2007, former Venezuelan president Hugo Chavez nationalized the country’s oil fields, causing many Western oil companies to lose significant investments. Most looked to western Canada, which also has substantial reserves of heavy crude, as Russia is the other major holder of heavy oil reserves and suffers from both political instability and frequent sanctioning. These oil companies have since made significant infrastructure investments in Canada.

It should be noted that the United States has something of a mismatch when it comes to refining capacity. Most US refineries are located along the Gulf of Mexico and are designed to process heavy, sour crude oil. The development of hydrofracturing technology led to a domestic oil renaissance. However, oil extracted by this method comes out very light and sweet, making it unsuitable for most of these refineries. Heavy crude from Venezuela could help keep these refineries at capacity.

While the Trump administration has implied that US companies are eager to enter Venezuela, industry analysts disagree, noting that an estimated $100 billion in infrastructure upgrades will be necessary to make such investments viable. Given the uncertainty of the country’s long-term political stability and that such operations would compete with their Canadian interests, thereby lowering profitability on both fronts, it is not a terribly attractive investment, especially given that oil prices are already relatively low.

It's also worth noting that it is very expensive to extract oil via fracking, which means that if a large oil glut drops prices below a certain threshold, many of those operations will become unprofitable and go offline. The fact that oil input costs vary so greatly, yet are sold on the same global market, means that only super-high prices are conducive to full extraction capacity, which is then immediately offset by increased supply. Hence, the old saying that you can't drill your way to low oil prices and the oft-added, you can only recession your way to them. 

The repressive nature of the Maduro regime has also resulted in a significant brain drain of engineers and other experts vital to the industry. Reports of Venezuela’s oil sector describe a system that is almost held together with duct tape, as the remaining experts live in camps on the drill sites, working under military supervision for very little money. Again, reversing this would require significant investment from Western oil companies, along with costly security guarantees from the United States.

The Petrodollar

As I’ve written many times before, you really cannot understand American geopolitical machinations without understanding the vital importance of the petrodollar. The petrodollar system is the global practice of pricing and trading oil exclusively in U.S. dollars. This was put in place following the collapse of the Bretton Woods system in 1971, when the U.S. ended the dollar's convertibility into gold. The end of the gold standard caused global currency instability, and the OPEC oil embargo that followed the 1973 Yom Kippur War saw oil prices quadruple.

This created massive trade surpluses for oil-exporting nations, particularly Saudi Arabia. An agreement between the Saudis and the United States saw the U.S. trade military protection and arms sales to Saudi Arabia, which agreed to price its oil exclusively in U.S. dollars and to reinvest surplus revenues into American financial assets, such as Treasury bonds. As the Saudis effectively control OPEC, the arrangement spread to its other members, creating an artificial global demand for U.S. dollars that has allowed our country alone to run massive deficits in a fiat currency without triggering economic catastrophes.

With the dollar as the de facto world reserve currency, oil-exporting countries have reliably invested their revenues into global financial markets, particularly in the U.S., due to the dollar's widespread acceptance and the truly massive size of American capital markets. This is known as petrodollar recycling, and much of the oil-producing nations' surpluses flow into not only U.S. Treasuries, but stocks, bonds, and other investments, which helps finance those deficits while keeping borrowing costs artificially low.

I cannot stress enough how vitally important this is to the U.S. economy and how incredibly painful it would be for Americans were the petrodollar system to collapse. At the very least, we would see a deep recession (more likely something akin to the Great Depression). Stripped of the ability to spend money into the economy to stimulate it once countries stopped purchasing our debt at artificially low interest rates, and, as politically unlikely as it is that the U.S. government would tax great concentrations of wealth, our leaders would likely revert to a painful level of severe austerity that could trigger a death spiral for the entire economy.

While challenges to the petrodollar system have arisen, they have largely failed, mostly due to the absence of an alternative currency with the acceptability, convertibility, size, and liquidity of U.S. financial markets. However, the rise of BRICS, along with monetary tools such as cryptocurrencies and stablecoins, has made the threat all the more viable. BRICS is an informal grouping of emerging economies including Brazil, Russia, India, China, and South Africa. However, the recent additions of countries that include Saudi Arabia, Iran, Egypt, and the United Arab Emirates have led many analysts to view the petrodollar as much more vulnerable.

While the U.S.-Saudi relationship may still appear strong on the surface, Saudi Arabia has been pivoting hard toward U.S. adversaries such as China, Russia, and Iran in the years since Saudi Crown Prince Mohammed bin Salman took the helm and began prioritizing economic pragmatism over historical feuds and religious divisions. MBS also normalized relations with Venezuela under Maduro. China has secured long-term oil contracts with Venezuela. At the same time, Russia has become increasingly important to the Venezuelan economy, essentially allowing it to trade in crude oil, offsetting much of the economic pain caused by Western sanctions.

The fact that the same nations that are plotting to break free of the petrodollar system are cozying up to the country with the largest proven oil reserves in the world is precisely what U.S. officials mean when they say that they are not going to allow our adversaries to set up in our backyard and benefit from the resources of neighboring countries. Rest assured, even though you rarely, if ever, hear U.S. officials or the corporate media use the term "petrodollar," particularly as it relates to military conflict, it is paramount when it comes to the things our leaders are willing to defend at almost any price.

Venezuela’s future

The Trump administration’s relative indifference to the political outcome in Venezuela is perhaps the best evidence that this conflict has nothing to do with democracy or the future of the Venezuelan people (let alone narcotrafficking). For a long time, it looked certain that the West was poised to install Venezuelan opposition leader and activist María Corina Machado as Venezuela’s new leader. An ardent capitalist who endlessly signals her intention to work with Western countries and corporations to exploit her nation’s natural resources, Machado was awarded the 2025 Nobel Peace Prize in what many saw as an effort to brandish her bona fides ahead of Maduro’s fall.

While many in the West have sold her as a beloved populist, most polls show she is deeply unpopular with the vast majority of Venezuelans, with up to 91% holding an unfavorable view of her. Machado is also strongly at odds with a military junta whose cooperation will be essential to maintaining anything that resembles stability in the nation going forward. Trump was ultimately convinced by his people that the path of least resistance would be to allow Maduro’s vice president, Delcy Rodríguez, to assume power, despite being an avowed socialist with deep ties to the Maduro regime.

It is true that many Venezuelans, particularly those who have fled in recent years, are ecstatic about Maduro being deposed from power. However, as is often the case, it seems unlikely that the leader the people of Venezuela would choose would also be suitable to Washington’s interests, which is why regime-change operations are so rarely followed by anything resembling free and fair elections.

The Trump administration is pointing to the Panama operations that led to the end of Manuel Noriega's military dictatorship in 1989 as a case study. At this point, it seems that Iran, Iraq, Libya, and so many other costly failed regime change wars might provide better comparisons. It's also worth noting that Iran suffered regime change after a U.S.-backed 1953 coup following its decision to nationalize its oil, and both Iraq and Libya moved to sell oil in non-petrodollar exchanges. History doesn't always repeat itself, but it often rhymes. 

Dennis "Mitch" Maley is an editor and columnist for The Bradenton Times and the host of our weekly podcast. With over two decades of experience as a journalist, he has covered Manatee County government since 2010. He is a graduate of Shippensburg University and later served as a Captain in the U.S. Army. Click here for his bio. Mitch's 2015 novel, A Long Road Home, was recently released in its third edition. His other books can be found here. He can be reached at editor@thebradentontimes.com.