Special Episode: U.S. Intervention in Venezuela and What It Means for Canada
This special episode analyzes the United States’ intervention in Venezuela on January 3, 2026, and explores its broader implications for Canada and the Canadian oil sector.
Peter and Jackie open with a discussion of the geopolitical backdrop and the range of narratives circulating about the U.S. motivations for seizing and arresting Venezuelan President Nicolás Maduro and his wife, including efforts to curb drug trafficking and illegal migration, and to counter the growing influence of China, Russia, and terrorist groups in the country. They also reference the U.S. National Security Strategy released in November 2025, which calls for a Western Hemisphere free from hostile foreign control and signals renewed enforcement of a “Trump Corollary” to the Monroe Doctrine.
The Monroe Doctrine is a foundational principle of U.S. foreign policy, first announced in 1823, that set out the United States’ view of the Western Hemisphere. General principles at the time held that European powers should no longer interfere in the Americas and that the Western Hemisphere was now the U.S. sphere of influence.
Peter and Jackie then turn to the oil market implications for Canadian oil. If sanctions on Venezuela were eased, increased Venezuelan heavy oil exports to the U.S. could intensify competition for Canadian oil on the U.S. Gulf Coast, which accounts for about 10% of Canada’s crude oil exports. The exports to Canada’s largest market, the U.S. Midwest, which makes up 70% of all exports, are more insulated.
The discussion concludes with an assessment of potential Venezuelan production scenarios, including the possibility of declining output, a pattern that has frequently followed similar government changes in the past. They conclude that, in any scenario, a clear takeaway for Canada is that building additional West Coast pipelines is critical. Diversifying export markets, strengthening economic resilience, and improving national sovereignty and autonomy are imperatives for Canada.
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Episode 308 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas Podcast. I’m Jackie Forrest.
Peter Tertzakian:
I’m Peter Tertzakian. Well, happy new year where we’ve decided to come back a little bit early. We weren’t planning to record this podcast until Monday, but of course, unpredictable events hijack our agenda. So we are now going to talk about Venezuela.
Jackie Forrest:
That’s right. So we’re going to have a special episode today on Venezuela, and then we’re going to go back to our regular cadence and we’re going to have our 2026 predictions podcast next Tuesday. Watch for that.
Peter Tertzakian:
Right.
Jackie Forrest:
I think most people know, but over the last weekend, January 3rd, US seized and arrested Venezuelan president, Nicholas Maduro and his wife, and has said that the US is now in charge of Venezuela. They’re keeping the existing government in place with Delcy Rodriguez, who is now the interim president.
Since this arrest of Maduro, there’s been other things that the Trump administration has been talking about, like wanting to take over Greenland for national security reasons. So of course these events are pretty concerning and they have implications on a geopolitical perspective, but also implications for Canadian oil. We wanted to talk about that today.
Peter Tertzakian:
So we’re going to talk about this in two parts. The first thing is the big macro picture, the geopolitical angle, and where Canada fits into that perspective. Then we will go into what it means for the oil markets broadly. We’ve already got certainly market indications of how the market’s feeling about this, and it’s an ongoing thing, and obviously what it means for the Canadian oil and gas industry.
There’s a lot of speculation all the way from, okay, the business is going out of business, to maybe it’s even positive for Canada because it maybe necessitates an acceleration of getting to export markets. We will talk about that. Let’s start with the big picture.
Jackie Forrest:
So we’ll start with the geopolitical angle and the Canadian perspective. I think the first question on everyone’s mind is what is the end goal of the US? Of course, over the course of this week, there’s been many narratives around what the motivation is. Stopping the drug flow into the US, stopping the buildup of military capacity by Russia and China and other terrorist groups that have established themselves in Venezuela, stopped the flow of illegal immigrants into the US, take back the oil assets.
That’s definitely been a theme. The Americans invested in a lot of the facilities and they were taken from them and Trump is talking about wanting those oil assets back and of course exert more control over the Western hemisphere and not allow other powers like China and Russia to have influence. We did talk about this on our last podcast with this US National Security Strategy document that was released in November, that there was this idea of what’s being called the Monroe Doctrine, which was a doctrine that was a foundational principle back in 1823 about how the United States viewed the Western hemisphere as they want to have influence over it and not have foreign powers have influence.
