The US operation in Venezuela became the first significant geopolitical upheaval of this year. As a result, the value of the shares of major US oil companies increased, as well as in the conditions of geopolitical uncertainty, some investors sought refuge, as always, by buying gold and cryptocurrencies.
In general, the oil market reacted unexpectedly calmly – fuel prices did not fall, but even increased slightly, and we will observe the real impact in the long term.
In the world, the price of oil is increasing
Venezuela has the world’s largest officially confirmed oil reserves – about 303 billion barrels, so formally it is an important player in the global oil market. However, the reaction of the financial market reminds us that the amount of reserves alone is not enough. After the change of power, oil prices were expected to fall, quickly flooding the US with Venezuelan oil after the lifting of sanctions. However, the reality was the opposite – on Monday evening, the price of oil rose by almost 1%.
There are two main reasons for this. First of all, taking into account inflation, the global oil price is currently the lowest in almost 20 years – the supply is still excessive, so there is little basis for further price declines; rather, an increase in prices is expected.
Second, although Venezuela has huge oil reserves, the country’s oil infrastructure is outdated and requires significant investment, especially in heavy oil production. Even if US companies get involved, Venezuela’s oil will not reach global markets until several years after the infrastructure is rebuilt. Therefore, the global oil market situation will not change significantly in the near future.
What awaits Latvia?
Meanwhile, fuel prices in Latvia will remain relatively low in the near future, thanks to relatively cheap oil on world markets. The price of oil has probably already reached its lowest point, so this year, as the risk of global prices increases, the average price of fuel in Latvia will likely be higher than last year, additionally taking into account the increase in excise duty on fuel on January 1 of this year.
The Eurozone and Latvia are unlikely to feel a significant immediate impact. In our region, extreme fuel prices are mainly determined by global oil prices, which can remain relatively low if the US oil refining companies in the Gulf of Mexico invest and gradually restore Venezuela’s oil infrastructure.
The biggest gainer will be the USA, the losers will be China and Russia
It is no coincidence that heavy oil accounts for about 60% of all US oil imports. Heavy oil is used in the production of diesel fuel and aviation fuel, so access to Venezuela’s large reserves of heavy oil in the US would provide an opportunity not only to more effectively control fuel prices in the domestic market, but also to gain a competitive advantage in certain fuel product export markets.
Meanwhile, the biggest losers are likely to be China and Russia. Venezuela is an important supplier of heavy crude oil to Chinese refiners, so the future of these flows will increasingly depend on Beijing’s relationship with the US administration. Russia will also feel the pressure – in the long term, the USA will create more competitive pressure in various energy resource export markets, especially in the diesel fuel and aviation fuel segments.
Geopolitical turmoil is harming the world economy
It should be noted that such military operations or unexpected power changes usually increase uncertainty in the global economy. Investors and businessmen become more cautious at such times, consumption decreases, and market fluctuations increase. Such military action generally worsens the economic mood of the population.
Uncertainty is causing capital to flow to safer assets traditionally considered a “safe haven” in times of crisis, such as precious metals. It can be seen that gold prices have risen again since Monday. Similarly, interest in alternative assets such as cryptocurrencies is growing, although their response is more volatile as usual. This proves that uncertainty creates both risks and opportunities for those seeking safety or alternative profits.