Why The Keystone Pipeline Will Actually RAISE Gas Prices In the U.S.

George Washington's picture

Bloomberg notes:

Completion of the entire [Keystone] pipeline would raise prices at the pump in the Midwest and Rocky Mountains 10 to 20 cents a gallon, Verleger, the Colorado consultant, said in an e-mail message.The higher crude prices also would erase the discount enjoyed by cities including Chicago, Cheyenne and Denver, Verleger said.

CNN Money reports:

Gas prices might go up, not down: Right now, a lot of oil being produced in Canada and North Dakota has trouble reaching the refineries and terminals on the Gulf. Since that supply can’t be sold abroad, it reduces the competition for it to Midwest refineries that can pay lower prices to get it.


Giving the Canadian oil access to the Gulf means the glut in the Midwest goes away, making it more expensive for the region.

Tyson Slocum – Director of Public Citizens’ Energy Program – explains:

How does bringing in more oil supply result in higher gas prices, you ask? Let me walk you through the facts. A combination of record domestic oil production and anemic domestic demand has resulted in large stockpiles of crude oil in the U.S. In particular, supplies of crude in the critical area of Cushing, OK increased more than 150% from 2004 to early 2011 (compared to a 40% rise for the country as a whole). Segments of the oil industry want to import additional supplies of crude from Canada, bypass the surplus crude stockpiles in Oklahoma in an effort to refine this Canadian imported oil into gasoline in the Gulf Coast with the goal of increasing gasoline exports to Latin America and other foreign markets.




Cushing typically is a busy place – I noted in my recent Senate testimony how Wall Street speculators were snapping up oil storage capacity at Cushing. And all of that surplus capacity is pushing WTI prices down – and for many in the oil business, downward pressure on prices is a terrible thing. As MarketWatch reports, “[B]y running south across six U.S. states from Alberta to the Gulf of Mexico, [the Keystone pipeline] would skirt the pipeline hub at landlocked Cushing, Okla., a bottleneck that has forced Canadian producers to sell their oil at a steep discount to other crude grades facing fewer obstacles to the market.




There are several global crude oil benchmarks, and the price differential between Brent and WTI now is around $10/barrel, which is a fairly significant spread, historically speaking. Moving more Canadian crude to bypass the                WTI-benchmarked Cushing stocks, the industry hopes, will align WTI’s current price discount to be higher, and more in line with Brent.




The Keystone pipeline isn’t just about expanding the unsustainable mining of … Canadian crude, but also to raise gasoline prices for American consumers whose gasoline is currently priced under WTI crude benchmark prices.

Slocum notes that oil is America’s number 1 import at time same that fuel is America’s number 1 export.

Specifically, more oil is being produced now under Obama than under Bush. But gas consumption is flat.

So producers are exporting refined products. By exporting, producers keep refined products off the U.S. market, creating artificial scarcity and keeping U.S. fuel prices high.

Slocum said that the main goal of the Keystone Pipeline is to import Canadian crude so the big American oil companies can export more refined fuel, driving up prices for U.S. consumers.


Tom Steyer points out:

Statements from pipeline developers reveal that the intent of the Keystone XL is not to help Americans, but to use America as an export line to markets in Asia and Europe. As Alberta’s energy minister Ken Hughes acknowledged, “[I]t is a strategic imperative, it is in Alberta’s interest, in Canada’s interest, that we get access to tidewater… to diversify away from the single continental market and be part of the global market.”

And see this NBC News report.

As Fortune explains, the U.S. is now an exporter of refined petroleum products, but Americans aren’t getting reduced prices because the oil companies are now pricing the fuel according to European metrics:

The U.S. is now selling more petroleum products than it is buying for the first time in more than six decades. Yet Americans are paying around $4 or more for a gallon of gas, even as demand slumps to historic lows. What gives?




Americans have been told for years that if only we drilled more oil, we would see a drop in gasoline prices.




But more drilling is happening now, and prices are still going up. That’s because Wall Street has changed the formula for pricing gasoline.




Until this time last year, gas prices hinged on the price of U.S. crude oil, set daily in a small town in Cushing, Oklahoma – the largest oil-storage hub in the country. Today, gasoline prices instead track the price of a type of oil found in the North Sea called Brent crude. And Brent crude, it so happens, trades at a premium to U.S. oil by around $20 a barrel.




So, even as we drill for more oil in the U.S., the price benchmark has dodged the markdown bullet by taking cues from the more expensive oil. As always, we must compete with the rest of the world for petroleum – including our own.