Peter Tertzakian:
Yeah. It’s important to understand that because what was the Monroe Doctrine was effectively the creation of a geoeconomic exclusion zone. In other words, that the United States would effectively control the resources and the geopolitics of everything from the Arctic all the way down to Cape Horn and the tip of South America.
The reason for that was because the American settlers that had come in had basically recognized that the Europeans were going around colonizing the world and being mercantilists in terms of taking control of resources. They’re saying, “Okay, that’s not going to happen anymore.” So they created a Western hemispheric exclusion zone. At the time in 1823, they didn’t really have the naval power to be able to enforce it, but over time they have. Certainly now they have shown with tremendous military force and precision how they can enforce that.
There’s very much a sense that the Russians and the Chinese were making close friends with Maduro, with other countries in South America, Cuba, of course, and that it’s time to go back to exerting hemispheric control. Both the Russians and particularly the Chinese have been making intrusions, effectively sending a message. Really, the drug flow argument is a small argument because the big suppliers of the narcotics are Columbia and Mexico.
So this is very much, I think, a show of force. There’s definitely this mercantilist, continuation of this mercantilist attitude in terms of taking over the oil, but not necessarily controlling the country. They don’t want to make Venezuela the 51st state, but they want to have control over the resources, and that’s what is happening.
Jackie Forrest:
Yeah. Well, and appointing Maduro’s vice president, so really the same cast of characters running the country is kind of a different move here. A lot of people compared this to Panama. Well, it looks quite different in that you seem to be keeping that same regime in place, but you want to have more control of the country.
I will read one quote from this US national security strategy, which I do recommend people look at. We’ll put a link to it in the show notes. “We want a hemisphere that remains free of hostile foreign incursion or ownership of key assets.” So I guess we consider the oil key asset and you don’t want the Russians and the Chinese having the ability to own that. Okay.
Peter Tertzakian:
I think it’s important actually, let me just finish this, because there’s people that have been using the word, oh, Americans are acting as colonialists or imperialists. This is not colonialism and imperialism. Imperialism is actually taking over the country and governing it. They clearly don’t want to do that for obvious reasons because Venezuela is impoverished.
It’s basically a corrupt mess. They don’t want to run the country, but they want to control the trade, the resources, and the trade flows, particularly because it’s so close to the United States across from the Caribbean. So that is a very mercantilist view or attitude is we want to control the trade, the resources, but we don’t want to run the country.
Jackie Forrest:
Well, and, Peter, I’m thinking back to when President Trump was inaugurated early in 2025, you had come out with a lot of work on this mercantile, colonialist type way of thinking. So you were really early to this thinking, but it appears to me less than a year later, the Americans are really acting on some of those things that you were talking about. Yeah.
Peter Tertzakian:
This is just an amplification of the mercantile phenomena, which the Chinese have been doing for the last 15 years with their Belt and Road Initiative, which is being able to make inroads into countries all over the world, including South America, controlling trade routes, but not necessarily controlling or running the country. This was of concern to the Trump one government, and now with the reelection of Trump last year, we are now seeing that, okay, we’ve got to do something about this.
Effectively, it’s a mercantilist response. We’re going to see even more of this because also part of mercantilism is state capitalism, which is the state works with key multinational companies. So in the 17th century, it was like the East India companies, the Dutch East India Company, the English East India Company that went around the world controlling spice trades and other resources.
This is very much now in play that’s something to watch where this meeting that’s upcoming, I think it’s tomorrow, we’re recording on a Thursday, tomorrow’s Friday, in the White House between President Trump and the heads of the multinational oil companies. This to me signals, okay, there’s a state capitalistic flavor to what’s going on here where the state acts in concert with the big companies to actually control the resources of other countries.
So this is very much an amplification of the state capitalism. I think we’re going to probably see something like this in Greenland where if it’s not an outright … It may not be an outright imperialistic takeover, but it’s certainly going to be some kind of mercantilist outcome where the United States will ultimately, I believe, control the critical minerals of Greenland.
