Charles St-Arnaud: Trump's Venezuelan coup should act as a wake-up call for Canada
The ouster of Nicolás Maduro as Venezuela’s president has shifted control of the world’s largest crude oil reserves into the hands of the United States. This, along with the U.S. administration’s stated goal of encouraging massive investment by U.S. oil companies to revitalize Venezuela’s struggling oil infrastructure, clearly shows President Donald Trump’s ambition to expand the country’s oil production dramatically.
Venezuela produces heavy oil, very similar to oilsands crude , making it a close substitute for Canadian crude imports, which could be the reason why Trump has repeatedly said that the U.S. does not need Canadian oil. But could Venezuelan oil replace Canadian oil in the U.S.?
This is unlikely in the short term. First, Venezuela’s current output stands at a modest one million barrels per day, less than a quarter of the volume of Canadian oil imported by the U.S. Second, most of the Canadian oil is used at refineries in the U.S. Midwest and the U.S. West Coast, which is out of reach for Venezuelan crude due to a lack of transport capacity and prohibitive shipping costs, leaving only Canadian crude exported to the Gulf Coast vulnerable to short-term competition from Venezuelan oil.
The more immediate impact would be felt through pricing rather than direct displacement. Increased imports of Venezuelan oil into the Gulf Coast would widen the price differential between Canadian crude and West Texas Intermediate (WTI).
A quick estimate suggests that each additional dollar of discount on Canada’s heavy oil reduces Canadian oil revenues by about $2 billion annually, meaning that if the oil differential were to climb to US$20 a barrel, up from an average of US$12 in 2025, it would reduce revenues by $16 billion, more than offsetting the estimated benefits from the Trans Mountain pipeline expansion (TMX).
However, at the current WTI price of US$57, Western Canada Select (WCS) would be trading well below US$40 per barrel, leading to reduced investment and possible production curtailment.
While the regime change in Venezuela is unlikely to trigger an immediate shift in U.S. oil sourcing, the potential for increased Venezuelan production cannot be ignored, even if the scale of investment required to restore Venezuela’s oil sector is immense, estimated at US$183 billion, according to Rystad Energy AS.
The question is whether U.S. oil producers see a case for spending that much, even before considering the inherent risks of investing in Venezuela and their previous experience investing in the country.
Similar to Canadian oil producers, U.S. producers have been returning a greater share of their revenues to shareholders in recent years. Whether they will be willing to sacrifice these sources of revenue and put sizable capital at risk remains uncertain. This is especially the case when, at current low oil prices, the return on such an investment looks doubtful.
That the U.S. directly intervened in Venezuela suggests Trump will do everything to generate a significant increase in oil production; whether this takes the form of guaranteed elevated returns for U.S. oil producers or threats of retaliation against those holding back remains to be seen. But already, the president has floated the idea that by investing in Venezuela, U.S. oil companies that were evicted without compensation during the nationalization of their assets under Hugo Chavez could fully recoup their losses.
Nevertheless, even with Trump’s support and the billions of dollars in investment, Rystad Energy estimates Venezuela’s oil production would only reach two million barrels per day in 2030, and it would take 15 years to reach three million barrels per day — the level of output sustained in the early 2010s. That’s still not enough to fully replace imports from Canada, but it’s meaningful enough to have a significant negative impact on Canada’s industry.
Does the access to Venezuelan oil weaken Canada’s leverage in its trade negotiations with the U.S.? Maybe, but only marginally. Canadian oil is not going to be replaced any time soon, so Canada still has some leverage for a while. As such, Canada’s reliability and stability in its supply give the country leverage, especially given the highly uncertain outlook for long-term production in Venezuela. However, as time passes and Venezuela’s production trajectory becomes clearer, there is a risk that Canada’s leverage could vanish.
For Canada, the lesson is clear: trade diversification is not merely a strategic objective; it has become an urgent necessity. The country’s heavy reliance on the U.S. market, where more than 90 per cent of Canadian oil is exported, exposes it to significant risks.
The recent expansion of the Trans Canada pipeline has demonstrated the tangible benefits of diversification. It suggests that greater West Coast export capacity would yield the most economic benefits for Canada.
It increases the capacity to move oil away from the Midwest-Gulf Coast corridor, which would reduce or even prevent a widening discount on Canadian crude; it provides greater access to Asia, which is expected to be the region with the fastest global oil demand growth over the next decade; and it reduces the likelihood of direct competition, since shipping Venezuelan oil to the Pacific is costlier.
Nevertheless, such a project remains costly, and the recent experience with TMX, coupled with currently low prices, could deter a private proponent. Similarly, you could wonder whether a single pipeline will be enough in the long run, given the risk of more than two million barrels of Venezuelan crude reaching the U.S. by 2030. This suggests that further export capacity outside the U.S. may be required.
The current situation in Venezuela should be a wake-up call for Canada. Canada’s oil exports to the U.S. are not a short-term risk, but the current situation highlights the importance of trade diversification and reinforces the need and urgency to invest in export infrastructure.
Charles St-Arnaud is chief economist at Servus Credit Union.