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Why The Keystone Pipeline Will Actually RAISE Gas Prices In the U.S.
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.
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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.
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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.
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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?
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Americans have been told for years that if only we drilled more oil, we would see a drop in gasoline prices.
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But more drilling is happening now, and prices are still going up. That’s because Wall Street has changed the formula for pricing gasoline.
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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.
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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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If by "interesting," you mean "silly," then yeah.
ChitCongo has some of the highest gas prices in the nation including Hawaii, WTF is this clown kidding?
Someone is forgetting that if the Keystone does not get built the Canadians will complete a pipeline to the West Coast and start exporting oil to the Far East. Prices will really go up in the Midwest, then.
Damn right we will, unfortunately the natives are getting restless so we have to deal with them first
Excellent point Zero. The story is complete nonsense. If it was true then shutting down existing pipelines must be a good thing. LMAO! Who said the oil sands are unsustainable? Good grief. Well yes, I suppose they won't last more than 200 years. What is wrong with some of you? Sheeesh. So negative. Let me tell ya a little secret...the Alberta tar sands are so big...they extend into Saskatchewan too!
And what fraction is amenable to strip mining? What fraction will have to be exploited using SAGD?
And how did you come up with that gem of a non sequitur about closing pipelines?
Easy. There are already a dozen major pipelines transporting Canadian oil to the U.S. Apparently they all raise our gas prices. More supply equals higher prices...right? That is what the story is telling us. LOL
That ain't gonna happen either...
It's gonna go somewhere......supply and demand.
Your little theories aside....
But it already is going somewhere....
Do you think that the bitumen is simply piling up at the rail depot in Ft. McMurray?
Hey Flak:
Alberta oil is going by unit trains (100% oil), crossing the U.S. border and being reloaded into existing American pipelines. Of course, this is wasting resources and creating more pollution. But what do you care about that. Better to pontificate while the rest of the world carries on.
By the way, there are many load railcar facilities (in Canada) and reload (into U.S.) pipelines facilities being built right now. And the oil/railcar business is booming. The oil will find a way to market- no matter how cosy you get with the Saudis.
What is your point?
You mananged to create at least 2 strawmen, what exactly do the Saudis have to do with this?
I realize I am not going to influence a zealot. First point clearly stated- the oil has already found a way to the market and more is coming.
Second point- OPEC and the Saudis finance many things for their own interest; one of them is the oil chicken little lobby.
Reduced to conspiracy theory are we?
Ever heard of Motiva? Thats another player in FTZ game of heavy oil refining...
The Oracle of Omaha would love to see the pipeline scrapped so his new railroad can haul the crude. Remember the derailments last year? Much safer right? This article is misleading. In fact very misleading. The problems outlined with the bypassing of the hub in Oklahoma etc. is real. Not to mention ridiculously low refining capacity in the US. I don't think anyone serious argued that it would lower gas prices in the US. Oil is sold on a world market subject to many forces. But more is always better for the consumer in a large market. The Saudi's for instance hate the increased oil production because it means they can't control the price as much by raising and lowering production. Remember Prince Ala-whatever railing against fracking?
You are a shining example how the propaganda of the American Petroleum Council works...
Care to remind of when the the all-time highest capacity in US refining was acheieved? Why don't you Google it and get back to us?
And remind us how much C+C the US produces....
Since I know that you are too lazy to look it up
http://www.eia.gov/dnav/pet/pet_pnp_unc_dcu_nus_m.htm
You are a shining example how the propaganda of the progressive government and their minion media works...
Do you think I gained my knowledge of oil and what not from the "minion media" and following expertly shilled propaganda?
No wonder we are so fucked...
You are a fucking idiot. The worst kind of moron who truly believes they are smart. You clearly do not understand. The link you provided proves my point. 90+% capacity means less than 10% buffer. It's too tight. 70 or 80% would be much better for the consumer. Less than 10% buffer means it always puts upward pressure on the price of gasoline, especially with the different blends for different regions and seasonal switch overs. Everyone in the industry knows this.
Do you understand the difference between capacity and capicity utilization?
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MOPUEUS2&f=M
Remind us of when the cheapest real gas prices existed in the US? And how does that compare to utilization at the time??
You clearly don't have the foggiest clue what you are talking about..
Now take your school lesson like a man and learn that when you say stupid shit in the real world you will get called out..
You should stop. I understand quite well. And no I'm not going to remind you about anything. I mentioned one of the many upward pressures on gasoline and you you go read some stats and completely misunderstand what your looking at and write some smarmy comment. But this is not your first time misunderstanding stats.
