The US military action in Venezuela does not change the global market environment, for now. The incident has not affected the oil market, hence global inflation, outlook much. It also has not changed the calculus for China regarding its Taiwan policy, in my view, hence geopolitical risk to the global markets. However, the Venezuelan incident could have some macro impact on China as it is the major investor and creditor to Venezuela, but the risk remains manageable. The incident has benefitted precious and industrial metals, and the positive impact is expected to last.
Impact on the US – small
After decades of sanctions and political pressure, trade and financial linkages between Venezuela and the US are quite small now. US exports to Venezuela were just USD3.6 billion last year (less than 0.2% of total US exports), and imports are similarly small. The US banking sector exposure is also low.
Venezuela has not reported liability data for a decade; but the World Economic Forum estimates that Venezuela owes a total of USD150-170 billion in international liabilities. That is small compared to more than USD300 trillion of global total debt or to USD38 trillion of total US debt, according to US the Treasury. So, contagion from Venezuelan liabilities should be minimal.
Two-sided impact on oil – small
The upside
Although Venezuela has the largest oil reserves in the world (303 billion barrels, or 17% of global reserves), its production has dwindled to about 1 million barrels per day, less than 1% of total global production of 103 million barrels, due to US sanctions and lack of investment. While its production could be reduced further in
the near term if the US continues its intervention and naval blockade, any upward pressure on global oil prices should be negligible especially when the global oil market is in surplus.
The downside
If Venezuela works with the US to boost oil production to level seen in the 1990s of around 3 million barrels per day (Exhibit 1), that could have some downward pressure on global oil prices if the current global oil market surplus remains.
However, production is unlikely to be raised significantly quickly due to decades of underinvestment and outdated infrastructure. It may take a few years for production to return to its 1990 levels, assuming US investment materialises to facilitate local production. Furthermore, Venezuela produces heavy sour crude. It will take time for global supply chains and refining capacity to adapt to the flow of new Venezuelan oil.
Risk for China – manageable
The Venezuelan impact on China comes mainly from the financial side, as it is the largest creditor to Venezuela with outstanding loans estimated at USD20 billion (repayable by crude oil) under the ‘oil for loans’ programme. That is more than 18% of China Development Bank’s (China’s largest policy bank and lender to Venezuela) USD110 billion in total outstanding loans to the Belt & Road Initiative countries.
Venezuela’s foreign liabilities are mostly owed to China’s policy banks. None of China’s Big Four and other commercial banks operate there due to US sanctions.
Meanwhile, official data shows that Venezuela accounts for less than 0.1% of China’s total crude oil imports (outside the ‘oil for loans’ programme). Non-oil imports are also negligible as nearly all of Venezuela’s exports are crude oil and oil related products.
With deep pockets of the policy banks and few private sector involvements, Venezuela is a manageable financial risk to China. However, it could be a large political liability given the close relationships between the two countries.
Broader geopolitical implications
The US military action in Venezuela have raised geopolitical risks elsewhere. The key concern centres around the risk of China attacking Taiwan, which will disrupt global semiconductor supply chains and potentially develop into a broader regional conflict.
I beg to disagree. As I have argued for a long time, invading Taiwan to force a unification is not Beijing’s preferred policy. Legally, the Chinese army cannot launch any attacks. This is because none of the three conditions – 1) Taiwan declares independence, 2) some forces prompt Taiwan to go for independence, and 3) peaceful means to achieve unification have all failed – under Article 8 of China’s 2005 Anti-Secession Law is fulfilled that will the PLA to attack Taiwan.
There are other options for Beijing, including conducting military drills around the Island as a show of force and displeasure (as China has been doing since Nancy Pelosi’s visit to Taiwan in 2022) and, in an extreme case, taking over some outlying islands off the Taiwan coast. Furthermore, China has more imminent domestic economic problems to fix than Taiwan.
Rather, in my view, the US is a riskier factor in raising geopolitical tensions, as it is threatening to intervene in other parts of the world, including Iran and Greenland (straining relations with Denmark and the EU).
Investment implications
Market reactions to the Venezuelan incident have been muted. Some sectors, including oil, defence stocks and precious and industrial metals have even benefitted, and the impact may even last for a while.
The straining of the US-EU relations over Trump’s indication of taking over Greenland is boosting European defence stocks. More upside is likely, including for global defence stocks.
Precious and industrial metals are also benefiting, especially rare earth. China has watched Maduro’s capture with great concern. Beijing has provided loans for years to rebuild and upgrade Venezuela’s oil infrastructure and refineries in exchange for cheaper access to its oil. As the US is taking hold of Venezuelan oil, China will likely lose that privileged access.
If China retaliates, and an effective tool (as we saw last year) is to restrict rare earth exports to the US. Though Venezuela also has rare earth resources that the US could exploit, it cannot do so quickly due to technical and financial reasons. So, China still holds the US by the neck in terms of rare earth supply, as it remains the world’s most dominant exporter of rare earths, accounting for more than two-thirds of global production.
Silver also benefits in a similar fashion to rare earth metals. Since the Venezuelan incident, China has restricted the right to silver exports to only large, state-approved companies meeting high production and compliance thresholds. The market estimated that this could cut China’s export capacity by half, removing 5,000 tonnes. Since China controls about 2/3 of the world’s refined silver supply, the restriction tightens the global pipeline and exerts a structural supply squeeze that could continue to support global silver prices.
End.