Jackie Forrest:
Okay. Well, a couple things there, but I did want to clarify. So it’s January 8th right now, that meeting would be January 9th, just so if people listen to this podcast later, you talked about a few things. Let’s talk about the state capitalism and then the Greenland issue.
State capitalism, it’s very different for the United States because they don’t own these companies. If I was Vladimir Putin in Russia, and I could tell Rosneft or Lukoil to do something, they’re going to do it because they don’t really have free publicly owned companies. There is a lot of state control over those companies. If you don’t do what Russia says, they might just put you in jail.
The American system is very different. We have oil companies that report to their shareholders, and how can they go to their shareholders and say, “We’re going to dump tens of billions of dollars into Venezuela, a very unstable country at $56 oil price.” As we were speaking today, it rebounded closer to 57 WTI price. How can he convince these companies to invest in Venezuela?
Peter Tertzakian:
Well, this is what’s in play. So stay tuned even over the next few weeks. This is what’s in play is because under state capitalism and mercantilism you don’t have to actually … The state does not have to own the company. It does not have to be nationalized. The state will grant the company’s special privileges and dictate how it operates. So the special privileges that may be granted to the multinationals that go into a country like Venezuela could be state backing with low cost bonds or whatever, that kind of privilege or other things.
There’s a sideshow going on that I don’t know if you caught in the last couple days where the Trump administration is leaning on the defense companies, the ones that are making all the military hardware and saying, “If you don’t start delivering on time and on budget your military equipment, we are going to make sure you do not buy back your shares and pay your dividends.”
Jackie Forrest:
Yeah, I did see that. Yeah.
Peter Tertzakian:
So I mean, this is now a clash between Washington and Wall Street because investors are saying, “Hey, wait a minute.” By the way, the defense stocks traded down on this news. So there are other levers that can be pulled to bring big corporations into line with the state. State capitalism, as I say, is either a voluntary or forced alignment between government and big company to exercise geopolitical or other wishes of the state.
Jackie Forrest:
Yeah, good point. We’ve also seen in that computer chip area, some of these rules that can affect companies’ behavior.
Peter Tertzakian:
Right.
Jackie Forrest:
Okay. Well, we’ll see what happens there. Let’s talk about Greenland. Greenland is different. There’s many reasons being given for Venezuela, whether it be the drugs or the military capacity of Russia and China or just the influence they have through all the loans they’ve provided Venezuela. Greenland I think is different.
It’s being talked about for national security reasons. I don’t know what the risk is here of Greenland. I mean, before Trump started talking about it in early 2025, no one really thought about Greenland, but the idea of the US taking a NATO country against its will is just hard to imagine. Certainly a new world order is evolving because I think NATO disappears or is very different in terms of its power if that actually happens.
Peter Tertzakian:
Yeah. Well, no scenario is hard to imagine anymore in the unpredictability of the things that are going on and the changing of the world orders so quickly. Yes, the Europeans are now meeting to think about what they’re going to do if one of their NATO countries, Denmark is assaulted militarily in Greenland.
So I mean, there’s the school of thought. I think actually it’s more than a school of thought. I think it was Marco Rubio, I’m just paraphrasing, basically said, “Hey, we’re doing this because we want to bring them to the negotiating table. We just want to buy Greenland.” Much as I guess they bought Alaska.
One way or another, the Americans will come out of this controlling the resources of Greenland. That’s my belief. That’s my prediction. I don’t know exactly whether it will be a full imperial takeover and Greenland will become another state. Or whether, as I said, it’s more of a mercantile model where they control the resources and that Greenland either stays independent or part of Denmark.
Jackie Forrest:
Okay. Well, this whole situation from a Canadian perspective is quite concerning because of course we are also in the US sphere of influence. We’re in the hemisphere that they want to influence more. I just think this Monroe Doctrine is not good for us. Of course, Canada’s highly vulnerable as we have not broadened our trade relationships. We are highly dependent on the US.
