If you filled up your tank this Labor Day weekend, you ended up paying the highest gas prices ever for this time of year.
The national average hit $4.15 per gallon during the holiday, an approximately 30% increase from last year, according to AAA. What’s more, August was the first month in history where the national average never dipped below $4 on a given day.
Diesel is worse. Truckers paid as much as $5.85 a gallon, a new record.
All of this happened as the White House announced what it’s calling the “biggest oil deal in world history,” with as many as 65 billion barrels secured from Venezuela’s oilfields. Will this be enough to lower prices for Americans?
The Pentagon Is Now in the Oil Business
Let’s start by looking at the deal itself.
The U.S. government isn’t buying oil from Venezuela. It’s becoming a shareholder. The Pentagon’s Office of Strategic Capital will take a 35% passive stake in North American Blue Energy Partners (NABEP), a private company led by Venezuelan businessman Alejandro Betancourt that holds rights to 17 oilfields containing an estimated 65 billion barrels. Washington will also get preferential rights to buy 20% of production at cost.
NABEP says it will invest close to $100 billion to lift Venezuela’s output above 1 million barrels per day.
The administration calls this a re-establishment of the Monroe Doctrine, the framework I wrote about last December. On that count, they’re not wrong. China had been buying roughly 80% of Venezuela’s exports at steep discounts. That appears to be over.
Rich in Reserves, Poor in Production
Many of you reading this are no doubt aware that Venezuela sits on more proven than any country on earth—roughly 202 billion barrels, or about a fifth of the world’s total. It ranks ahead of Saudi Arabia, Iran and Canada.
And yet Venezuela produces only 1.2 million barrels a day, down from a peak of around 3.5 million in the late 1990s. Almost none of it reaches American refineries anymore.
In the chart above, look at the dark blue portion. In October 1998, U.S. refiners took in 1.6 million barrels a day of Venezuelan crude. By mid-2020, it was zero, and it stayed at exactly zero for 43 consecutive months. This year, it’s averaging about 140,000 barrels a day.
Canada, meanwhile, took the whole thing. My home country went from around 1.1 million barrels a day in the late 1990s to nearly 4 million today. It now supplies roughly two-thirds of all crude oil we import.
Not because of politics, but because of chemistry and money.
Venezuela’s oil is notoriously heavy and sour. David Levine, an economics professor of UC Berkeley’s Hass School, describes it as having the consistency of cold peanut butter. To move it through a pipe, you have to blend it with imported diluents like naphtha, which adds about $15 a barrel before it ever reaches a port. It’s loaded with sulfur and metals that corrode equipment and poison catalysts. It sells at a $12 to $20 discount to for good reason.
Then there’s the human problem. Venezuela’s petroleum engineers all left. They’re in Houston, Calgary and Bogota now. Levine estimates it will take 10 to 15 years to rebuild that kind of workforce. You can wire $100 billion into a country in a week, but you can’t conjure a generation of engineers in the same amount of time.
Rystad Energy estimates that Venezuela could technically return to 3 million barrels a day by around 2040, with roughly $183 billion of investment starting now. Are you willing to wait that long?
The Bottleneck Moved Downstream
Even if Venezuela’s crude showed up tomorrow, we’d have a hard time doing much with it.
American refineries are running at 96% utilization, the most sustained maximum-capacity stretch in more than a quarter century. Running plants this hard for this long is how you risk getting major mechanical failures.
Meanwhile, up to 3 million barrels a day of throughput capacity is scheduled to come offline for maintenance before year-end, against a backdrop where wars in Iran, Russia and elsewhere have knocked out at least 5 million barrels a day of fuel supply.
So why isn’t anyone building more refineries?
President Donald Trump asked executives that exact question at the White House last week. The answer is uncomfortable but honest. Owning a refinery in the U.S. right now is enormously profitable. Building one isn’t.
These are 40-year assets, and the operators don’t believe today’s margins last 40 years. They’re not wrong to be skeptical. The last major U.S. refinery was completed in Garyville, Louisiana, in 1976.
In other words, the scarce thing isn’t oil in the ground. It’s the ability to turn oil into diesel and gasoline.
Who Actually Shows Up
So who will be operating in Venezuela?
has been in the country since 1923, and it just expanded its position with additional Orinoco Belt acreage, committing over $7 billion across five years to roughly double production to 600,000 barrels a day at total costs under $20 a barrel.
, meanwhile, has stayed on the sidelines, exactly as CEO Darren Woods said it would back in January when he called Venezuela uninvestable absent serious legal reforms. He took heat for that. Eight months later, Exxon and ConocoPhillips are still out. That’s precisely why Washington had to construct a state-backed private vehicle to get anything moving at all.
The Diesel Shock Has Arrived
Back in December, when Brent was down more than 20%, I wrote that diesel-driven inflation risk was being badly underpriced.
Diesel is now at an all-time high, and it’s showing up everywhere, because diesel moves food, freight, farm equipment and everything else in the physical economy.
It’s also showing up in bonds. Long-dated government debt is selling off worldwide. German, U.K. and recently hit their highest levels since 2011, 2008 and 1996, respectively.
Add in a Strategic Petroleum Reserve (SPR) sitting at 286.6 million barrels, the lowest since 1982, and you have less cushion than at any point in my career.
When governments underestimate inflation, they react late and overcorrect. That’s rarely been good for financial assets, but it’s historically been very good for real ones like oil and, of course, .
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