Donald Trump’s Venezuela oil deal is already up and running

The 30m barrels the United States is planning to take is roughly the total capacity of Venezuela’s crude storage which, due to the blockade, is full.

THE PACE of change is breath-taking. On January 3rd United States special forces captured Nicolás Maduro, Venezuela’s dictator. On January 6th Donald Trump said Venezuela would be “turning over” 30m to 50m barrels of oil to the United States. Two days later the regime said it would release “a significant number” of political prisoners. The next day an American delegation arrived in Caracas, the capital, to work on reopening the embassy. A Venezuelan team is expected to head to Washington, with Mr Trump saying he would meet them “pretty soon”.

A demonstrator holds a toy of the caped superhero named "Super-Bigote" (Super-Mustache) during a rally in support of ousted Venezuela's President Nicolas Maduro in Valencia, Carabobo state, Venezuela (AFP)

Chart,

A crucial question is whether Mr Trump will “run” Venezuela down the barrel of a gun—he initially threatened interim president Delcy Rodríguez with a fate worse than Mr Maduro’s if she didn’t comply with his plans for the country—or whether he might be more collaborative. The latter may signal an intention to let Ms Rodríguez settle in for a longer period, an alarming prospect for Venezuela’s democratic opposition. Setting aside the bluster there is clear evidence, especially from the emerging deal on oil, of collaboration.

Mr Trump initially framed the arrangement as pure coercion. Officials in Caracas spun it as a “simple sale, a commercial transaction”. The Economist has spoken to a range of oil executives, financiers and traders to assess the possible contours of the scheme. Much remains uncertain and could change, but the deal appears to be mutually advantageous, albeit with some coercive elements.

The 30m barrels the United States is planning to take is roughly the total capacity of Venezuela’s crude storage which, due to the blockade, is full (see chart). Without significant sales PDVSA, the state oil company, will soon have to stop pumping, forcing it to shut down infrastructure which will be difficult and expensive to restart. That is an incentive for adopting a possible scheme under which PDVSA or one of its joint ventures would sell most of its inventory and probably its future output to a buyer. Those buyers will include Chevron, the only American major which already has a licence from the United States to operate in Venezuela.

Vitol and Trafigura, two Switzerland-based commodity traders, have also obtained licences from the American government to transport and market Venezuelan crude. The Economist understands the firms will buy oil directly from Venezuelan storage, shipping it to end buyers in America or elsewhere (at the time of publication, Vitol had not replied to a request for comment on the fact. Trafigura declined to comment). The assumption is that the oil will be sold at close to market prices.

Data from Vortexa, a ship tracker, suggests more than a dozen empty tankers that are not under American sanctions, capable of holding a combined 8m barrels, are scheduled to arrive at Venezuela’s main crude-export terminals in January. Once they bring their oil cargo to its destination, which will often be the United States, some of it will be refined. Some will be put into America’s strategic reserves and the rest shipped to other buyers.

Payment, net of the trader’s fee, will go not to PDVSA but rather to an escrow account at a big American bank. Where Chevron is involved, a small percentage is likely to be used to repay debt that Venezuela still owes to the firm. As Venezuelan law requires, 20-30% of the remainder would then be wired, in dollars, to the state. Under its existing licence Chevron uses oil to make royalty payments, but that will probably change under the new scheme. Oil payments make little sense for Venezuela while the United States is enforcing an embargo on sales beyond those it controls, says Juan Szabo, an energy consultant who worked for PDVSA for decades. Another chunk of the cash from escrow would cover PDVSA’s expenses. Mr Trump claims all future capital spending will have to be on American-made rigs, pipes and other equipment.

What’s left would seem to belong to the joint-venture partners, PDVSA among them. It is possible that PDVSA’s share will stay in escrow as a sovereign-wealth fund for the future of Venezuela or be used as “compensation” for alleged wrongs such as nationalisations.

For the United States the deal is not a game-changer. Its refiners gain another source of heavy crude and the wider oil industry gets more business (although its domestic shale drillers worry about prices being driven down). In time, some of the proceeds could be reinvested to expand Venezuela’s production, which will remain under American control. On January 9th Mr Trump posted that “at least $100bn will be invested by BIG OIL”. After meeting with Mr Trump that day, most majors remained cautious. Exxon said Venezuela was “uninvestable”. Chevron said it could increase its existing production by 50% in less than two years.

For Venezuela, such a deal looks attractive compared with the status quo. In addition to clearing the glut and keeping wells open, the arrangement, at least in theory, allows Venezuela to sell oil at a higher price than it did when it flogged it off cheaply to shadow traders and on to China. The country gets an injection of dollars. “Venezuela needs money, and we’re going to make sure that they get money,” said Mr Trump on January 9th. The flow of oil revenues needs to normalise quickly. The dollars are desperately needed to head off the extremely serious currency crisis and looming hyperinflation, says Tamara Herrera, an economist based in Caracas for GlobalSource Partners, a consulting firm.

The plan also leaves Mr Trump plenty of room to tighten the screws. Pricing could be manipulated to squeeze PDVSA. Sanctions, loosened to enable all this, can be re-imposed. And the administration promises to control how Venezuela spends the cash it gets. It will benefit “the Venezuelan people, not corruption, not the regime”, said Marco Rubio, the secretary of state.

Oil is not the only territory on which the Trump administration is jockeying with the Venezuelan regime. Among the political prisoners released was Enrique Márquez, a prominent opposition politician. His release and that of others appears to be a response to American demands. On January 6th Mr Trump said Venezuela had a “torture chamber in the middle of Caracas that they’re closing up”, referring to the Helicoide prison which symbolised Mr Maduro’s despotic rule. But, as this story was published the release had been confirmed of just eleven out of more than 800 political prisoners.

It seems Mr Trump, for now, wants to collaborate with the new face of the old regime. On January 9th he said he had cancelled a threatened “second Wave of Attacks” because the two countries were “working well together”, especially on oil. The Trump administration’s demands are not so extreme that they seriously risk fomenting a coup against Ms Rodríguez, yet. If the oil scheme is as it appears, it will provide a crucial economic boost.

Questions about Venezuela’s democratic future may present a bigger test of the new relationship. Will, for example, the administration demand that Venezuela allow the speedy return of political exiles? This would include Edmundo González, who won the 2024 election that Mr Maduro stole, and María Corina Machado, the recent Nobel peace-prize winner who backed Mr González after Mr Maduro barred her from running. An image of Mr González still appears on wanted posters at Venezuelan airports, accusing him of treason and offering $100,000 for information leading to his arrest.

An early indication of where this is heading may come next week. Mr Trump says he will meet Ms Machado on January 13th or 14th. It is a big opportunity for Ms Machado—dismissed hitherto by Mr Trump as lacking “the support” to run Venezuela—to convince him to hasten steps towards democracy. (She has said she would like to give him her Nobel; he has said he’d like to have it.) But as many others have found out, a visit to the Trump White House can easily backfire.