Donald Trump’s grab of Venezuela’s oil is not just about making money. He is also grabbing an ultra heavy grade of highly sulphurous oil that is very difficult to refine. That sounds bad and normally it would be. But in the 1990s the US oil industry was convinced that the era of simply light sweet oil was over and built new refineries to process heavy and sour blends being produced in the Gulf. Today about 70% of US refining capacity is designed primarily to handle heavier crude grades rather than light, sweet crude.

The shale revolution upended that bet by producing plentiful fresh supplies of light sweet oil. Trump has grabbed Venezuelan oil as he needs to feed the starving industrial monster that was specifically designed to eat only what Venezuela produces and can’t easily or efficiently process the light blends. That industrial monster must feed the US economy because now the shale party is about to end. Shale production will not stop, but analysts agree that the boom is over. 2024 was the first year since the revolution began in 2010 that annual production of shale oil showed a decline.

Despite Trump's bluster, the decision to capture Venezuela oil production is actually totally rational and is important for US national security interests.

Back in the 1990s US firms began to look at Venezuela's ultra-heavy, very sulphurous and toxic metal-heavy sludge coming out of Venezuela’s Orinoco Belt and saw it as the future of the oil industry.

Future reserves were geographically concentrated in the Middle East or were “Trash Grades” like the Canadian Bitumen oil sands, Venezuelan Extra-Heavy Orinoco sludge and the Mexican Maya blend from the massive Cantarell field.

The oil majors invested billions into refineries to process it and for a time it worked. And it was not only Venezuela, as Mexico was always producing the similar “Maya” heavy grade of crude. US refiners like Valero, Chevron, and LyondellBasell decided that to stay profitable, they had to spend billions upgrading their facilities. And initially it worked. The unpopular heavy grades could be bought at steep discounts while the refined products went at market rates, creating huge margins.

And then Venezuela itself got in on the act. The state-owned Petróleos de Venezuela S.A. (PDVSA) bought a 50% stake in the US refiner CITGO in 1986 and completed a full takeover in 1990. CITGO owned refineries in Lake Charles, Los Angeles and Corpus Christi, Texas, and was contractually obliged to retool to handle Venezuela’s Orinoco sludge.

The logic was that the Gulf of Mexico basin was destined to be the global hub for processing heavy oil.

Dubbed the Apertura Petrolera (Oil Opening), Caracas sought to attract capital and expertise to manage its technically demanding reserves. The Apertura Petrolera was a Venezuelan government initiative during the 1990s that successfully liberalised the nationalised oil industry to attract foreign investment, technology, and operational expertise.

The policy, framed through Operating Service Agreements and Strategic Associations, offered extraordinary fiscal incentives. These deals, which included low royalty rates “as low as 1%”, underpinned the construction of the upgraders needed to turn Orinoco sludge into exportable synthetic crude and added roughly one million barrels per day to Venezuela’s production capacity by the end of that decade.

Venezuela was sitting on top of the oil world with the US refineries and companies as its close partner. Then it all went pear-shaped.

Hugo Chávez came to power and got greedy. He argued that the Apertura undermined national sovereignty and enacted a new law doubling oil royalties from 16% to 30%. He also insisted that any future oil project must be majority state-owned by the state company PDVSA. In 2006 the government declared the earlier contracts illegal and ordered their conversion into mixed enterprises, stripping partners of their shares. The death blow to the Apertura came on February 26, 2007, when Chávez signed Decree 5200. Foreign firms had to accept a minority stake (max 40%) in the new ventures or leave the country.

Some companies — including Chevron, Total, BP and Statoil — stayed under the new terms. Others, notably ExxonMobil and ConocoPhillips, refused and saw their assets expropriated, kicking off a storm of lawsuits that froze Venezuela assets abroad and killed the investment climate stone dead.

Capital fled. Brains were drained. Oil production collapsed. And infrastructure went into terminal decline. Venezuela went from being the richest country in Latin America in the 1970s to the poorest by the noughties.

As shale production fades, the old refineries come back to the fore. Venezuela’s copious deposits – more three times larger than Russia’s – will feed once more. A lot has been made of the $100bn-plus cost of modernising Venezuela’s oil industry and the decade-long time scale needed to effect those investments. But access to reserves the size of Venezuela’s will ensure the longevity of the US oil industry for multiple decades and ensure its place as a leader for at least several generations.