Venezuela has more oil beneath it than any other country on the planet, but it has so mismanaged its resource that it could take years to return to being a leading energy exporter — even if it started fixing things today.
That didn’t stop oil markets — already near six-month highs — from roiling on Tuesday at the prospect of a once-dominant oil power like Venezuela on the verge of collapse.
Benchmark West Texas Intermediate jumped 35 cents, or 0.55 percent, to $63.84. Brent Crude climbed more than 1 percent to nearly $72.78 per barrel. Oil prices have risen 60 percent this year.
Venezuela’s oil decline “potentially means a lot, especially if you combine it with what [the Trump] administration is up to with respect to Iran sanctions,” said Stephen Brown, an oil consultant with RBJ Strategies.
“Regardless of whether you think [Trump’s] sanctions are good or bad,” Brown said, “the impact on global supplies will be significant and, thus, the impact on gasoline prices is going to be significant.”
American drivers are feeling the surge at the pump. According to AAA, the national average price for regular gasoline Tuesday was $2.88 a gallon, about 25 cents more than a month ago.
Venezuela once pumped more than 3 million barrels a day and exported more than a third of that. It now produces less than 1 million barrels a day and almost all of that goes to domestic needs, including its 1 cent per gallon gasoline price that helps keep the Maduro regime in power.
Blackouts, unrest and other factors limited production to as low as 600,000 barrels a day in March. The national oil company, known as Petroleos de Venezuela (PDVSA), rallied and produced an average of 780,000 barrels per day, according to an analyst.
“It’s been the worst decline in oil production of any country in modern history that is not at war,” said Pavel Molchanov, an energy analyst at the investment firm Raymond James. “Venezuela certainly has the resources to produce large amounts of supply, but it would realistically take years, even with a quick regime change.”
U.S. oil refiners, once highly dependent on oil imports from Venezuela, have had to adjust and find their oil elsewhere — including drilling for more oil in the United States and relying on Nigeria, Canada and the Organization of the Petroleum Exporting Countries.
But in the carefully calibrated oil world, where 1 million barrels added or subtracted to daily supply can swing prices, the Venezuelan debacle has tightened supply and fueled uncertainty.
“The missing Venezuelan supply is what is enabling Saudi Arabia and other OPEC members to tighten up global supplies and push prices considerably higher,” said John Kilduff of Again Capital.
Analysts said most of Venezuela’s decline has already been baked into the market. But it isn’t the oil industry’s only disappearing act.
“You’ve taken Iranian oil off the market. You’ve taken Venezuelan off the market,” Brown said. “If there are further disruptions in either Nigeria or Libya, you do have a pretty big risk a year before a presidential election on gas prices.”
President Trump is fueling the uncertainty in oil markets as the U.S. pressures big oil consumers such as China, India, South Korea and Turkey to stop buying Iranian oil. The Iran sanctions were imposed last fall, but Trump granted waivers to several countries, allowing them to continue buying Iranian crude. At the time, he was using Twitter messages to urge OPEC, and Saudi Arabia in particular, to pump more oil so that prices would stay affordable.
Trump finds himself walking a supply tightrope as he tries to cajole Saudi Arabia and other Middle Eastern petroleum producers to increase production and replace the 1 million-plus barrels per day that will be lost if the sanctions against Iran take effect a few days from now.
“They maintain that Saudi Arabia and the United Arab Emirates have said they will fill the gap,” said Frank Verrastro, senior vice president at the Center for Strategic and International Studies. “For Saudi Arabia to open the spigot at this point, after being fooled once last fall, would undo all the work they did with OPEC to get to a supply freeze.”
Saudi Arabia, now pumping around 9.8 million barrels a day, must increase production to supply its own energy needs with the approach of summer. The desert kingdom needs oil to generate the electricity needed to supply its vast air conditioning infrastructure.
Verrastro said world oil prices could easily hit $75.
The optimal price for everyone is about $80. That is a price at which producers such as Saudi Arabia can make plenty of money without creating outrage and economic strain among customers.
The rule of thumb is that a sustained $10 increase in the price of a barrel of oil shaves a half-point off the U.S. gross domestic product.