Venezuela’s Oil Industry: Political Risk, Infrastructure Decline, and U.S. Supply Chain Impacts

Written by Vaish Akella (Research Lead), Stephanie Bui, Natalie Grooter, Will Streets

EXECUTIVE SUMMARY:

• Venezuela historically relied heavily on oil exports, particularly to the United States, which drove rapid economic growth in the mid-20th century but also created long-term dependence on a single industry

• Venezuela’s economy has relied heavily on oil exports, especially to the United States, which brought wealth but made the country very dependent on one industry

• Restoring Venezuela’s oil industry would require hundreds of billions of dollars to rebuild pipelines, refineries, and supporting infrastructure, making recovery extremely costly

• Political instability, sanctions, and weak legal protections have discouraged foreign investment, leading many major energy companies to view Venezuela as too risky for long-term projects

• The decline in Venezuelan oil production has forced U.S. refineries and global markets to rely on alternative sources of heavy crude, such as Canadian oil, reshaping regional and global energy supply chains

Introduction

The United States and Venezuela have had a long history of economic ties driven largely by Venezuelan oil. Throughout the mid-20th century, Venezuela emerged as one of the world’s richest oil producers and a major supplier to the U.S., with oil revenues creating rapid economic growth and making the country one of the wealthiest in Latin America by the 1960s. This relationship was built on foreign investment and export-led growth, but it began to shift as Venezuela became increasingly dependent on oil revenue and government control expanded. The nationalization of the oil industry in the 1970s marked a major shift, with the Venezuelan government taking full control over oil production and revenues. While initially this policy increased government revenue, it ultimately increased Venezuela’s dependence on oil and left the economy vulnerable to price swings and mismanagement. These factors contributed to declining production, economic instability, and a more strained relationship with the United States (University of Toronto). 

Impact on Infrastructure

Venezuelan oil infrastructure began to decline after Hugo Chávez's government took control in 2000 and implemented the Hydrocarbons Law, which raised royalty payments from 16.67% to 30% and required that the state hold at least a 50% stake in all primary oil activities (U.S. Department of State). The law shifted PDVSA (Venezuela's state-owned oil and natural gas company) from an autonomous public company to an entity fully controlled by the Ministry of Oil and Mining. This caused many skilled workers to become outraged and go on strike, which ultimately led to mass layoffs implemented by Chávez of more than 18,000 employees. These skilled employees moved to work in different countries, leaving Venezuela with few skilled workers in its main industry of income—the Venezuelan Brain-Drain.

While oil production was already declining under the rule of Chávez, when his successor, Nicolás Maduro, took over in 2013, production lowered even further, below 0.5 million barrels per day (CongressGov). Venezuelan oil is very thick; Professor David Levine describes it as “the consistency of cold peanut butter” (USBerkeley). It is not free-flowing oil that is usable as soon as it is harvested from the ground; it must go through an expensive and specific refining process using specific infrastructure. In fact, in 2023 President Trump called it, “the worst oil probably anywhere in the world” during his campaign before capturing Maduro in 2025 to take over Venezuela's oil reserves (SkyNews). However, as production levels in Venezuela dropped in 1999, the infrastructure used to manufacture this crude oil was left to severely deteriorate.

Without this expensive machinery, the oil reserves in Venezuela are useless, trapped in the ground, and inaccessible without infrastructure investment. Restoring Venezuelan infrastructure and the power grid that has also been under maintained to begin rampant oil production again, experts estimate will cost $183 billion (WorldOil). This investment is an additional expense on top of the already expensive-to-produce crude oil Venezuela contains. It is clear why big U.S. oil companies such as Exxon and Conoco are hesitant to invest in Venezuelan oil; they are concerned about quality over quantity, especially since Venezuela isn’t the only option. Other countries such as Guyana also have large oil reserves except their oil is lighter, more economically beneficial to produce, and is unaffected by international sanctions (NPR).

Figure 1: Venezuelan Crude Oil Production, 1999–2025. The chart shows production falling from over 3 mbd in the early 2000s to below 1 mbd by the 2020s, highlighting the effects of political instability, declining infrastructure, and reduced investment in the oil sector

Investments

Rystad Energy estimates that approximately $183 billion will be required over the next 15 years to restore Venezuela's oil output to a potential 3 million barrels per day (bpd) (WorldOil). This investment encompasses a variety of upstream, midstream, and infrastructure investments, including rebuilding pipelines and repairing storage facilities. About $53 billion of this total is needed just to sustain the current production at 1.1 million bpd according to, Rigzone, which is below one-third of Venezuela’s historical peak production (Congress)

The amount of capital needed for investments is not the only constraint; investor confidence is equally, if not even more important. Companies remain cautious due to Venezuela’s history of volatility and unpredictable policies. The lack of strong legal protections and high political risk raises the cost and uncertainty of investing. An expert in the sector and the current CEO of ExxonMobil, Darren Woods, has described Venezuela as “uninvestible,” emphasizing the urgent need for investment protections that would be necessary before large firms commit to long-term investments (WorldOil).