I just think this geopolitical situation should spur Canada to build infrastructure as soon as possible to expand all of our exports, especially of our natural resources. I mean, this whole situation, if it is really about the oil, Venezuela literally produces a million barrels a day. We produce more than five times that on oil and we produce a lot of gas too.
It just shows you the value of that asset, that production. Is Canada doing what it can do to expand our allies? Economic might is power, so we need to grow our economy. We need to grow the people that would stand up for us because they depend on our trade as soon as possible.
Peter Tertzakian:
Well, I think there’s some things that Canada needs to do before that. Number one is acknowledge that the world is changing. I feel like there is a substantial part of our populace that is not acknowledging the very rapid and dynamic changes that are going on in this world order. Yes, we have Bill C5 with a new liberal government or Mark Carney, which is now going to be almost a year old.
The recognition that we have to diversify our export markets based on all the tariff drama of last year at this time. That tariff drama and tariffs, by the way, if you recall, are also part of a mercantilist set of strategies. To now recognize that this whole situation is amplified far beyond tariffs, the use of military force to bring about outcomes is a whole new level. I believe that Venezuela is now being dealt with.
There’s Cuba, there’s Columbia, Greenland, Panama, and of course there’s Canada. I think all these other ones are going to be dealt with first and then we’re going to see where we come out in the wash. I will say though, further to one of the things that you pointed out is that Canada and the Monroe Doctrine, I mean, we’ve been definitely, it’s been very beneficial to Canada to be under the umbrella of the United States or adjacent to the United States since post World War II.
I mean, our prosperity and our defense and everything else. It’s just now that the changing of the world order means that, okay, wait a minute, what does this mean for us? Do we want to be controlled under a mercantilist model or do we want to try and stay more independent and pursue our own destiny? On that note, we have our prime minister heading off to China next week. So that’s going to be very interesting to watch because that is another mercantilist power and we are somewhat sandwiched between the two.
Jackie Forrest:
Yes. Of course we have advantages for delivering heavy crude oil to Asia because actually compared to Venezuela, we have very close geographic reach. Straight shot over to China where Venezuelan oil has to take a very long trip to get to China. If the Americans are wanting to see more of this Venezuelan oil, we’ll get to that in the next section, come into the Gulf Coast.
It makes a lot of sense that we fill that void by supplying our heavy oil to China and of course create more trade relationships. Of course, got to be careful with China too, because you don’t want to become dependent on another major power. Seems like a good move for Mark Carney to be making that trip.
Peter Tertzakian:
Well it seems like a good move. I’m going to say this is a difficult dilemma because if you, again, acknowledge the geoeconomic models that are emerging, we have the state capitalist model that has influx, as I talked about earlier, with getting multinationals onsite to exert geopolitical influence for the benefit of the state. As we see in the Venezuelan oil fields playing out.
The dilemma will be, okay, the Chinese say, “We’ll play ball and we will invest in Canadian infrastructure, whether it’s ports, railroads, oil fields, pipelines, LNG facilities,” whatever. So the dilemma is the minute you take foreign capital like that, you are then beholden to the mercantilist control. So would you rather have Chinese mercantilist control or American mercantilist control? Or how do we stay independent and walk the fine line in this very sensitive and dynamic world?
Jackie Forrest:
For sure. I mean, this is a lot of why Venezuela is so beholden to the Russians and the Chinese because they took a lot of money from them and …
Peter Tertzakian:
Will the Americans allow us to take money from the Chinese under the Monroe Doctrine?
Jackie Forrest:
Also, we haven’t talked about it, but we still have the Americans wielding other sorts of financial or economic warfare, including these tariffs. Tariff issue is really quite unresolved here in Canada and that’s certainly a lever that they have that’s quite painful for Canada if they decide to put tariffs back on more Canadian products.
Okay. Well, let’s switch to the oil markets. There’s so many other geopolitical things we could talk about in terms of what this means for the other spheres of influence in the world.
Peter Tertzakian:
The Middle East.
Jackie Forrest:
China, Russia.
Peter Tertzakian:
Russia. Yeah.
