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Biden’s risky scramble to keep gas prices down

If you think President Biden doesn’t care about gasoline prices, you haven’t been following his Venezuela policy.

Okay, hardly anybody follows US policy toward Venezuela. But it suddenly has direct implications for pump prices and for Biden’s reelection odds.

With little fanfare, the Biden administration on Oct. 18 eased sanctions on Venezuela’s oil sector, which should allow the beleaguered socialist nation to export more oil to the United States and to global markets. Venezuela is one of the world’s most oil-rich countries, but incompetent, repressive dictators and US sanctions have wrecked much of the industry and left it pumping a fraction of its potential.

The Biden administration says the sanctions relief is aimed at cajoling Venezuelan President Nicolás Maduro into holding free-ish elections next year. The deal has a six-month shelf life and can either be extended or canceled, based on whether Maduro seems to be abiding by the terms.

But there’s good reason to think the Biden administration cares about oil supplies at least as much as the prospect for democracy in Latin America. Research firm ClearView Energy Partners thinks Venezuela is one of four sources of additional oil the Biden administration has been trying to draw on to the market for the last several months. Two other sources — Iran and Saudi Arabia — may now be off the table due to the mushrooming war between Israel and the Palestinian terror group Hamas. The fourth source is Russian crude, via relaxed enforcement of a US-led price cap scheme that went into effect last December.

Venezuela generates about 800,000 barrels of oil per day, less than 1% of global production. A suspension of US sanctions could boost Venezuelan output by 200,000 to 300,000 barrels per day, according to analyst estimates gathered by S&P Global. Much of that could end up coming to the United States to be refined into gasoline and other products.

The United States imports about 150,000 barrels of oil per day from Venezuela — a scant 1.8% of all imports and less than 1% of total consumption. If that doubled, as seems possible, Venezuela would still be a niche supplier. Yet small changes in supply can move prices up or down when the market is tight, as it is now. If nothing else, a bit more oil from Venezuela might ease upward pressure, assuming broader supply and demand trends remained stable.

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The Biden administration must think it’s worth the trouble to coax a bit more Venezuelan oil on to the market, since the move carries political risk. Republicans immediately bashed Biden for coddling a dictator and begging an oppressive socialist country for more oil instead of producing it at home.

The six-month time frame for the easing of Venezuela sanctions gives Biden some breathing room to reinstate them next spring, if Maduro reneges or oil prices seem comfortably under control. It’s a safe bet, however, that voters care more about keeping gas prices down than elections in Venezuela, and that the new Biden policy will stand. “Higher prices could risk backlash from voters everywhere,” ClearView noted in an Oct. 18 analysis.

Venezuelan President Nicolas Maduro speaks during a meeting with Saint Lucia's Prime Minister Philip Joseph Pierre at the Miraflores presidential palace in Caracas, Venezuela, Friday, Oct. 6, 2023. (AP Photo/Matias Delacroix)
Venezuelan President Nicolas Maduro speaks during a meeting with Saint Lucia's Prime Minister Philip Joseph Pierre at the Miraflores presidential palace in Caracas, Venezuela, Friday, Oct. 6, 2023. (Matias Delacroix/AP Photo) (ASSOCIATED PRESS)

As for domestic production, Biden has put new restrictions on where US fossil firms can drill. But that affects future production, not current supply. He did kill the Keystone XL pipeline that would have moved oil from Canada to the US Gulf Coast, but much of that oil gets to the United States in other ways, and Canada remains America’s top source of foreign oil, by far.

Unlike Venezuela and the majority of major oil-producing countries, US production rests with the private sector, not with the federal government. US energy firms got crushed during the COVID pandemic in 2020, and these days they prefer to lock in profits instead of investing in new wells, which risks overproduction along with plunging prices and profits. Even so, high prices are coaxing US firms to drill more, and domestic oil production is likely to hit a new record high late this year or early in 2024.

Biden hamstrung himself somewhat by drawing down the US strategic oil reserve in 2022, when gas prices hit $5 per gallon. That reserve is now at a 40-year low, leaving Biden almost no room to tap it further — especially with a Middle East war underway, which raises the risk of a genuine energy crisis.

Before Hamas attacked Israel on Oct. 7, the Biden administration had been quietly easing its enforcement of sanctions on Iran, allowing the Islamic theocracy to export more oil. But it may now have to reverse that policy, given that Iran is Hamas’ biggest funder. There was also hope Saudi Arabia might pump more in 2024, as part of a normalization agreement with Israel. But that deal now seems indefinitely delayed, if not dead.

That has made the Biden administration more tolerant of Russian oil exports, even if Russia is selling oil above the $60 price cap the United States and other advanced democracies imposed last December. The administration says it is beefing up enforcement of the price cap, but new actions seem limited, and the group of countries enforcing the price cap has rejected calls to lower it, to further dent the oil revenues Russia needs to finance its war in Ukraine. A senior Biden administration official recently explained to Yahoo Finance that a key goal is “keeping oil prices stable,” and if the price cap were lower, Russia might sell less.

Biden can only do so much to control oil and gasoline prices. They could rise — perhaps by a lot — if there’s a broader Middle East war that involves Iran or other major oil producers. They could also fall if global tensions in Ukraine and the Middle East unexpectedly ease and there are no fresh wars anytime soon. A recession would also bring energy prices down, if only because anxious consumers close their wallets. If there’s any bottom line, it’s that pain at the pump will cause Biden pain at the polls — and he clearly knows it.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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