It has been more than two months since President Donald Trump’s tentative ceasefire with Iran broke down, and gasoline prices are still high. With the midterm elections looming, the president seems to have turned his attention to the problem, rolling out a series of actions he says will secure more crude oil from Venezuela and exempt refineries from renewable fuel mandates. Most recently, he summoned refiners to the White House earlier this week to discuss ways to lower prices at the pump, although the refiners left without making any public statements and the White House didn’t publish a list of the attendees.
In the months since the blockade of the Strait of Hormuz, the world has found ways to conserve oil and move Middle East crude around, but structural factors are still keeping prices high. The U.S. average gas price on Thursday was around $4.11 per gallon, up more than 90 percent from this time last year, and diesel was even higher.
The “crack spread,” which is the difference in price between crude oil and refined gasoline and diesel, soared to an historic high of more than $70 per barrel. This is a clear sign that the market for refined products is going haywire, and oil companies are raking in profits. The largest refineries in the United States have been operating at almost maximum capacity for several weeks now, longer than at any time in recent history, and they have deferred regular maintenance to take advantage of these soaring prices.
The president’s frustration with the high fuel cost has become clear over the course of the summer.
“Based on a shortage, they’re making too much money,” Trump said at an Oval Office briefing last month. “They ought to give some of that back to the public, and they better cut the retail price, the consumer price.”
The biggest reason prices have remained high is that there isn’t enough refining capacity to make gasoline from all the available oil. Many refineries in the Middle East have shut down during the conflict, and Russia’s diesel refineries are also offline thanks to Ukrainian drone attacks. The remaining refineries in North America and China are not large enough to fill that gap.
In its effort to lower prices at the pump, the Trump administration first turned to Venezuela, where it kidnapped leader Nicolas Maduro in January and announced a plan to revive the country’s moribund oil industry. Experts said after the Maduro raid that American companies would be hesitant to tap Venezuela’s oil reserves, but the Trump administration has tried to make the country more palatable by easing sanctions and pushing interim leader Delcy Rodriguez to rewrite the country’s oil laws.
These efforts seem to be paying off. The Pentagon announced last week that it would take a stake in North American Blue Energy Partners, a private Venezuelan company that controls around 20 percent of the country’s reserves; the company plans to increase production in oil fields that had once been drilled by China and Russia. Alejandro Betancourt, the head of the company, has been described as Trump’s “viceroy” in Venezuela, and earlier this year, the Trump administration helped him avoid a Swiss arrest warrant. Chevron, the largest U.S. company that operates in Venezuela, also announced on Wednesday that it would double its production there, signing an agreement with the Rodriguez government at the Miraflores Palace in Caracas.
“In general, the read is positive,” said Ramón Andrade, a lawyer focused on the energy business and a partner at the law firm Ponte Andrade & Casanova in Caracas. He said that the business community in Venezuela is optimistic about a revival of the sector, but cautioned that on the Pentagon deal, “I think we need to look at what’s actually going to be signed.”
Even so, there is no chance that this will help reduce gasoline prices, even after the midterms. For one thing, only a small number of U.S. refineries can process the heavy crude from Venezuela, and they are already working overtime to take advantage of high fuel prices.
“Everything that the Venezuelans could produce right now, I’m sure they’re squeezing out,” said Al Salazar, an analyst at the energy firm Enverus Intelligence who studies oil and gas markets. “You could get incremental production out of there in six to twelve months, but what really is causing the gasoline and diesel price spike is the lack of refining capacity.”
For another thing, scaling up production will take many years, if the legal agreement with the Pentagon even holds that long — the final details aren’t yet available, and some parties have alleged that conceding resource wealth to the United States would violate the Venezuelan constitution. The interim government has yet to face voters in an actual election.
You need that long runway to be able to develop this resource,” said Salazar, who spent decades in the Canadian oil industry, which also produces heavy oil like Venezuela’s.
The administration’s other major move this week might do more to keep prices down at the margins, though likely not enough for most consumers to notice. The Environmental Protection Agency ended its summer ethanol blending requirements early. The rules mandate that refiners and fuel importers add ethanol to the nation’s fuel supply to reduce gasoline-caused smog. It also announced a series of waivers that would exempt a few dozen refineries around the country from having to integrate biofuel into their diesel and gasoline products. The purpose of this “renewable fuels standard” is to support farmers and reduce greenhouse gas emissions, since biofuels don’t warm the planet as oil does, but many oil industry parties argue that using ethanol drives up costs for refiners.
A number of major lobbies opposed these waivers. Midwestern politicians and biofuel associations argued that they will harm farmers by reducing demand for the corn that makes ethanol, and even the American Petroleum Institute warned that sudden exemptions would create an unpredictable business environment for refineries. The two sides of the biofuel debate argue that the exemptions either will or won’t reduce gasoline prices. Given that crude oil prices are still high, it’s possible ethanol is a cheaper ingredient than oil, and it’s unclear whether the exempt refiners like Marathon and Chevron will pass costs on to customers.
Even with the waivers, gasoline prices in many states are $1.50 above their pre-Iran highs. The early months of the conflict hinged on the question of the Strait of Hormuz, but even if the strait were to open tomorrow, the gasoline market will remain tight, and neither more oil from Venezuela nor cheaper inputs will free up refining capacity.
“I think it’s going to have a tremendous impact; ultimately, prices are going to come down,” said Trump at the Oval Office on Monday. “Will it happen before the election? I can’t tell you that.” The stubborn high prices do not bode well for Republicans in the midterm elections. On average, the president’s party loses 25 more congressional seats in midterm elections after gas prices spike than in those after gas prices go down, according to a Politico analysis of elections since 1978.
Things could get even worse by then. Around half of U.S. refining capacity is located on the Gulf of Mexico, in the bullseye for Atlantic hurricanes. Forecasters are predicting a quiet season, but there’s still potential for a massive outage. Tropical Depression Edouard formed in the Gulf of Mexico and passed over a Texas refinery complex this week, but it fizzled out before it could become a major storm.