How Tillerson Could Push Gasoline Prices Higher
Brace yourself! You could soon be paying more for gasoline.
The price you pay at the pump gets determined by a few different things, but unfortunately for consumers the risks mostly seem pointed in the wrong direction.
The key factors to watch are the supply of oil, demand for oil, and the availability of the refineries to convert crude oil into gasoline.
Venezuela, currently mired in an economic malaise of hyperinflation and privation, produces around 1.6 million barrels a day, according to a February-dated report from oil cartel OPEC. That’s down from 2.2 million barrels a day in 2016. Still, despite the dire economic mess, it is a major world producer.
If the country’s economy collapses, and with it the oil business, then expect oil prices to jump by as much as $10 a barrel, or up 17 percent from about $60 a barrel recently, according to financial research firm Hedgeye Risk Management. There would also likely be a similar increase in the price of gasoline – an increase of around 31 cents a gallon versus the current price of $1.88 a gallon on the CME futures exchange.
Such price jumps wouldn’t last long because other oil producers, probably those in the Middle East, would quickly start pumping more.
There is another scenario.
Already, Secretary of State Rex Tillerson has primed countries neighboring Venezuela to expect further U.S. sanctions, according to Hedgeye.
Yes, there will be more sanctions, but don’t expect it to be an all-out effort to destroy Venezuela, says Dr. R. Evan Ellis, research professor of Latin American studies at the U.S. Army War College, Strategic Studies Institute and author of Transnational Organized Crime in Latin America and the Caribbean. Why? Because then the U.S. would likely be asked to fix the resulting mess.
What we do know is that Tillerson, formerly head of energy giant ExxonMobil, is an oil expert.
“Never before have we had a secretary of State who had such extensive knowledge of how to hurt Venezuela’s oil regime,” says Ellis.
In other words, Tillerson knows which sanctions will disrupt Venezuela’s beleaguered oil industry, while leaving the rest of the country mostly alone. Probably he’ll focus on halting the supply of replacement parts needed to drill. Eventually, lack of parts would bring Venezuela’s oil business to a standstill. And just like its economy collapsing, expect to pay 31 cents more a gallon for U.S. gasoline.
Such jump in prices would get exacerbated by the fact that the U.S. Gulf Coast is home to a slew of U.S. gasoline refineries that have been specially fitted to refine Venezuela’s heavy crude. They can't operate using other types of oil and to retrofit the plants could cost as much as $1 billion, says Hedgeye. In any event, a refit wouldn’t be quick.