President Trump likely won’t be able to count on Saudi Arabia to help defray the impact of his Venezuela oil ban, which could cause prices to rise.
Saudi Arabia’s medium sour grade of oil is a good enough substitute for the sludgy, heavy product from Venezuela, which is rare and craved by U.S. Gulf Coast refiners built to process it. But Saudi Arabia has little incentive to help after Trump successfully prodded the kingdom to boost exports last year to offset his oil sanctions on Iran, only to see the president later grant exemptions to eight countries, allowing them to continue buying Iranian oil because he feared higher prices, thereby creating oversupply.
In reaction, the Saudis began implementing an OPEC pact with Russia in January to cut production in order to raise low prices — a deal the Saudis say they are committed to carrying out, despite complaints from Trump.
As a result, the Saudis are not predisposed to aid Trump, even though Treasury Secretary Steven Mnuchin, announcing the sanctions on Monday at the White House, leaned on them to help prevent an oil market mess, saying, “Many of our friends in the Middle East will be happy to make up the supply as we push down Venezuela’s supply.”
“Although Saudi barrels are a good candidate to replace Venezuelan supply, Saudi caution is understandable after they were burned in November when the Trump administration very publicly bullied them for more oil, only to grant a slew of Iran sanctions waivers at the last minute,” said Antoine Halff, a senior research scholar with the Center on Global Energy Policy at Columbia University.
The oil market so far has barely responded to the the Trump administration sanctions against Venezuela’s state-run oil company PDVSA, an effort to kill the main source of revenue for the regime of Nicolas Maduro and empower opposition leader Juan Guaido. The sanctions divert the proceeds of U.S. purchases of the country’s oil to a blocked account, preventing the Maduro regime from receiving it.
Oil prices have risen modestly this week, but nowhere near levels reached in October, when the price breached $85 per barrel — a four-year high.
Experts say that’s because Gulf Coast refiners had anticipated sanctions, and had begun trying to reduce their dependence on it. The U.S. also relies less on Venezuelan oil than in the past.
Data released by the Energy Information Administration on Thursday shows the U.S. Gulf Coast imported 511,000 barrels of crude from Venezuela in November, down from more than 1 million barrels per day a decade ago.
“The market has already baked-in the Venezuela situation — which was a long time coming,” said Dan Eberhart, CEO of the oil services firm Canary and a Trump donor. “That’s why we haven’t seen a huge swing in prices.”
But Eberhart and other experts expect that to change, because of constraints on potential replacement sources of oil, such as heavier oil stock from Canada, which is limited by a lack of market access and pipelines. Mexico produces heavier crude too, but it doesn’t have enough spare capacity to help.
“Refiners are concerned about supply, so the longer Venezuela is offline the bigger impact it will have,” Eberhart said.
Mnuchin claimed Monday there would be little impact on U.S. oil and gas prices.
“Mnuchin’s remarks of little to no impact are premature,” Frank Verrastro, senior vice president of the energy and national security program at Center for Strategic and International Studies, told the Washington Examiner. “Refiners will soon be scrambling and bidding up prices.”
That explains why the Trump administration is calling on allies such as Saudi Arabia to help.
The U.S. is much less dependent on oil imports than a decade ago, and is expected to be a net energy exporter by 2020. But the Saudis still represent the second-largest source of imported oil to America.
America, thanks to the shale boom, has surpassed the Saudis as the world’s top oil producer, with output expected to reach new record highs of 12 million barrels per day in 2019.
But because European allies and competitors such as China continue to rely on production from OPEC, and with the U.S. economy dependent on the global economy, American consumers are still exposed to oil price shocks.
Trump’s fears of an oil price spike and his dependence on Saudi Arabia are a sign that U.S. foreign policy remains beholden to global energy supply, some energy experts say, and the best way to end that is to transition the world away from oil through efficiency and alternative fuels and transportation.
“The days when the U.S. had a hotline directly to Saudi Arabia on oil policy are over,” said Amy Myers Jaffe, director of the program on Energy Security and Climate Change at the Council on Foreign Relations. “The hotline has worked in the past. But we are in a different world today, and the best way forward is to not need the hotline and continue to lower the oil intensity of the U.S. economy.”