This is an unprecedented shift. Since the dawn of the modern-day oil markets in downtown Manhattan in the 1980s, U.S. gasoline prices have followed the domestic oil price ….


In the past year, U.S. oil prices have repeatedly traded in the double-digits below the Brent price. That is money Wall Street cannot afford to walk away from.


To put it more literally, if a Wall Street trader or a major oil company can get a higher price for oil from an overseas buyer, rather than an American one, the overseas buyer wins. Just because an oil company drills inside U.S. borders doesn’t mean it has to sell to a U.S. buyer. There is patriotism and then there is profit motive. This is why Americans should carefully consider the sacrifice of wildlife preservation areas before designating them for oil drilling. The harsh reality is that we may never see a drop of oil that comes from some of our most precious lands.




With the planned construction of more pipelines from Canada to the Gulf of Mexico, oil will be able to leave the U.S. in greater volumes.

This isn’t old news … or just a hypothetical worry.

As Bloomberg reported in December 2013:

West Texas Intermediate crude gained the most since September after TransCanada Corp. (TRP) said it will begin operating the southern leg of its Keystone XL pipeline to the Gulf Coast in January.


[West Texas Intermediate oil] prices jumped to a one-month high, narrowing WTI’s discount to Brent. TransCanada plans to start deliveries Jan. 3 to Port Arthur, Texas, via the segment of the Keystone expansion project from Cushing, Oklahoma, according to a government filing yesterday. Cushing is the delivery point for WTI futures. Crude [oil pries] also rose as U.S. total inventories probably slid for the first time since September last week.


“With the pipeline up and running, you are going to see drops in Cushing inventories,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It drives up WTI prices far more than Brent. You are going to see a narrowing of the Brent-WTI differential.”

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SmittyinLA's picture

On this one I agree with GW, worse still they want to remove limits on Nat Gat exports too, trying to sell it to the US public with "cheap gas" as a benefit with the EU paying more than double what we pay for nat gas I don't believe them either.

One of my greatest fears is China using their US fiat surplus to outbid Americans for US fuel, food, land, influence.  

If "they" make more off what we print than what we make off what we print, printing wont help.

Augustus's picture

Converting NG to LNG and shipping it to foreign markets is expensive.  Even moving it by pipe withing the country is fairly expensive.  However, the US consumer should be able to purchase NG at something near a $3 discount to europe, and possibly deeper depending upon location near production.


The US imports are generally into the northeast.  Their problem is that have restriced the development of the pipes.  The reason that the US is  exporting while also importing is that some areas are only accessible by ship, not pipes.

Flakmeister's picture

The NG producers want to bring the price of NG here to international price levels... Hence all the applications for LNG export lisences despite the US still being a net importer of NG...

OC Money Man's picture

The idea that Americans would so stupidly stop expansion of the spectacular oil and gas boom because it might temporarily raise gas prices by ten cents is incredibly small minded.  Fracking has the potential to not only frre America from the Middle East, but also will fund the entire cost of the national debt.  

Penny wise and pound foolish is what we usually expect of government, not thinking people. 

OC Money Man's picture

The idea that Americans would so stupidly stop expansion of the spectacular oil and gas boom because it might temporarily raise gas prices by ten cents is incredibly small minded.  Fracking has the potential to not only frre America from the Middle East, but also will fund the entire cost of the national debt.  

Penny wise and pound foolish is what we usually expect of government, not thinking people. 

Flakmeister's picture

I don;t think anyone is saying that...

BTW, did you just pull "fund the entire cost of the national debt" out your ass?

Finally, just how much oil does the US import from the Middle East?

Augustus's picture

It makes no difference what the foreign source is.  Importing the product from whichever foreign source makes no difference in the balance of payments.  NOT importing it does.  And Not importing it will lower demand from those sources, reducing overall world price from whatever it might have been.

Flakmeister's picture

He mentioned the ME....As you are well aware, we are not in the ME to secure supplies of oil...

And where did balance of payments come in to this discussion?

Augustus's picture

I am aware that the US import supply does not come directly from the Middle East.  Transport costs are lower from other suppliers.  However, those large Middle Eastern supplies are a large part of the World Market which is the supply source for US imports.  Those prices are all related to each other and then adjusted for transport costs to determine the landed product cost in the US.

Augustus's picture

It is wonderful to read the posts of all of those who enjoy screwing oil producers by making them sell into a restricted market.  building the Keystone pipe may shrink the discount in the oversupplied midwest for a while.  However there is still increasing supply from the Permian and other southwest basins all going into the Gulf refineries.

