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May 4, 2018

Will Gas Prices Cut Into Our Summer Fun?

Russia and Saudi Arabia play a big role in how much it costs to fill your tank.

It’s hard not to notice that prices at the pump have been edging up over the last several months. Granted, we’re not to the point where we were a few years ago when Americans collectively wondered if $4 a gallon was the new normal, but the fill-up that cost $20 a couple years ago may set you back closer to $40 now.

While government (rightly) gets some blame for its taxation schemes and its crazy regulations regarding ethanol, oil industry experts will tell us that the cost fluctuation of a gallon of gas is mainly based on the going price for the primary ingredient — crude oil.

Since the early part of 2016, when prices bottomed out at $27 a barrel, we’ve seen the rate for West Texas crude reach nearly $70. Prices haven’t topped the $100-plus per barrel we saw a decade ago, but this increase has prompted some sticker shock and a prediction that this will be the most expensive summer driving season in four years.

In its heyday, OPEC could bring the U.S. to its knees with a production cut. At first, our response to the cartel was that of enforced conservation, such as CAFE standards for vehicles. And then there’s the ethanol boondoggle, which has created a dependent class within the agricultural industry — one that wails each time its ethanol subsidies are threatened. More recently, though, advancements in extraction technology and the economic interest of cashing in on the higher per-barrel prices has created a new surge in domestic oil exploration. Thus, we’ve rebooted our own oil industry to a point where the OPEC cartel has less influence on our supplies.

But while it isn’t as much of a factor on the supply side, OPEC can still be a price driver. In this case, both Saudi Arabia and non-OPEC Russia have put aside their foreign policy differences and enforced an 18-month-long production cut between themselves — a slowdown that has eliminated the supply glut (and low prices) we enjoyed over the last few years. And since those two nations are the second- and third-largest producers of crude oil (trailing only the U.S.), their coalition significantly influences the market. The higher prices also buy Russia greater geopolitical influence, as oil revenue is crucial to its economy.

This may be the shape of things to come: Saudi Crown Prince Mohammed bin Salman recently revealed that a decades-long pact on oil between the two nations is possible. “We are working to shift from a year-to-year agreement to a 10- to 20-year agreement,” he said. “We have agreement on the big picture, but not yet on the detail.” If such an agreement comes to pass, the era of sub-$2 gasoline may be gone for good.

That’s not to say, though, that everyone is a loser in such a deal. The rebound in prices has allowed good times to return to the oil patch, particularly the Permian Basin in West Texas. One oil patch company has such a need for skilled labor that half its employees can now boast a six-figure salary. Of course, this also makes other avocations less attractive. “The biggest problem I face is low unemployment — finding workers,” said Jerry Morales, who serves as the mayor of Midland and also owns two restaurants in the city. He’s resorted to twice-yearly wage increases and raising menu prices to keep up.

Oddly enough, some of that West Texas crude may be finding its way to a nation that’s awash in oil. Venezuela, which boasts the world’s largest supply of proven reserves, has made such a mess of its oil industry that it’s resorted to importing 200,000 barrels of American oil daily in order to distill its own crude oil stock, which is a heavier variety unsuitable for refining into gasoline.

That presents a problem for Venezuela’s socialist regime, because gasoline is a commodity subsidized so heavily by the government that filling one’s tank costs pennies. This may have worked nearly two decades ago, when the nation produced 3.5 million barrels a day and could pocket the profits from its exports, but with production having collapsed to less than half of that high-water mark, importing $90-a-barrel distillates isn’t sustainable.

For a nation that has so much, Venezuela provides precious little due to the damage done by its horrendously short-sighted socialist policies. While the U.S. could stand some improvement in its own energy policy, our system has allowed us to weather the inevitable market fluctuations while fully enjoying such luxuries as the summer driving season.

Maybe that’s the next thing Venezuela needs to import.

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