Venezuela’s Return and the Canadian Decision: The Real Hedge is Bringing Markets to Energy

Venezuela’s surprise return to the world’s energy headlines has been interpreted as a possible danger to the Canadian energy sector and the export of heavy crude into the U.S. market. With sanctions and a lack of investment for so many years, Venezuelan barrels were idle. They’re back in motion today because of the realignment of geopolitics. The message is simple: if Venezuelan barrels increase in the marketplace, the price of Canadian energy may be at risk. The danger is not the Venezuelan barrels; the danger is being too export-dependent. The policy is not withdrawal; the policy is the delivery of markets to the energy sector. And one of the most viable tools available is the use of Bitcoin mining.

The Venezuela energy experience today is one of volatility, not substitution. Years of poor management decimated productive capacity, infrastructure, and investment confidence. Although production has wobbled back into the vicinity of one million barrels per day at times, it is precarious, capital-starved, and extremely vulnerable to political change. Even the most optimistic scenarios recognize that to achieve any semblance of real, lasting increases would take billions of dollars of investment, reform, and rebuilding, and this is hardly assured anytime soon. Venezuelan oil contributes barrels to the equation, but it doesn’t yet provide the predictability and bankability needed by industrial consumers and refiners.

By contrast, the energy security of Canada is founded on institutional stability rather than luck in geopolitics. The benefit of Canada is more than that of an energy-producing nation; rather, it is that of an energy-producing nation founded on the stability of enforceable contracts, guaranteed infrastructure, and the rule of law. This is especially true in situations where market conditions become noisy. However, Canada is still susceptible to the same risk that has been common in most energy-producing states: concentration. This is because its reliance on export destinations is limited to the United States.

Even if Venezuelan energy were to begin to more aggressively vie for U.S. refinery capacity, it is not enough that Canada look to new routes to ship their product. A more profound hedge is to make less of buying markets elsewhere by developing domestic demand that is centered around energy, industries that move themselves to where there is abundance, underutilization, or transmission constraint.

This idea, of course, has been a historically underestimated one within Canadian politics, but it has been a perfect fit for the country’s characteristics, from energy resources to stranded gas, remote hydro, to long permitting cycles for a traditional export solution. Bitcoin mining has increasingly filled that niche.

Bitcoin mining upends energy economics by making electricity itself an exportable good. Rather than shipping molecules or electrons across borders, energy can now be turned into a digital asset on-demand. The implications are huge in a world where pipelines are mired in politics, transmission lines are mired in permitting, and global energy trade is increasingly driven by strategic risk rather than just price. Bitcoin mining lets energy producers turn what would otherwise be cut back, flared, or heavily discounted production into revenue, with the option to ramp up and down.

It’s enlightening to contrast the Venezuelan experience in Bitcoin mining. Venezuela is commonly cited as a low-cost mining location because of its subsidized electricity, but the current suppression of mining in the country highlights the obvious weakness in that approach. The fact that the power infrastructure is unreliable, the government’s regulatory structures are opaque, and the rule of law is uncertain makes the cost of electricity a non-issue. Venezuelan mining has remained a cottage industry, unable to support capital investment.

Canada, on the other hand, provides the opposite scenario. Though power costs are not always the lowest, Canadian power costs are some of the most reliable in the world, and mining in Canada can be viewed as an industry, not an arbitrage play. This scenario takes on even greater significance as the mining industry develops from an exploration play to a load management industry that is integrated with power management.

More significantly, the Canadian Bitcoin mining sector is moving beyond the straightforward model of ‘plug in and burn power.’ In the province of Alberta, Bitcoin mining has already been coupled with the use of ‘stranded gas,’ which was previously considered an environmental problem with no economic use. Rather than wasting gas by simply flaring it, companies can now harness it to produce electricity, which can be used to mine Bitcoin. Not only has it enhanced the economic viability of mining projects, but it has also made them less ‘dirty.’ It’s the ultimate case of ‘taking markets to energy where infrastructure doesn’t work.’

In other areas, the reuse of heat is now driving the integration of mining into mixed industrial applications. The waste heat can be used for the creation of greenhouses, district heating, or for other industrial applications, and this will enable the integration of mining into a multi-output system as opposed to the current single-purpose load. But above all, Bitcoin mining brings flexibility into energy markets. Demand from mining can be shed in short order, which allows it to be perfectly suited to absorb excess during off-peak periods and make way during periods of high demand. In a future grid that will be increasingly defined by intermittent resources and climate variability, flexible demand will be as precious as new supply. Here, mining not only consumes electricity, it helps manage grids and enhance rates of usage; just the opposite of how it is portrayed in popular media. From this perspective, the Venezuelan issue becomes almost beside the point. Venezuela might provide some extra supply. Venezuela might compete on the margin. But the future of Canadian energy security will not be determined by who gets the most barrels on the Gulf Coast on an annual basis. Rather, it will depend on whether the Canadian energy industry continues to view energy as simply only an export commodity or begins to view energy as the foundation upon which onshore markets should be built. Bitcoin mining isn’t the silver bullet, nor should it be the solution. Yet it’s one of the first sectors to provide Canada with the opportunity to diversify against global market changes. In this new world where geopolitics can redirect markets overnight, the successful countries are the ones that learn to turn energy into lasting local value.