Jackie Forrest:
We’ll talk about that maybe a little bit more on our next podcast. I want us to just focus on the oil market and Canadian implications of potentially Venezuela becoming a place that could grow its oil production. Even at a minimum, today, Venezuelan oil is pretty limited in its ability to get to the US because of sanctions that have been put on it. If those are removed, what that means for Canada.
I think I would just start with a bit of background for people. As I said already, Venezuela averaged a bit under one million barrels a day in 2025 in terms of their production. So quite small, 20% of what Canada produces are less. Of course, they’re down over half from what they produced in 2016. If you look at the early 2000s, they were producing three million barrels a day.
Peter Tertzakian:
Actually, if you go back to the 1970s, they were producing four million barrels a day.
Jackie Forrest:
Well, there’s no shortage of resource there.
Peter Tertzakian:
There’s no shortage of resource there, but it also shows you after 30 years of Chavez rule and basically gutting of the country’s economy and the oil fields, this is what’s happened is basically they’re barely 700,000 barrels a day. There’s no money being reinvested into maintenance, let alone growth, which is why the production has been declining.
Jackie Forrest:
Yeah. This will be familiar to a lot of Canadians in the oil patch, but Venezuelan production is very similar chemically to Canadian oil, the heavy oils, and it cannot flow without adding diluent to it or upgrading it. So one of the things that is a barrier for them to grow their production is back in those years when they produced all the oil, they had a lot of upgraders.
There was four upgraders that took the heavy crude and made it into the lighter products that could then flow. So today those have been shut down and there’s no upgrading capacity to process the heavy crude. So they’re dependent on this diluent, which is the light …
Peter Tertzakian:
Like a blood thinner.
Jackie Forrest:
Yeah. Yeah. They blend that in and then they get something that will flow in the pipelines and get into the tankers. So this appears to be a big problem because getting that much diluent has been an issue for them and that has been constraining their production. So it’s not as simple as going just on the upstream side as everyone in Canada that’s in the oil patch knows, these upgraders are pretty complex. They’re like big refineries. So it’s going to take quite a bit, I think, to kind of get oil flowing there again.
Peter Tertzakian:
Yeah. As by way of background in North America or Canada and the United States, the oil infrastructure for heavy oils is such that the diluent is then taken out in the refineries in the United States and then there’s a pipeline that brings the diluent back to Canada to be blended again. I mean, it’s just like this continuous loop that goes around.
Jackie Forrest:
Well, and then we add some all the time too because we have our own condensate.
Peter Tertzakian:
So to be able to build that kind of supply chain infrastructure in Venezuela is going to take some estimate like 150, 200 billion dollars US. So the question then is where’s the money going to come from? We’re going to get to that because at $56 a barrel, there’s really no incremental cash to satisfy investors, pay royalties and taxes, sustain production, and grow.
Jackie Forrest:
Well, and not only do you need that potentially $100 billion plus over maybe closer to five to 10 years, but you also need to bring people back to the country to run these upgraders. That’s a very specialized, unique skillset. Who wants to … Well, let’s go back to it.
The same cast of characters is running this country. Is it going to be a safe place that people want to go and work and live? I think probably today the security situation is such that a lot of people wouldn’t want to go there. So I think that’ll be a barrier as well.
Peter Tertzakian:
Yeah. Well, we’ll see how it plays out because it’s early days and we don’t know whether the social military or the paramilitary. I mean, Venezuela is composed of a whole bunch of people with guns running around and some of them in the jungles and elsewhere. So I don’t know. I’m not going to talk about things I don’t know about. From what I’ve seen, I’ve been there once, but that was 40 years ago and it’s a lovely country, but boy, socially and it’s governance, it’s a mess.
Jackie Forrest:
Yeah. So security and stuff will be an issue for getting workers down there. Let’s talk about the immediate threat, I guess, is the existing exports. You don’t have to grow production for there to be a bit of a problem for Canada. After they produce their million barrels a day, they use some internally and they have 700,000 barrels a day of exports.