The result is going to be that produceers get a more fair price, Canadian crude is processed in the US, and it is still available for US supply.  The US will enjoy the investment benefits, processing benefits, and the transport discounts for shipping costs.

A lot of these posts exhibit the worst characteristics of being greedy bastards, hoping for government restrictions to benefit them.


Flakmeister's picture

Its a complicate issue. Further complicated by the fact that lot of that "increasing production" is lighter stuff that the refineries do not want... 

A dirty little secret about the shale plays is that it is crappy refinery stock for the most part. The money is in the diesel and even the Bakken assays are ~20% light in yields...The EFS is primarily condenstate not crude oil by any standard measure....

Combine that with a complete mismatch of infrastructure with production and you have the situation where the Midwest was all but out of propane while 400,000 barrels a day are being exported from the Gulf Coast...

Augustus's picture

That propane shortage is the result of transportation problems. And that transportation problem results from the inordinate demand due to extraordinary fall and winter weather.  It has nothing to do with restricting deliveries to US markets.  The many generating plant switches from coal or oil to NG has distorted the NG market and the liquids markets in a fairly short period of time, related to building the pipes and processing.

Light crudes are actually ore desireable.  The problem is that US refineries were built in anticipation that imports from heavy crude production would be the norm.  You might want to look at the premium being paid for Louisiana Light when considering what is more desireable in most markets for processing.  US crude is backing out Venezuela.

Flakmeister's picture

The word I hear is the midwest propane stocks had a big drawdown in fall as a result of a large wet corn harvest (propane is used to dry things) combine that with typical winter and you get what we have now...

The lesson is that infrastructure for getting propane north is borderline inadequate... There is no spare pipeline capacity for NGLs heading north... 

How does electricity generation affect the NGL market? I do agree that the flood of NGL from non-traditional regions (these NGLs are classified as oil as far anyone not in the business goes) has flipped US infrastructure on its head but that is independent of electrical generation...

The trend to heavier sourer crudes has been ongoing for many many years as you are aware. As for LLS, it indeed has higher distillate assay than WTI, hence the premium...

The problem with the East Coast refiners was that they could only handle light sweet crude and the spreads killed them. Given that the refiners were bidding against the ROW for feedstock, it is no wonder they shutdown....

Augustus's picture

You might have issed it, but the large wet corn crop was not combined with a "typical" winter.  All of the weather sources I follow indicate that this winter is the coldest in about 50 years.  It is exacerbated by the restrictions on coal for energy generation.  NG diverted to fuel a power plant cannot be used for propane.  Until a few months ago, the frac spread favored leaving the propane in the NG stream because the LNG price was so cheap.

Flakmeister's picture

Coldest winters in past 120 years in the CONUS were 1977 and 1979 (look it up)...

Depending on exactly where in the Midwest this winter ranks in 10-20 coldest (out of 120 years)...

On the whole January is about average as the west has been hot...

Propane is typically removed from the NG + NGL stream because of its value; however, what is now occuring is the the NG stream is getting spiked with Ethane (of which there is a glut)...

Could you provide evidence of your "exacerbated" coal claim.... I'll call bullshit until you do so...

Edit: Here is Bloomburg from November 20, long before the cold weather


Kayman's picture

"A dirty little secret about the shale plays is that it is crappy refinery stock for the most part. The money is in the diesel "

And the other dirty little secret, kept suspiciously quiet by the Flakmeister, is that diesel yield is far higher from oil sands heavy oil.

And shale is not "crappy refinery stock" per se, rather it yields more gasoline which is already in ample supply while our pretend economy stagnates.

More selective "facts" by the Flak.

Flakmeister's picture

Why do you think that the US refiners have been angling for that supply of heavy crude to replace the drop in Venezualan production? 

The US refiners has always exported excess diesel primarily to Europe while European refiners exported gasoline to the States..

The Bakken is crappy refinery stock from a crack spread profit perpective, they isn't any money to be made in gasoline.. Did it ever occur to you why it is so cheap relative to WTI even accounting for the transportation costs...

BTW, your comment on distallate yields from heavy crude is the first real contribution you have made here....

So given all this, is it any wonder Valero and others are salivating at the prospects of tax free high margin diesel exports from the Keystone feedstock...

Kayman's picture

Hey Flak:

Why hold back until now to tell us that you knew there was a higher crack spread in the heavies?  It is/was not a secret why Keystone was being built; to get Alberta heavy oil south so refineries on the line could produce more diesel.

