LATAM BLOG: Iran war fuels Venezuela's oil comeback, but democracy lags behind

Venezuela is set to reap a substantial windfall from the global oil shock triggered by the US-Israeli military campaign against Iran and the effective closure of the Strait of Hormuz. But the country's new leadership faces a paradox that analysts say could entrench autocracy while delaying any democratic transition for years.

The conflict, which began with US and Israeli strikes on Iran on February 28, sent Brent crude prices to a high of $120 a barrel on March 9 before Donald Trump's mixed signals about the war's progress dragged them back to around $90 by end of trading. Oil economists broadly agree that if hostilities persist beyond a month, prices could breach the $100-per-barrel mark, a level that, following Russia's 2022 invasion of Ukraine, eventually peaked at $124.

For Caracas, the timing is both a gift and a trap.

Venezuela, which holds the world’s largest proven oil reserves, has historically benefited from instability in the Middle East. Each time conflict disrupts Gulf exports, importing nations scramble to secure crude stocks, propelling prices higher and delivering a surge of oil income to Caracas. Venezuelan economist and former industry minister Víctor Álvarez, writing in El País, argues that the country has never managed this boom-bust cycle without trauma, oscillating between euphoria and despair without building resilience for either phase. "When prices rise, we become intoxicated by the feast of plenty," Álvarez said. "We believe that oil revenues will continue to grow and we don't prepare for times of scarcity."

What has changed structurally this time is that, following the January 3 capture of Nicolás Maduro by US forces, Venezuela no longer controls its own oil revenues. Under Executive Order 14373, signed by Trump and titled "Safeguarding Venezuelan Oil Revenue for the Good of the American and Venezuelan People," proceeds from Venezuelan crude sales are deposited directly into designated US Treasury accounts. US Energy Secretary Chris Wright, who travelled to Venezuela last month for talks with acting president Delcy Rodríguez, announced that oil payment flows are now deposited directly in US Treasury accounts, replacing an earlier mechanism that had channelled revenues via Qatar.

While the US treats the funds as Venezuela's sovereign property in principle, in practice both the Secretary of State and the Treasury Secretary must jointly approve any movement or allocation, determining how much flows back into the domestic financial system, how much underwrites bilateral trade, and how much is directed towards decrepit public infrastructure.

Washington has disclosed that of a first tranche valued at roughly $2bn, some $500mn has been remitted to Venezuela, where it is reportedly being channelled through the banking system to fund hard-currency purchases by private importers.

This arrangement means that any windfall from soaring oil prices will be filtered through Washington before it reaches Caracas – limiting, though not eliminating, the regime's ability to deploy petrodollars as a political instrument.

State oil company PDVSA issued a statement earlier this month pointing to supply contracts with trading houses delivering crude and refined products to the US market as evidence of what it called a historic commercial relationship. The company styled itself as a "reliable provider" committed to the "necessary equilibrium" in global energy markets amid global tensions, and renewed its call for sanctions on the Venezuelan oil industry to be fully lifted.

Chevron this month resumed shipments of diluted crude oil (DCO) – extra-heavy Orinoco Belt crude that requires naphtha as a diluent to achieve the viscosity needed for pipeline transport – to the US Gulf Coast, marking the resumption of a trade flow that had been suspended for months under US sanctions. By late February, PDVSA's storage tanks held 4.8mn barrels of DCO, the largest accumulation of any heavy Orinoco grade, that had been sitting idle throughout that period, according to The Street.

The Hormuz Strait's closure, strictly enforced by Iran's Islamic Revolutionary Guard Corps, transformed what would have been a routine supply story into one with immediate geopolitical stakes. The waterway handles around 20mn barrels per day, close to a fifth of all oil consumed globally, with Saudi Arabia, Iraq, the UAE and Kuwait all routing exports through the passage. Venezuelan crude, by contrast, travels through the Caribbean and into the Atlantic, entirely outside the conflict zone.

Output could recover to between 1.1mn and 1.2mn barrels per day by year-end if sanctions relief is sustained, according to data analytics firm Kpler.