Today, only about 150,000 barrels a day of that goes to the United States under special waivers that were given to Chevron. Generally, US imports are not allowed because it’s been sanctioned. So a lot of the oil goes more than half to two thirds, depending on the month, goes to China. The country is in debt to China. They’ve taken money for oil loan programs. So they took the money promising that they would send China oil in return for the money that they took, and they’ve got deals like that in place with Russia as well.
So if the US were to allow Venezuelan oil to flow to the Gulf Coast, that is the natural home for Venezuelan oil. It’s closest in proximity. It’s the cheapest to deliver. Why would you deliver all the way over to China when you could deliver right on your doorstep? On top of that, the refineries in the US, were actually many of them on the Gulf Coast were built to take that crude oil.
So it is the natural home, but Canada is now also sending crude oil to that market. We send about 400,000 barrels a day to that market. That’s only 10% of all our exports. I’ll remind people. 70% of all our exports go to the Midwest of the US.
Peter Tertzakian:
Illinois and places.
Jackie Forrest:
Yeah, Chicago and that area. Today, there were many pipelines that actually send crude oil south direction. So it wouldn’t be easy for Venezuelan crude to reach the Midwest. So really we’re just talking about competing with this 400,000 barrels a day or 10% of our exports on the Gulf Coast.
Peter Tertzakian:
Yeah. Well, to me, it’s not like the United States is going to cut China off. They would have a reciprocal response if they did that with things like the critical minerals, which the Chinese have already in 2025 put restrictions on, and then there was a deal to lift some of those restrictions. Then reciprocally, the Americans had put restrictions on AI chips and then the reverse course on that.
So it’s a very fluid thing. I think that this is a money play as much as anything and controlling the resource, this very valuable resource yields dollars and the dollars can be sold. Why would they ship to China? Because China would probably pay more than the Gulf Coast refiners will pay. It’s in the interests of a refinery to get cheap barrels, not expensive barrels.
Jackie Forrest:
Well, I think also China may, because of these loan programs, it maybe they have to ship to China. I will challenge you, Peter. I know you’ve been following the news, but just yesterday, the US took actions that imply that they will decide if oil flows to China and Russia with the US Department of Energy saying that they will only allow oil to be transported that meets the sanctions.
Of course, the Americans seized tankers yesterday, one in the North Atlantic, which was a Russian tanker and a Caribbean, one that was stateless. These dark fleet tankers, you don’t know really who’s behind them, but it could be countries like China. Do you think they’re going to exert more control to say, no, this oil is going to come to the United States?
Peter Tertzakian:
I think they’re exerting control on Russia, which is sanctioned, and it’s in their interest to exert control on Russia because of the Russia-Ukraine war and the negotiations going on there. I don’t think they’re going to exert restrictions on Chinese markets. I think out of this, what is it, 700,000 barrels a day you said that Venezuela produced, I think 500 of that goes to China.
Jackie Forrest:
Yeah, depending on the month. There’s some months that are higher than lower, about two-thirds to a half at least every month is going to there.
Peter Tertzakian:
So I think it’s important, again, to recognize that not all oil is the same. This is heavy oils and different grades of oils go to different types of refineries. The Chinese refineries want and the Gulf Coast refineries want this heavy oil.
Jackie Forrest:
Right. Yeah. No, the Gulf Coast refineries can take it and so can the Chinese.
Peter Tertzakian:
So if the Gulf Coast refineries take the Venezuelan oil and the Chinese refineries fall short, where are they going to get it?
Jackie Forrest:
Well, I think probably this is the thing that Canada has to mitigate the effect of this is that we do have the ability to take the Canadian crude that comes to the Gulf Coast if there’s a lack of demand for it because Venezuelan oil is sitting there and being used. We do have the ability to re-export Canadian crude out of the Gulf Coast and send it to China
Peter Tertzakian:
The US agents, I’ll call it, will take a cut of the commission for doing that.
Jackie Forrest:
Yeah. Well, and it’s not the most economic thing. It’d be much smarter just to send it off our west coast, much shorter transportation distance.
Peter Tertzakian:
Yeah, that’s right.
Jackie Forrest:
Here we’re taking it down to the Gulf Coast, putting it on tankers to get to a place that we could have accessed.
