Commentary: The US-Venezuela oil deal looks like it is built on quicksand

Commentary: The US-Venezuela oil deal looks like it is built on quicksand US President Donald Trump's oil deal with Venezuela is an opaque settlement that may put new elections further out of reach, says Liam Denning for Bloomberg Opinion. NEW YORK: Oil has what you might call a weak correlation with liberal democracy. Consumers have long tolerated being dependent on unstable or unsavoury regimes for their energy. As Paolo Scaroni was fond of observing when he ran Italian oil major Eni, no one drills for oil in Switzerland. Which brings us to President Donald Trump’s new “agreement” for the United States to apparently take majority ownership of more than 65 billion barrels of Venezuela’s oil reserves. Acting Venezuela President Delcy Rodriguez muddied the messaging, such as it was, with a speech this weekend that lauded US money and technology to revive the country’s decrepit oil sector, but was also at odds with Trump’s assertion of US sovereignty over her country’s resources. As of Monday (Aug 31), it appeared that the US would somehow take a direct stake in a private oil company developing 17 oil fields for an initial term of 25 years, thereby receiving preferential terms on some portion of that oil production. For what would constitute a radical shift in Washington’s relationship to both global oil markets and Caracas, the striking lack of transparency on how this might actually work is perhaps its most salient aspect, signalling its vulnerability. The deal smacks of old-school colonialism. Moreover, having struck that deal with an unelected administration headed by the deputy of ousted former President Nicolas Maduro, it might incentivise the US to delay, rather than encourage, new elections in Venezuela. From the perspective of the Switzerland-avoiding oil industry’s perspective, that isn’t necessarily a dealbreaker, as Venezuela’s history demonstrates. The country’s initial oil boom occurred in the decades prior to 1959, before democratically elected governments in Caracas became the norm. Conversely, the rise of resource nationalism under those elected governments in the 1970s, deterring foreign investment, precipitated the first crash in Venezuelan oil output. The pattern was repeated when reforms in the 1990s opened the oil sector to foreign companies again, before Chavismo wrecked it. WHAT VENEZUELA NEEDS Venezuela doesn’t lack for barrels under the ground. Rather, its deficiencies are infrastructure, capital and expertise to rebuild that infrastructure, and credible institutions and safeguards to, once again, entice that capital and expertise back into the country. Rodriguez’s acting administration has taken steps in that direction already, for example by relaxing rules on foreign operators having to team up with the state-owned oil company. Still, while prominent oil majors such as Chevron have expanded output and signalled more to come, these involve relatively small amounts of added production rather than the bonanza sought by Trump. He now seems intent on forcing the issue. But if the idea is to reassure oil majors that overt US involvement offers all the guarantee they need to expand aggressively, it is flawed and most likely counterproductive. Extra-heavy grade oil constitutes the bulk of Venezuela’s reserves. Getting it out of the ground is the work of tens of billions of dollars and many years, however. While oil majors don’t necessarily need a functioning democracy in order to commit, they do need to be reasonably certain that whatever settlement is in place will prove durable. Trump’s deal looks unlikely to deliver on that front. It has been struck between a White House facing likely party setbacks in the rapidly approaching November midterm elections, and Trump’s own departure in early 2029, and a Venezuelan administration with no electoral mandate and taking flak for its poor response to this summer’s devastating earthquakes. That it has all the hallmarks of a resource grab by a US president who in May branded Venezuela as the “51st state” - Canada’s feelings notwithstanding - raises the probability of some future government in Caracas changing the terms, as has happened several times before. Would Trump or another future US president respond with economic, or even military, force against Venezuela in response? If that is what ultimately backstops the majors’ return, they would be wise to avoid getting involved. As much as they don’t need a restoration of democracy for democracy’s sake, they need it as a crucial step in rebuilding the legitimacy of Venezuela’s governing institutions in the eyes of its people. After the tumult of the past two decades, that would offer the surest support for long-term deals involving the country’s resources. An opaque settlement forced on the nation instead, and possibly putting new elections further out of reach, would be inherently brittle. Trump was jubilant over the middle-of-the-night military raid that removed Maduro in January, but seems to have mistaken a necessary first step for a kind of universal template of action. Like extracting the oil itself, restoring democracy in Venezuela will be the work of many years of intense effort, building confidence, addressing complexities and overcoming inevitable setbacks. All too characteristically, Trump instead seeks a shortcut, relying on the premise and relentless pitch of raw US power. For a reminder of how that can go awry, see Iran.