Cenovus has 800 new oil cars arriving this fall to set up more unit trains to transport by rail across the border and to dump into oil reloads (U.S. pipelines just across the border).

"Did it ever occur to you why it is so cheap relative to WTI even accounting for the transportation costs..."      Crack spread depends on the oil and the refinery. Bakken oil is often blended with heavy oil.





Flakmeister's picture

Given the outcome for the typical american, combined with privatizing (at give away tax rates) the gains with externalizing almost all the down side makes for a pretty shitty deal....

Walt D.'s picture

One thing that is being overlooked is that gasolene is a refined product. An increase in the supply of oil will do no good unless there is excess refining capacity. EPA rules and regulations mean that it is almost impossible to increase refining capacity or build new refineries in the continental US. This has resulted in the eastern US actually importing refined products. Nobody wants to build a new refinery on the east coast.

Flakmeister's picture

You are a fine example of how a little knowledge can be a dangerous thing... 

Spastica Rex's picture

The justifications are amazing.

Well, any moment now the price at the pump will fall back to $1.00/gal, or thereabouts. Americans will get back to living their "non-negotiable, blessed way of life." God bless pickups.

Any moment now, because NOTHING Flakmeister has documented ad-nauseum could ever take that away.


Kayman's picture

Spastica Rex

Hard to have a conversation with the stone deaf. No one suggested gasoline prices were heading to $1/gal. The Federal Reserve has guaranteed that. Bernanke may well have shown it is hard to price an FRN in gold but it most certainly will be priced in oil.

A Big Mac/Fries and a Coke where less than $1,  45 years ago. In a sense, gas is a bargain.

Since Politicians and Bankers no longer want to have this nation earn a living-they would rather print a fantasy, the dollar priced in oil will continue to decline and oil prices will continue to increase.

Spastica Rex's picture

It's the American Fossil Fuel Based Way of Life that I'm poking with a stick, not the price of gas; that's just a convenient abstraction, that you clearly recognize.

You and yours may be right - seriously. We'll know when everything gets back to normal. I'll eat crow then.

But not now.

My guess (I'm one of those pussies who suffers from a lot of self-doubt) is that I'll be dead long before the AFFBWL is comfortably restored.

Flakmeister's picture

The US has about 17 mmbpd of refining capacity which is roughly 6 mmbpd more than combined US+Can+Mex crude production so clearly we do not have enough capacity... \facepalm

Another one, ever notice how the shills conflate "energy independence" with "oil independence" or surreptitiously use "North American Energy Independence"...

And now  that we are "Net exporters of gasoline", ergo we no longer import oil and it should be cheaper...  

Seriously, these guys are worse than the 3-card Monte hustlers you see in the streets and the sheep still line up to play...

Kayman's picture

Al Gore... is it you ? How's that global warming thing going for ya now ?  Yeah, yeah, I know global cooling is caused by global warming.

And selling your soul to Middle Eastern oil interests had/have no influence on your "kill domestic oil" mentality.

Flakmeister's picture

You were actually adding something to the discussion and then you went and got all stupid with the above nonsense...

Mad Muppet's picture

Oil, the only commodity where an increase in supply leads to an increase in price. Or would that just be us getting fucked again by some big corporate monster?

the grateful unemployed's picture

to explain this first tear up that supply demand graph you learned in h.s. if A and B cost the same to grow process or manufacture and A is in high demand and B much lower, A has economy of scale. B requires more profit to justify the costs, because volume is lower. why doesn't everyone use B then? maybe B isn't supported, B works in NY but not in LA. suppose corporate giant XYZ wants part for a machine, lots of machines, and B simply can't supply enough, then A gets the contract. B can make the same part as A but then A is setting the price because of its economy of scale so B is less profitable. its the same reasoning that allows a hedge fund to own the stock of XYZ because XYZ just doubled their float. more stock is not dilutive, its accretive (and profits no longer matter thank you jeff bezos)

Flakmeister's picture

It all depends where the supply is and what the going price is there...

What do you think the spread is between a barrel of WCS at Cushing and a refined barrel on the Gulf Coast? Gulf Coast refined products are priced off of Brent which last I time I looked was about $10 a barrel more that WTI. Would you care to guess why that is? 

Finally, given that many refiners on the Gulf Coast can export their product on a tax free basis, why would they give up free profits to sell their products domestically???

Kayman's picture

And Alberta synthetic crude sells for $10/bbl more than WTI- care to guess why that is ?