Peter Tertzakian:
Panama Canal, which by the way, is part of the plan.
Jackie Forrest:
Yeah. Or these very large crude carriers, I don’t think they can’t go through the Panama Canal. They’re going all the way around. So really not that efficient, but we do have that ability. Just as a reminder, before the Trans Mountains started up, we actually saw re-exports out of the Gulf Coast of Canadian crude that got close to 400,000 barrels a day. So we know that there’s the facilities and infrastructure to do that.
Peter Tertzakian:
To do that.
Jackie Forrest:
Talking to energy experts, there’s probably even more capacity than that if needed. So we have a way to mitigate this. I will say, I do think it’s a likely scenario that there is competition. On Tuesday, President Trump indicated that Venezuela will give the US between 30 and 50 million barrels of crude. If that was delivered over three months, that would be like 500,000 barrels a day of Venezuelan oil coming into the Gulf Coast. So I think it’s likely that we’ll see some competition in that market.
Peter Tertzakian:
We’ll see some competition, but then as I said, it has to balance out. If the crude that comes from Venezuela displaces Canadian oil, the Chinese market will fall short for the heavy oil, so they have to find it from somewhere. So then the Canadian barrels go onto a tanker and go to China. Actually there was even a headline this morning that that’s one of the things that’s going on. So I think that it changes the supply flows and the money flows and who profits from all of this, but actually it doesn’t change the net supply global demand balance.
Jackie Forrest:
Right. It probably does have some impact on price though, because all things the same if Canadian oil needs to go further, then it should result in wider price differential. I think it’s pretty modest.
Peter Tertzakian:
The equity markets have also spoken, and there was an initial knee-jerk reaction on Monday after the first trading day after the January 3rd invasion and arrest of Maduro. So Canadian stocks, particularly the heavy oil stocks fell, I think some was seven, 8%, but started to recover by midday. Simultaneously, the share prices of ExxonMobil and Chevron and ConocoPhillips went up. By midday, they started to fall as people realized, well, wait a minute, all the things we just talked about have to be rationalized.
Now we have the situation where, okay, so the initial knee-jerk reaction got washed out of the system, but the price of oil has fallen because of the uncertainties that this event has on the global economy and the demand and the potential for oversupply with more Venezuelan barrels potentially coming to the market. I’m not convinced you’re going to see a lot more because of the mess that the countries and the oil fields.
Jackie Forrest:
Yeah. Yeah. Yesterday, January 7th, we saw oil price get into the $56 range at WTI. Interestingly enough, WTI fell more yesterday than Brent, so this idea that all this crude’s going to be forced into the North American market. So you’re seeing more pressure on WTI.
Peter Tertzakian:
Yeah. I mean, that’s the benchmark off of which all oils and certainly in the Western hemisphere are priced, but WTI is a very light oil. It’s really the heavy oil prices that matter.
Jackie Forrest:
Right, the differentials. I did want to mention too, refineries actually when up quite a bit on Monday and have stayed up, so this is deemed to be good. Yeah, sure. More crude into the Gulf Coast, good for…
Peter Tertzakian:
Potentially more cheap crude.
Jackie Forrest:
Good for refiners in the US. Oil field service companies went up as well with some up 5%, some up as much as 10% on Monday. Some have come off a bit since the initial response.
Peter Tertzakian:
Yeah. Well, we’ll see what happens. As you said, we’re going to be back on Tuesday. We’re going to release our next podcast. This is a special edition being recorded the Thursday prior. Tomorrow at the White House, as mentioned earlier, there’s a meeting with the Trump administration and the CEOs of the big oil companies.
That is going to be very important to watch because as I said, we are going to see or maybe not see, we don’t know what deals get cut behind the scenes, whether or not these companies get granted some kind of special privilege. Special privilege could be loan guarantees or who knows what or military protection in the oil fields and stuff to reduce the risk of spending capital there.
