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Early Saturday morning, United States (U.S.) military forces captured Venezuelan president Nicolas Maduro and his wife. According to U.S. official sources, both will be held pending legal proceedings in the U.S.
Much else, however, remains unclear. President Trump has stated publicly that the U.S. will “run” Venezuela, but he has provided few details about how. Delcy Rodriguez, who was Maduro’s vice president, was sworn in as interim president and has already indicated her strong opposition to the U.S. plans for “regime change.”
The situation is therefore uncertain and will likely remain fluid. Nevertheless, some initial implications for markets and investors are worth highlighting.
U.S. intervention is not unprecedented. The U.S. has a long history of intervening in the Western Hemisphere. The U.S. first formally declared its “hegemonic interests” in the region via the Monroe Doctrine of 1823. It would therefore be incorrect, in our view, to consider this week’s action as a fundamental change in U.S. foreign policy, or to suggest that similar steps might be contemplated in the Middle East or elsewhere.
Defense investment becomes more important. The Trump Administration has reinforced the perception that the U.S. is willing to act unilaterally and to use force. Other countries, with territorial interests elsewhere, could be emboldened by the U.S. use of power. This action will also likely add to the uncertainty of the dollar’s role as the “safe heaven” while raising further questions about deterioration of international institutional pillars. Today’s U.S. military action is therefore likely to reinforce the trend, well underway, for various countries worldwide to invest more in their national security. That has been one of our key investment themes since the Russian invasion of Ukraine.
Limited short-term oil supply impact. Given the uncertainties about how Venezuela will be governed and given the checkered U.S. history of “regime change” in petro-countries (e.g., Iraq or Libya), oil markets are unlikely to anticipate a rapid increase in crude oil supply from Venezuela. Venezuela has the world’s largest reserves of crude oil (over 300 billion barrels), but the poor state of its ageing oil extraction and transportation infrastructure, coupled with the low quality of its “heavy” crude, suggest that even the arrival of political stability will not quickly increase its crude oil output or exports (presently around 1 million barrels per day, or roughly 1% of world output). Another factor to keep in mind is that most of Venezuela’s oil is exported to China.
Potential long-term oil market impact stronger. Longer-term stability in Venezuela, coupled with a potential peace deal in Ukraine, could release more than 5 million barrels per day of oil onto global crude markets by the end of this decade. If so, that would amount to about 5% or more of global crude output, enough to keep oil prices depressed for longer, which would be a clear positive for global growth and a restraint on inflation.
In sum, this week’s U.S. military action is not unprecedented, nor is it likely to reflect a fundamental shift in U.S. foreign policy. Alone, it cannot unlock Venezuela’s massive crude oil reserves. For that, durable political stability is necessary. Accordingly, the initial reaction to the military action across equity, fixed income, and commodity markets is apt to be small. But the use of force will reinforce the view in many countries of the need to boost spending on national security.
Finally, and over the longer run, a more stable, productive, and prosperous Venezuela will have the potential to offer the world significant supplies of oil. That would be significant for global growth, but it will take political stability and considerable investment to unlock that potential. Getting rid of the corrupt Venezuelan government may be good, but as Colin Powell once said: “If you break it, you own it.”
Stephen Dover, CFA, is Franklin Templeton’s Chief Market Strategist and Head of the Franklin Templeton Investment Institute. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.
Lawrence Hatheway is Global Investment Strategist – Franklin Templeton Institute.
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