US invasion of Venezuela could spark severe oil crisis

UNDER-REPORTED in our part of the world are the very serious consequences for the entire world, and the Philippines, of a US war against Venezuela. Indeed every day, US President Trump in word and deed is preparing America for war, in position in the Caribbean near Venezuela waters.​

The US aircraft carrier strike group (USS Gerald R. Ford) and more than 10 associated warships have been positioned near Venezuelan waters since last month carrying around 15,000 US personnel, including at least one Marine Expeditionary Unit capable of amphibious land operations. Last week, Trump announced that Venezuelan airspace was closed, a clearest sign of an imminent invasion.

I have devoted my Monday column and this one to post the explanation of this coming tectonic geopolitical development and the views of one European expert on the issue, Yanis Varoufakis.

Varoufakis’ words start here:

“The Trump administration designated Maduro and Venezuelan government officials as members of the ‘Cartel de los Soles’ foreign terrorist organization on November 24th. This is an escalation with profound economic consequences. When you designate a government as a terrorist organization, you criminalize not just government-to-government relations, but any economic activity that might benefit that government. That means any company anywhere in the world that does business with Venezuela could potentially face prosecution under US law for material support of terrorism.

Think about the chilling effect on trade. Venezuela imported roughly $12 billion worth of goods in 2023. Most of that came from China, Turkey, Brazil and European suppliers. If those companies face potential criminal liability for continued trade, Venezuela’s import capacity collapses even further.

Venezuela’s economy has already contracted by approximately 75 percent since 2013. GDP fell from $337 billion to roughly $97 billion. This is economic collapse on a scale rarely seen outside of major wars. Hyperinflation peaked at over 1 million percent in 2019 before dollarization brought some stability. But with imports collapsing and the oil sector facing further decline, we could see renewed inflationary spirals.

Collapse

When economies collapse severely, you get migration. Venezuela has already experienced the largest refugee crisis in Western Hemisphere history, with over 7.7 million people fleeing the country since 2014. That’s more than one-quarter of the population. If economic conditions deteriorate further, we could see another 2 to 3 million people attempting to leave.

Where do they go? Colombia has already absorbed 2.9 million Venezuelan refugees. Panama has become a major transit route for migrants heading north through the Darién Gap. Mexico is seeing increased flows, and ultimately many are heading to the United States. The economic cost of this migration is enormous — both for host countries providing services and for Venezuela losing its most productive population.

Let’s talk about what military conflict would actually mean economically. If the United States conducts strikes against Venezuelan military targets or attempts a broader intervention, oil markets would go into panic mode immediately. We saw this during the Gulf War in 1990-1991 when oil prices spiked from $20 to $40 per barrel in a matter of weeks. We saw it again briefly in 2003 with the Iraq invasion.

A military conflict involving Venezuela would be different because of Venezuela’s strategic location. The Caribbean is a crucial transit route for global commerce. Approximately 12 percent of global seaborne oil trade passes through the Caribbean. Fifteen percent of US petroleum imports transit through the region. If that route becomes a conflict zone, insurance rates for shipping spike dramatically. We’re talking about increases from current rates of around 0.1 percent of cargo value to potentially 2 to 3 percent of cargo value.

In a conflict zone, that might not sound like much, but when you’re shipping 500,000 barrels of oil worth $43 million at current prices, a 2 percent insurance premium adds nearly $900,000 to the cost. That gets passed directly to consumers. Shipping costs from the Gulf of Mexico to East Coast refineries could double or triple overnight.

Sukhoi

Venezuela has 21 operational Sukhoi SU-30 fighters that can be armed with supersonic Kh-31A anti-ship missiles. These missiles have a range of about 160 km and are specifically designed to target naval vessels. Venezuela also reportedly now has Russian Pantsir-S1 and Buk-M2E air-defense systems. If Russia provides more advanced missile systems like the Kalibr cruise missile, which has a range of 2,500 km, suddenly every US Navy vessel in the Caribbean is potentially at risk.

The USS Gerald R. Ford carries over 4,500 sailors. A Ford-class carrier costs $13.3 billion to build. Losing even one major naval vessel in this conflict would be an economic and strategic catastrophe beyond measure.

The risk premium on such an engagement is enormous, which is precisely why Venezuela and Russia are emphasizing these capabilities. They’re trying to make the cost of intervention prohibitively high.

From a game-theory perspective, both sides are locked in a commitment problem. The Trump administration has deployed massive military resources and issued ultimatums. Backing down now would be seen as weakness, potentially emboldening rivals elsewhere. But Venezuela, supported by Russia, has its own credibility on the line. If they capitulate to US pressure, Maduro’s government likely falls and Russia loses a strategic foothold in the Western Hemisphere.

This is where economics and strategy become inseparable.

Standoff

The current standoff is consuming roughly $10 million per day in direct military costs for the United States. That’s $3.7 billion annually. But the indirect costs — higher oil prices, reduced trade, increased migration — are likely 10 to 20 times higher. We could easily be looking at $40 to $70 billion in total economic impact annually if this situation continues.

And it will continue because neither side can afford to back down without achieving their core objectives. The United States wants regime change in Venezuela, or at minimum a complete reorientation of Venezuelan foreign policy away from Russia and China. Venezuela wants survival, sanctions relief and access to international markets for its oil. Russia wants to maintain its strategic partnership and use Venezuela as leverage in broader negotiations over Ukraine and European security. China wants stable energy supplies at reasonable prices and doesn’t particularly care who governs Venezuela as long as the oil keeps flowing. India finds itself caught in the middle, trying to balance its growing strategic partnership with the United States against its desperate need for affordable energy to fuel economic growth.

Let’s examine what the endgame scenarios look like economically.

Scenario 1: The United States successfully pressures regime change in Venezuela through a combination of military pressure, economic sanctions and support for opposition forces. A new government comes to power, normalizes relations with Washington, and begins the long process of rebuilding the oil sector with American and European investment.

In this scenario, Venezuelan oil production could potentially recover to 2 to 2.5 million barrels per day within 5 to 7 years. That additional 1.5 million barrels per day would represent a meaningful increase in global supply, potentially bringing prices down by $10 to $15 per barrel in the medium term. The US gets a friendly government in Caracas. Russian influence is expelled from the Western Hemisphere, and American energy companies get access to the world’s largest oil reserves.

Infrastructure

But here’s the problem: Rebuilding Venezuela’s oil infrastructure would require between $100 and $200 billion in investment over a decade. Given the political risk, investors would demand risk premiums of 10 to 15 percent returns. At current oil prices, that might be achievable. But if oil transitions to a structurally lower price environment due to increasing renewable energy adoption, as many predict, those investments don’t make economic sense.

Scenario 2: The current standoff continues indefinitely, becoming a frozen conflict similar to the situation with Cuba for decades. Sanctions remain in place. Venezuelan oil production continues declining, and the country becomes increasingly dependent on Russia and China for economic survival.

In this scenario, we’re looking at sustained higher oil prices, continued migration flows, and ongoing military expenditures for the United States. The economic drag on the US economy would be persistent but manageable — perhaps 0.2 to 0.3 percentage points of GDP growth annually. However, the cumulative cost over a decade would be substantial, potentially $500 billion to $700 billion in lost growth. Russia and China strengthen their position in Latin America, and the trend toward de-dollarization accelerates as more countries seek to avoid being caught in similar sanctions regimes.

Scenario 3: Military escalation. The United States conducts broader strikes against Venezuelan military infrastructure or attempts a limited intervention. Venezuela, with Russian support, retaliates against US naval vessels or regional allies. The conflict escalates into a broader regional war involving Colombia, Brazil and potentially other actors.

This is a nightmare scenario economically. Oil prices spike to $150 to $200 per barrel. Global growth contracts by 2 to 3 percentage points. The US faces simultaneous challenges in Europe with Ukraine, in the Middle East, and now in Latin America, overstretching military resources. The federal budget deficit explodes to $2.5 to $3 trillion annually as military spending surges and economic growth collapses.

Realistically, I assess scenario 2 as most likely. Neither side wants full-scale war, but neither can back down without unacceptable losses. We’re heading toward a protracted economic siege of Venezuela, with Russia and China providing enough support to prevent total collapse, but not enough to restore prosperity.

Great power rivalry

The Caribbean becomes another zone of great power competition with all the associated costs and risks. For global markets, this means several things.

First, oil volatility is here to stay. Any resolution of this crisis is years away, which means the risk premium on oil prices remains elevated. Energy-intensive industries need to plan for sustained higher costs.

Second, the de-dollarization trend accelerates. More countries will seek alternatives to dollar-based trade to reduce vulnerability to US sanctions.

Third, defense spending globally increases as countries observe that economic interdependence didn’t prevent great-power competition — it just changed the battlefield.

The broader lesson here is that we’ve entered an era where economic policy and military strategy are completely fused. Sanctions are weapons. Trade policies are tactics. Currency systems are strategic assets. The post-Cold War assumption that economic integration would reduce conflict has been proven wrong. Instead, economic integration created vulnerabilities that can be exploited.

And we are watching that exploitation happen in real time off the coast of Venezuela.

For investors, this environment demands a fundamental reassessment of risk. Geographic diversification isn’t enough when conflicts can disrupt global supply chains. Currency diversification becomes essential when the dollar’s role is being challenged. Energy security transitions from a “nice to have” to a critical requirement for any major economy.

The Venezuela crisis is a preview of the conflicts to come. As climate change disrupts agriculture, as water resources become scarce, as critical minerals for technology become strategic assets, we’ll see more situations where economic interests and military power intersect. The cost of these conflicts — measured in reduced growth, higher defense spending, and lost opportunities for cooperation — will be measured in the trillions.

What we are witnessing isn’t just about Venezuela. It’s about the rules of the global economic system being rewritten through confrontation rather than negotiation. And that process, regardless of how it resolves in this particular case, will define the economic landscape for decades to come.”

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US invasion of Venezuela could spark severe oil crisis
Source: Breaking News PH