What's in store for gas prices after Venezuela and Iran sanctions?

New sanctions on oil producers Iran and Venezuela could result in reduced global oil supply and rising prices at the fuel pump this summer, some energy experts are warning. Oil prices in the United States have risen almost 20% this year to $72 a barrel due to geopolitical uncertainty and increased global demand for oil, ending a glut that had seen prices fall as low as $30 a barrel in 2016.

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Earlier this month the Trump administration decided to exit the Iran nuclear agreement and reimpose strict sanctions, followed by fresh sanctions on Monday against Venezuela after what it called the "sham" re-election of President Nicolas Maduro.

The Iran sanctions in theory remove Iranian oil from the global market, while Venezuela's already wilting production is likely to fall even further, dropping below 1 million barrels per day. Iran is the world's fifth largest oil producer, while Venezuela has slipped to 12th.

With the peak holiday driving season arriving, Daniel Yergin, a top energy analyst at IHS Cambridge Energy Research Associates has predicted that U.S. prices could hit $85 this summer. However, analysts are not predicting a return to the $120 per barrel price of a decade ago.

Other experts say that the global oil market is so fungible that while they may be a short-term impact on prices, supplies will quickly adapt to the new reality. Iran may also be able to bypass U.S. sanctions by exporting more barrels to countries like Turkey and India, which are not bound by Washington's action.

"I think there is a tendency to exaggerate the possible impact," said Gustavo Coronel, a Venezuelan political scientist who has studied the oil industry. "In the short-term, maybe some impact will be felt but the oil market tends to correct itself over the mid-term, (six to 12 months)" he told Univision News.

Venezuela's production has fallen so far already that it has become almost irrelevant in global terms, despite having the world's largest oil and gas reserves, Coronel added.

Jorge Pinon, a former oil company executive who is now director of the Latin America and Caribbean Energy Program at the University of Texas at Austin said the U.S. was increasingly insulated from price shocks due to its proximity to Canadian oil shale and its own rising production due to fracking.

"From a U.S. perspective, the Canadians have really replaced Venezuela," he said, noting that the United States now imports more than 50% of its oil needs from Canada, thanks to the notorious Keystone oil pipeline which carries Canadian heavy crude from the Alberta tar sands to U.S. refineries in Texas and Illinois.

"We are down to 400,000 barrels per day from Venezuela," he added, citing official data from the Energy Information Administration (EIA).

Two decades ago Venezuela supplied 1.6 million barrels per day to the United States, more than the South American country's current total capacity. Indeed, Colombia this year surpassed Venezuela as the fifth largest exporter of oil to the United States. In a dramatic reversal, Venezuela now imports large amounts of light crude from the United States due to its own lack of refining capacity.

Pinon said he is so aghast at the falling oil production in Venezuela that "I wake up every morning wondering how come the Venezuelan government hasn't collapsed.'

Global oil production

Iran and Venezuela remain important suppliers on world market, together providing roughly one of every 20 barrels.

Global oil supplies are can withstand a “significant reduction” in exports from Iran, according to a White House memo reported by Reuters in March. The Trump administration's sanction take effect in November, allowing the market to gradually find alternatives.

China and India are the biggest buyers of crude from Iran, which currently produces about 3.8 million barrels a day, up almost one million barrels since the sanctions were lifted in 2016. If Iran's production slumped back to 2015 levels that would signify just under 1% of total global production.

Venezuelan output is at its lowest in decades and has fallen by more than 200,000 barrels per day since late last year.

It is only expected to fall further as its already chronic economic crisis deteriorates. One third of Venezuela's production is sent to China and Russia to pay off outstanding debt, leaving only two-thirds for cash-paying customers, such as the United States. Venezuela's internal consumption has dropped to 500,000 barrels per day from 700,000 barrels per day.

ConocoPhillips seized Venezuelan oil export terminals in the Caribbean this month as compensation for the nationalization of its assets in Venezuela, and more than a dozen Venezuelan tankers had to be redirected.

“In Venezuela, the pace of decline of oil production is accelerating and by the end of this year output could have fallen by several hundred thousand barrels a day,” the IEA said a report last week. “The potential double supply shortfall represented by Iran and Venezuela could present a major challenge for producers to fend off sharp price rises.”

The IEA said it’s still confident that the world’s demand growth remains strong at a projected 99.2 million barrels a day this year. “Still,” the IEA said, “the fact is that crude oil prices have risen by nearly 75 percent since June 2017. It would be extraordinary if such a large jump did not affect demand growth.”