Along with the political issues, uncertainty persists regarding U.S. government involvement in Venezuela’s oil sector. Recently the U.S. Treasury Office of Foreign Assets Control (OFAC) has issued several General Licenses, that gradually expand the involvement of U.S. based companies in the region. General License 46 permits certain sales of Venezuelan origin oil. This has enabled the exportation and trade of crude oil under specific conditions. General License 47 permits the sale of light grade U.S. origin oil to be used to dilute the heavy oil produced in Venezuela, which is essential for enabling its flow through pipelines and refineries (HKlaw). Building on these, General License 48 allows for U.S. entities to provide goods, services and resources deemed necessary to maintain and grow the Venezuelan oil industry. Finally, the most recent General License 49 takes this a step further, by allowing U.S. entities to negotiate contracts for investments (Akin). These licenses facilitate the movement, trade, and limited authorization of investing in the oil sector, but they do not eliminate underlying risks or fully authorize unconditional investing. The political sensitivity of the region and its history of sanctions lead many investors to view the area as vulnerable to potential reversal, reinforcing the idea of a wait-and-see approach. As long as the political atmosphere lacks long-term predictability, companies will face risks and remain unable to fully commit long-term investments.

Unintended Consequences

U.S. involvement in Venezuela has created several unintended disruptions in global and domestic oil supply chains. One major issue is the sharp slowdown in Venezuelan oil exports. U.S. military actions and sanctions halted tanker loadings and forced ships to reroute, cutting export levels to roughly half of late 2024 volumes (Business‑Standard). Because the oil cannot leave the country, storage tanks have filled up, increasing the likelihood that PDVSA may need to reduce production even further (Business‑Standard).

Inside Venezuela, the industrial supply chain has weakened after years of underinvestment and sanctions (Logistics Viewpoints). Frequent power outages, broken port equipment, and delayed maintenance make it difficult to operate or repair essential systems, while outdated terminals and an unstable power grid further limit reliability (Energy Magazine).

Venezuela’s extra‑heavy crude adds another challenge because it requires imported diluents like naphtha to flow through pipelines. Supply chain disruptions have made these diluents hard to obtain, slowing production (DiscoveryAlert). Many U.S. refineries also struggle to process this type of crude efficiently, creating additional bottlenecks. The U.S. policy continuity has reinforced these issues; the Biden administration largely maintained the Trump‑era sanctions, limiting Venezuela’s export flexibility (AP News).

A major factor in the downstream impact is refinery capability. Many Gulf Coast refineries were built to process heavy crude, including Venezuelan grades, so they feel immediate effects when Venezuelan supply declines (WSJ). When this happens, refiners often substitute Canadian heavy crude, which fits the same equipment (EIA). Pipeline geography adds further constraints. Gulf Coast facilities can receive heavy crude by tanker, but Midwest refineries, such as Marathon’s Detroit facility, depend on Canadian crude delivered through Enbridge pipelines, which do not transport Venezuelan oil (Marathon Petroleum; Enbridge).

Finally, Venezuela’s production struggles did not begin with recent sanctions. Earlier structural shocks and operational breakdowns in the early 2000s weakened PDVSA’s long‑term stability, making the system more vulnerable to modern disruptions (EIA Background).

Overall, Venezuela’s crisis is shaped by political decisions as well as the material realities of logistics, crude quality, damaged infrastructure, and U.S. refinery and pipeline configurations. These combined factors create long‑term bottlenecks that affect both Venezuela and the global oil market.

Figure 2: U.S. Imports of Venezuelan Crude Oil and Petroleum Products, 2000–2023. The sharp decline from historically high import levels in the early 2000s to near-zero levels by the early 2020s illustrates how geopolitical tensions and supply chain disruptions significantly reshaped trade patterns (EIA)

Figure 3: OPEC Basket Oil Price, 2019–2024. This graph shows a broad decline in OPEC oil prices, signaling weaker market conditions that disproportionately impact Venezuela, who's heavy‑sour crude already sells at steep discounts and is more vulnerable to global price drops. (OPEC)

Conclusion

Overall changing politics, along with shifts in the global oil market, have played a major role in shaping Venezuela’s oil industry and its relationship with the United States. As shown in crude oil pricing trends during the modern era, fluctuations in global oil prices have significantly affected countries that rely heavily on oil exports. Venezuela’s heavy crude already sells at a discount compared to lighter oil, so when global prices fall, the country is hit even harder economically. At the same time, political instability, sanctions, and declining infrastructure have made it difficult for Venezuela to increase production or attract the large investments needed to rebuild its oil sector. As a result, even though Venezuela holds some of the largest oil reserves in the world, its ability to participate fully in the global energy market has been limited which shows how both market conditions and political decisions continue to shape the future of the industry.