Flakmeister's picture

First of all, provide a link for that spread...

Here is mine that says you are full of shit


BTW, did you think that maybe it is because Syncrude has a higher distallate yield?

Kayman's picture

Try psac.ca-first energy. Calgary.

Second stop being such a fucking zealot. You tell everyone else that has a contrary opinion to your incessant drivel that a little knowledge is dangerous.  I take it that your house has no mirrors.

And Syncrude isn't the only synthetic oil producer.

ps. I think your shit meter is pretty close to the source.

Flakmeister's picture


I abhor bullshit.... quit spreading it and everything will be fine...

Re; Syncrude, Never said it was, just a convienient shorthand. Would you like a list? 

BTW, you gave the link of a trade association... Is that where you really get your quotes?

From my previous line of work, I learned that if you did not know stuff you asked questions or researched things yourself before making outrageous claims...Unlike many here...

I also know enough to realize how much I do not know. Again, unlike many here...

Kayman's picture

I gave you an industry reference to current pricing in Alberta. Apparently, you who knows everything, think the quoted prices are fictitious.

Once contrary information is presented to you- you attack the source. What a fucking narrow-minded child.

"I also know enough to realize how much I do not know" Only the quantum is in question.

Global Observer's picture

Production costs of oil from Alberta tar sands are extremely high, upwards of US$ 80/barrel. If prices for that oil fall because of a glut in the US and oil products from that oil cannot be sold in the global market, the production itself will cease. The pipeline will create jobs and since the pipeline runs through the US, it can be expected that Americans will be employed in those jobs. So any politician that says that is not lying. However, if anyone explicitly claimed that it will bring the prices of gasoline down s/he would be lying.

Kayman's picture

"oil from Alberta tar sands are extremely high, upwards of US$ 80/barrel"

1. Part of the high costs relate solely to the boom and capital in situ costs. Production costs are actually pretty low.

2. SAGD for the deeper oil sands generally have relatively low costs. Look at Conoco and Cenovus.

Blame Crash's picture

Is that why oil companies the world over are rushing to Alberta to set up operations.  If only they knew wnat you know eh!  Maybe you should tell'em.

PS : the oil sands have been in operation since the 80's (at least) and the production has of yet not "ceased"

Ned Zeppelin's picture

Whenever you hear an American politician say that a particular bill, war or project is all about American jobs, double up on the application of KY to your nether portal.

ItsDanger's picture

I dont think it will have much of an impact at all on gas prices, volume is too low.  Higher gas prices will occur regardless.

Trucker Glock's picture

I have yet to understand why people rally against importing foreign oil.  Isn't it in our best interest to have "wells" tapped, reserves at the ready while importing all that we possibly can?  Don't we want to be the last place on earth to run out of oil?  I think the "end our dependency on foreign oil" idea is a sham, pushed by oil companies and their DC puppets to con the masses.  Just my opinion.

headhunt's picture

We need the fields developed now even if they are not used, as I am sure you know, development can take years and in political years centuries.

A nice kitty is a P7 M13

NoWayJose's picture

Don't worry. Oil is moving on Buffet's trains. Buffet backs Obama. 'nuff said..

Flakmeister's picture

What fraction of BNSF railcar loads are oil?

Why don;t you look it up and get back us and explain why it is so important...

Your next task will be research cancelled pipeline projects because producers in the Bakken will not sign contracts guarenteeing crude supplies 10 years down the road...

Chess is being played and you apparently are commenting on  the color of the checkers....

headhunt's picture

Why would anyone sign a 10 year deal when its viability is dependent on what has become a schizophrenic government.


orangegeek's picture

Gas is dervived from and either leads or lags the price of WTI Oil.


WTI Oil has made a move up recently and looks ready to roll over in the daily chart below:




And CME gas prices will follow - all the way down



Radical Marijuana's picture

One of the many ironic paradoxes of Neolithic Civilizations' social pyramid systems is that they developed over thousands of years as ways to cope with the chronic political problems associated with natural scarcities, while, then, especially during the last Century or so, they have developed "artificial scarcities." As usual, there will be wildly oscillating, yo-yo effects from this kind of deliberate manipulation of volatility, which benefits the middlemen manipulators, while screwing the shit out of the producers and consumers.

tip e. canoe's picture

artificial scarcities that amplify natural scarcities by an order of {you choose the integer}...

all just to keep the top part of the pyramid levitated away from the rest as if by magic.

The Heart's picture

 The answer to higher gas prices is easy. Stay home.

Meanwhile, this is interesting.: