Trump's Venezuela Gamble Is Not A 'War For Oil,' Says Economist Paul Krugman: It Is A War For 'Oil Fantasies'

Economist Paul Krugman is casting doubts on the economic rationale behind President Donald Trump’s recent actions in Venezuela, which led to the capture of the country’s President Nicolás Maduro over the weekend.

This Is A War For ‘Oil Fantasies’

In his newsletter on Wednesday, Krugman said, “whatever it is we're doing in Venezuela isn't really a war for oil,” adding that the vast oil wealth that Trump envisions “doesn’t exist,” making this a war for “oil fantasies” instead.

The Nobel Prize-winning economist noted that Venezuela's claim of holding the world's largest oil reserves expanded from roughly 100 billion barrels to 300 billion barrels when Hugo Chávez was the country’s President, and it wasn’t due to major discoveries, but the government’s decision to reclassify its heavy oil as “proved.”

Krugman also noted that the country’s oil output has never kept pace with its massive reserves, which he said reinforces the view that these claims are largely fictional.

He pointed to the low prevailing crude oil prices relative to historic standards today, with WTI February futures trading at $56.29 per barrel, which he said was made possible by fracking methods used by U.S. oil giants.

With U.S. fracking profitable near $62 a barrel and Venezuelan oil in the Orinoco Belt requiring breakeven prices of “more than $80,” Krugman concluded that Trump's vision of an oil windfall “would be an unrealistic fantasy.”

He also highlighted the stark shift in Trump’s messaging since the events of last week, with his latest suggestion that the government might reimburse oil companies for investments in Venezuela.

The administration went from “big talk about huge money-making opportunities” to effectively subsidizing the oil industry at the taxpayers’ expense.

Venezuela’s Expensive, Extra-Heavy Crude

Venezuelan oil, primarily concentrated in the Orinoco Belt, is overwhelmingly heavy-crude oil, which is expensive to extract and refine, and as a result, sells at a discount.

Despite these concerns, Goldman Sachs analysts have said that the global energy markets are looking at a meaningful reset following the recent political upheaval in Latin America, which could result in downside pressure on the commodity over the next few years.

The United States Oil Fund LP (NYSE:USO), which tracks the price of light, sweet crude oil, is down 3.53% over the past week. The fund scores poorly on Momentum in Benzinga’s Edge Stock Rankings, with an unfavorable price trend in the short, medium and long terms. Click here for deeper insights into the stock.

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