Flak is right - refineries are completely different than most manufacturing facilities - they need to run flat out and their costs go down radically - high utilization rates in the 50-60's produced low spreads between crude costs and kerosene / gasoline - this was a period when commodities were not manipulated by wall street and various banks were not involved in distribution and storage of commodities
"they need to run flat out and their costs go down radically "
Any production facility of any kind that has fixed costs will reduce its unit costs by running flat out. So you have proved Flak to be wrong !
Either all refineries are running flat out right now and for some reason when/if Keystone is built these refineries intend to reduce production or sell more of their product offshore or Flak has a bad case of headus rectumus.
Spin it anyway you want buddy...
You are way out of your league in this one...
“The [Keystone XL] pipeline will bring secure energy to America, support the creation of thousands of jobs, and help bring down prices at the pump.”
--Rep. Fred Upton, chairman of the Energy and Commerce Committee, Feb. 16, 2012
I don't consider political rhetoric to be serious. A lot of people on both sides (POLITICALLY) made erroneous claims about the pipeline. Which is why I try to look at it from an objective point of view. At the end of the day, oil through a modern pipeline is much better than shipping by train or truck. This is an infrastructure issue. Very important for our future. You have to put aside your disdain for big oil companies who provide a necessary product that you and I cannot produce on our own and realize we must have oil. And we should do it in the most responsible way possible considering we need it for the foreseeable future. The laws of physics are hard to get around when it comes to energy. I believe we will break that barrier but fossil fuels is the only vehicle with enough abundance to get us to sustainable energy. Not to mention food industry relies on petroleum products (fertilizer etc.) to produce food. The price at the pump will not come down with an inflated dollar among many other issues.
At the end of the day, oil through a modern pipeline is much better than shipping by train or truck. agreed, but why not build some new refineries closer to where the oil is being excavated, rather than build a pipeline to ship it all the way down the gulf?
food industry relies on petroleum products (fertilizer etc.) to produce food. unfortunately, all too true. but if so, and a large part of the food industry is in the midwest and thus the midwest is a large consumer base, again, why ship it all the way to the gulf at all just to bring the refined stuff back up the mississippi by truck or train?
"why not build some new refineries closer to where the oil is..."
1. There are refineries and upgraders already. But you need to sell all the products produced from a refinery.
2. Different refineries require different feedstocks. Heavy oil feedstock refineries already exist on the Gulf Coast.
3. New refineries are a multi-billion investment and NIMBY is alive and well.
BP just spent $4.2 billion to upgrade to its Whiting facility to handle heavy crude.
you need to sell all the products produced from a refinery.: you couldn't sell the large majority of those products right there in the midwest? not trying to be snarky here, but like what?
New refineries are a multi-billion investment :: so is POMO...per month. i understand about heavy oil refining needing specialized equipment, but how long has the tar sands been known about? long enough to build several of them already yes?
NIMBY is alive & well: in the Dakotas? that's about as low of a pop density as there is in the continental US. if that's really the case, then peeps need to cut down their petrol consumption about 50% and start growing gardens before they bitch, because everyone is contributing to the problem.
GW I usually enjoy your articles. I think this one is a bit misleading. Basically, there is a massive oversupply of gas in regions where it is being extracted, and a mass under supply everywhere else. So yes taking some of that extra supply would probably raise the prices those folks pay. But isn't that exactly how a healthy market works?
The price of fish is much less at the docks due to the oversupply, vs the price of fish far inland with an under supply. It's true that finding new markets for the fish far inland might raise the price at the docks a few cents. But more or less it should still be competitive with the market far inland, minus the cost of transportation, and several middlemen.
Am I missing something here?
This propaganda is akin to a wooden arrow being shot at a steel battleship in the hopes that enough of them will sink the Alberta Oil Sands industry.
The article is weird because it proposes artificial barriers to keep a commodity available for a special region. I would argue that the commodity is currently moved by rail, a pretty expensive process and even worst for the environment. There no "win" here: the people are not paying less and the producers of oil waste a lot of resources on transportation costs. Only the intermediaries and speculators may turn a good profit.
Yes, the wordgames of predictive programming. They tell you what they're going to do and then they do it.
Enjoy the Super Bowel
For the record, I don't even know who's playing.
“The [Keystone XL] pipeline will bring secure energy to America,
support the creation of thousands of jobs, and help bring down prices at
the pump.”
--Rep. Fred Upton, chairman of the Energy and Commerce Committee, Feb.