Since the licensing expansion that followed Maduro's toppling, Vitol and Trafigura together have moved approximately 27mn barrels of Venezuelan crude, predominantly the Merey heavy grade. Chevron, the only US major that remained in the country during the Chavista regime thanks to ad-hoc waivers, now operates under an indefinite licence with threat of revocation. A new Hydrocarbon Law enacted in late January, championed by Rodriguez, paved the way for the grand return of the private sector by restructuring the terms for foreign investors, lowering the fiscal burden and, crucially, granting access to international arbitration.

ExxonMobil, which departed Venezuela after the Chávez-era nationalisations, is reportedly weighing a return with a scoping team expected to visit in the coming weeks, in a striking reversal after chief executive Darren Woods declared the country “uninvestable” as recently as January.

And in yet another sign of a business frenzy, Reuters reported that caravans of hedge fund managers, energy investors and private equity groups are flocking to Caracas to meet senior political and business figures and assess potential opportunities.

The geopolitical windfall, though, may prove most advantageous not to the Venezuelan people but to Delcy Rodríguez, who assumed power following Maduro's capture under Washington’s watchful approval. Trump has praised her as a “terrific person” who is “doing a great job” in managing the three-phase transition outlined by Secretary of State Marco Rubio, but her democratic credentials are questionable, as she served in the Chavista regime for nearly two decades in different positions. The Miami Herald columnist Andrés Oppenheimer identifies three structural reasons why the conflict is likely to strengthen her hand.

Rising oil prices will boost the regime's export revenues regardless of the US revenue-control architecture, providing fiscal breathing room. The Iran campaign is also pulling US military assets away from the Caribbean. Washington had already repositioned the USS Gerald Ford carrier strike group from Venezuelan waters to the Middle East in the days before the strikes began, reducing the coercive leverage it had previously held over Caracas.

And crucially, Oppenheimer argues, Trump has reframed his Venezuela policy around stability rather than democracy, repeatedly praising Rodríguez, sidelining opposition leader Maria Corina Machado and citing post-Maduro Venezuela as a template for what he would consider a successful outcome in Iran.

The diplomatic posture of the post-Chavista administration over the Iran war, meanwhile, has been conspicuously cautious, underlining the sea change in Caracas’ foreign policy following Maduro’s ouster. Rodríguez's only public comment was an expression of solidarity with Qatar, steering away from statements of solidarity with the “brotherly Islamic Republic of Iran” typical of the Maduro era.

Rodríguez has moved quickly since Maduro's ouster, enacting a sweeping amnesty law and pushing through oil and mining reforms that some observers have cautiously welcomed. But Washington has yet to announce a timetable for the release of all political prisoners, press freedom restoration or free elections.

Alejandro Werner, a former head of the IMF's Western Hemisphere department, told Oppenheimer that a prolonged conflict could also attract oil investment that had previously been conditional on democratic progress. "In a new world where Middle Eastern oil exports decline or are unreliable, some companies that were hesitating whether to invest in Venezuela until there is a return to democracy will now say, 'it may be worth taking a risk in Venezuela,'" Werner said.

Beneath the immediate market dynamics lies a longer-standing question of whether Venezuela can break its inglorious rentier cycle. Álvarez advocates converting the US-administered accounts into sovereign wealth funds: accumulating windfall revenues rather than exhausting them during booms, channelling profits back into the oil sector and the broader economy, and stripping governments of the discretionary power to distribute petrodollars as political patronage. Such a model, he argues, would dismantle a system in which oil revenues have underwritten political control for decades.

For now, that transformation remains theoretical. According to The Street, PVM Oil analyst Tamas Varga offered a blunt assessment of Venezuela's near-term market impact: "The world has enough oil in 2026 with or without Venezuela. What Venezuela represents right now is not a price catalyst. It is a signal that the geopolitical and commercial ice around one of the world's most resource-rich countries is finally starting to thaw."

Whether that thaw benefits Venezuela's post-Chavista regime, its population, or primarily Trump's strategic calculus is the riddle at the heart of the country's oil comeback. And the Iran war has now made it considerably harder to solve.