On that note though, let’s talk about investment. At $55 a barrel, and I said this earlier, 56 or whatever it is, it doesn’t matter anything below 60, there isn’t enough money to pay royalties and taxes, operating costs, investor returns that are expected, sustaining production, and then on top of that to grow. You’re right at the margin at $60 a barrel. So in fact, what you’ve been seeing with these American companies over the course of the last couple quarters is they’re taking on more debt to be able to pay all of the above.
Jackie Forrest:
They’re investing less. The drilling rates are down quite a bit.
Peter Tertzakian:
Drilling rates are down, so they’re not investing to grow domestically. So the question is, well, if there’s a hundred and some billion dollars needed in Venezuela, admittedly over many years, but even in the near term, where’s the money going to come from? So the money is either going to come from these companies go into debt, more debt to pay for this, or there’s going to be, as I said, some state backed deal where the government’s going to go in and say, “Okay, we’ll help you out with paying for all this stuff.” I suspect it’s going to be the latter.
Jackie Forrest:
Yeah. At the current price level.
Peter Tertzakian:
I’ll tell you what, that’s a whole new different dimension because the world of oil is broken up into national oil companies and independent oil companies, which has been the norm largely since post World War II. The independent big multinationals are free market. They have investors and it’s all been based on the premise to free trade of oil globally, et cetera.
The state owned companies, as the name says, is owned by the governments such as Aramco and all the other ones. Okay. So if all of a sudden now the big American companies have some state backed privileges, that upends the whole competitive landscape of how you think about cost of capital, how you think about competitiveness.
Jackie Forrest:
A lot of distortions here. Generally, when we have low oil prices, people stop investing and that causes the price to eventually come back up again. If we have distortions like governments for other reasons because of their goals around spheres of influence, want to see investment at $56, then you could see price stay low longer. So it really distorts the market. It makes it harder to predict, right?
I want to wrap up this podcast with three future scenarios. One scenario we haven’t been talking about and nobody’s been talking about this week is the potential for lower Venezuelan oil production. Everyone’s talking about Venezuela growing and investment, but at this moment, there’s still a reasonable chance that the country becomes less stable, oil production declines. From an oil market perspective, this would be constructive for Canada.
Of course, it’s not the dominant narrative, but if you look at history, when there has been a major government change like this, it’s very likely that production goes down and stays lower. For example, with Iraq, I had a look at it. US invaded in 2003, before that invasion oil production was 2.1 million barrels a day, and it was five years before that level was ever achieved again. So I think the most likely scenario is not what people are talking about is that the production goes down and stays down.
Peter Tertzakian:
Yeah. I think what you’ll probably see is you’ll see the production tick up because they’ll probably throw the valves open and get as much production in the near term out as possible, but then it can’t be sustained because the drilling hasn’t really happened yet to offset the declines and then it starts to go down. Then we’ll see what happens over the long term, whether the companies go back in.
Yeah, I think you’re right. I think notwithstanding a short term increase, I think potentially by the end of the year you’ll start to see it go down again. I mean, the industry’s just been gutted, as you said, by the human resources and the exodus of the talented people and then no maintenance capital. I saw some aerial photos or satellite photos yesterday of these oil fields. I mean, they’re just rusting, decrepit mess.
Jackie Forrest:
Right. No skilled workers to turn things around. Scenario two is when we’ve talked about oil production stays flat, but US lists restrictions on importing Venezuelan oil. We’ll see what the Chinese do, but regardless, the Chinese still need heavy oil. So Canada’s way to mitigate that would be to send the oil to China.
Scenario three, stable Venezuela attracts capital and growth production meaningfully. This comes back to where we started. This is a scenario where we, Canada, need to be thinking about building this West Coast pipeline. It’s not just from an oil market perspective, it’s from a perspective of diversifying our trade, increasing our sovereignty, and creating more allies. In a world that’s got spheres of influence and conflict, and having more allies is going to be important.
Peter Tertzakian:
Well, we’ll have no shortage of things to talk about this year. It’s a very unpredictable world, and we talked about unpredictability last year and how to think about it, and we’re going to talk about it again. Stay tuned for our next podcast next Tuesday, where we will also talk about our predictions for what we think is going to turn out in this unpredictable world.
Jackie Forrest:
All right. Thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
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