16, 2012
George:
Since you know nothing about the oil business, you ought to velcro your lips shut. BP just restarted their heavy oil refinery in Illinois, but the majority of refineries in the Midwest use sweet crude or a blend of sweet/heavy oil. Ergo the dilbit or WCS (western Canada select) that will go to Texas and Lousiana by pipeline is surplus to the Midwest.
Only if there is surplus refining capacity in the Gulf would any increase in feedstock from Keystone translate in more refined oil exports. PADD 2 and 4 have more oil available to them than they can refine.
And it probably would be news to you that the rail disaster in Quebec was North Dakota light Bakken heading by rail to the Irving refinery in New Brunswick. Now why would a producer be selling oil to a refinery on the Atlantic coast by rail unless the local market is plugged with oil ?
I know some of these concepts might be a little bit over your head, when politics are the only prism you look through, but at least develop a little knowledge before pontificating.
p.s. I heard yesterday from a reliable chicken that the sky is falling. Jeez....
Right, so I'm asking a question legitimately trying to understand where you're coming from here. I do not understand why you think bringing additional supply to the rest of the country is a bad thing from an economic point of view.
The reason being is that the crude is destined for the Gulf Coast where once it is refined it will be sold to the highest bidder, i.e. exported. Here is my tanker, fill it up...
I really suggest you also learn about tax-free Export zones along the Gulf coast....
So no, it will not bring additional supply to the country...
Here, let google that for you
http://lmgtfy.com/?q=tax+free+export+zones+gulf+coast
and if you really want to be a Boy scout, read the Valero 10-Qs outlining how it works...
I followed your link and did the research. Thank you, I did not know any of that. However the docs state that the FTZ's that you referred don't impact imports of Canadian crude at all. There is no impact on taxes from Canadian, or Mexican, crude imports because of NAFTA. The FTZ is irrelevant to "tax free oil", because any oil imported anywhere into the US from Canada or Mexico is exempt from import duties.
It has to do with re-exporting the refined products... The GC refiners are incentivised by the TFZ to export the refined products, so unless you think the refiners are very generous people, domestic prices will be higher....
Actually, that's not the way it read. The docs you linked to state that the tax burden is zero, regardless of whether they sell to a foreign or a domestic buyer. So if the tax burden is equal (zero) whether they sell to a foreign buyer or a domestic buyer, then it is just a matter of where can they get the better price. Am I missing something?
What exactly is a TFZ then in this context then? Valero is still on the hook for earnings derived from domestic sales...
Oh, now I see, you are reading the American Petroleum Institute "Rebuttal" here
http://www.api.org/policy-and-issues/policy-items/keystone-xl/~/media/Fi...
Read it again very carefully, of course there is no taxes or duty on the oil itself... Note how they do not mention REFINED products...
can't remember where so accuracy can't be verified, but just read somewhere that oil was US #1 import AND #1 export.
if this is correct, wrap your mind around that inefficiency wrapped in a fallacy and it all makes perfect sense.
You realize that the US earns the equivalent of a seigniorage from refining...
In fact when you examine the breakdown of domestic production there is category called "refinery gains". It turns out that ~10% of US "production" is actually volumetric gains from refining imported oil...
it's all about the vig, baby
btw, don't know if you watched the Stuper Bowl last night, but if not, fyi, X-ON bought more ad time than anyone and was pimpin nattie like no tomorrow.
It sounds like he's coming from Chicago, Cheyenne or Denver and he doesn't want to lose his discount, just so the rest of America can enjoy the benefits of market arbitrage.
Because the Rockies and the Midwest are all that matters, right?
I have been saying this would be the result of Keystone for at least 18 months here....
+++++++
from the wall street point of view we must have low cost energy available to the countries or regions where we outsource manufacturing - this is also our foreign policy, the ultimate purpose of the Al Qaeda revolution is to overturn Shia law, and allow nationalist states to form and compete, and create military industrial states that will supply cheap goods to the global economy, and supply labor to replace the increasingly higher cost labor in China. the corporate multis need lots of ignorant, poor people.
the US midwest is dying, and this only puts the nail in the coffin, while our food supply is outsourced or relocated. (much of the aquifer is depleted anyway so it is time to move on) the long term plan should be to make natgas the standard, and crude oil the marginal energy market, that would reduce oil prices and raise ng prices, which is fine, we are prepared to export LNG. also as global warming increases, there is a release of methane from the frozen tundra and that source can probably be developed for export, since the principle of the formation of methane and other fossil fuel is the same. as we warm the planet more energy is available, which allows us to burn more, and which warms the planet further. its a virtuous cycles (haha)
Start paying attention to where a lot of packaged food comes from. You'll notice a lot of China, the land of the not so sanitary.