How much would Keystone pipeline help US consumers?
“Millions of Americans will spend 10 to 20 cents more per gallon for gasoline and diesel fuel as tribute to our ‘friendly’ neighbors to the north,” the highly respected Dr. Verleger wrote. “The Keystone XL pipeline will move production from Canadian oil sands to a deepwater port from where it can be exported.”
But that is not merely Verleger’s opinion. It’s based on findings of the economic consultants hired by TransCanada – contained in their analyses of the pipeline’s impact on Canadian oil producers and in official testimony before Canada’s National Energy Board.
“Existing markets for Canadian heavy crude, principally [the US Midwest], are currently oversupplied, resulting in price discounting for Canadian heavy crude oil,” concludes a 2009 analysis on behalf of TransCanada by Purvin Gertz, Inc., an oil economics firm based in Houston. “Access to the [US Gulf Coast] via the Keystone XL Pipeline is expected to strengthen Canadian crude oil pricing in [the Midwest market] by removing this oversupply. This is expected to increase the price of heavy crude to the equivalent cost of imported crude.”
Gulf link to global markets
As a result of those increases in the price of heavy crude in the Midwest and sales of higher-margin refined products shipped out from Gulf Coast refineries to other markets, Canadian oil producers could be expected to reap $2 billion to $3.9 billion more each year, the analysis says.
“Shippers on the Keystone XL Pipeline have contracted for access to the [US Gulf Coast] market for their oil sands production and refining needs,” the Purvin Gertz study concludes. “Not only will this directly benefit these shippers, it will also provide a benefit to all [Western Canadian] heavy crude producers by increasing the price they receive for their crude, as well as providing significant pipeline capacity to an alternative market” on the US Gulf coast.
Why Canadian crude oil producers would choose Keystone XL when other pipelines to the US are running well below capacity has much to do with diversifying away from the US market to more lucrative markets in Europe, China, and other Asian countries, Verleger and others argue. Trends seem to support this thesis.
Over the past five years, exports from the US Gulf Coast have soared as refiners sitting in tax-free zones near Port Arthur, Texas, have shifted production away from gasoline and toward higher-margin diesel. Since 2007, overall US exports of diesel and other products have jumped 134 percent, the US Energy Information Administration reports. Of US exports, two-thirds is shipped abroad from Gulf Coast refineries – now more than 2 million barrels a day and up from just a quarter of today’s level a decade ago.
That trend was captured in testimony Sept. 17, 2009, before Canada’s National Energy Board. Seven Canadian companies were willing to pay higher pipeline tariff costs for using the Keystone XL pipeline, the testimony showed, in order to bypass Midwest refineries by sending 500,000 barrels per day, the lion’s share of the pipeline’s capacity, to Gulf refineries.
Valve to relieve Midwest oil “oversupply”
In addition to winning higher prices for Canadian oil in the Gulf, the pipeline would boost revenues by shuttling existing oil supplies out of the Midwest – boosting prices, the Canadian study and testimony also show.
“So seven shippers or seven producers are, in your view, pursuing this strategy in order to increase the [Midwest oil market] and Ontario prices. Do I have it right?” D. Davies, a Canadian energy board examiner asked Thomas Wise, the Purvin Gertz expert who authored the economic analysis for TransCanada.
“If a minority of the barrels were sold at the Gulf Coast at a Gulf Coast price, that would have the effect of raising the price not only in the Midwest and Ontario but in Western Canada,” Mr. Wise responded.
In hearings last May and December, TransCanada officials admitted to US legislators that the pipeline will indeed increase the price paid for Canadian oil in the Midwest – but suggested those higher crude oil prices would not necessarily mean higher gasoline prices in that region.
The pipeline would reduce the “discount on Canadian oil” currently paid by US refiners – an oil price increase for US refineries, Pourbaix said in a congressional hearing last May. Even so, “that crude will still remain the cheapest source of crude by a long shot that U.S. refineries have access to,” he testified.
“If you add significant new supply to a static demand for a product in a market, you should see the price go down,” Pourbaix explained. “So it is my absolute expectation, that over time, with incremental supplies of Canadian crude oil coming into the US market, you will see downward pressure on refined products prices, throughout US markets.”
In his e-mailed response, TransCanada’s Mr. Cunha cites a June 2011 report by IHS CERA, an energy economics firm that reached similar conclusions. “Prices at the pump will drop when America’s largest refining region (the Gulf Coast) becomes less dependent on the world’s highest priced crude (OPEC),” he wrote. “Foreign importers will have to cut their prices if they want to compete with the cheaper Canadian crude…. We would argue the overall US price per barrel will drop as refiners pay less for foreign and domestic oil competing with a higher volume of cheap Canadian oil.”
Testimony and supporting documents north of the border stating that Keystone XL would raise Canadian crude prices has set off alarm bells with several US legislators – while leaving others unmoved.
Legislators react to findings
Rep. Ed Whitfield (R) of Kentucky, who chaired two hearings into the Keystone XL, heard positive testimony about the pipeline – as well as contradicting testimony that it would do little or nothing for energy security while raising Midwest oil prices. He still likes the project, however.
“If our president decides that sending aircraft carrier strike groups to the Strait of Hormuz to defend oil flow is in the national interest, then one would also think a pipeline from Canada that would help eliminate our Middle East oil imports also serves the national interest,” Mr. Whitfield said in a prepared opening statement for the hearing he chaired.
In an e-mailed statement, Whitfield’s press secretary adds that the pipeline “will help lower the price of gasoline by bringing more oil supply to the market” and says the Department of Energy “specifically states that gasoline prices in all connected markets would go down.”
But Sen. Ron Wyden, an Oregon Democrat, was alarmed enough to call last year for a Federal Trade Commission (FTC) investigation into the matter based in part on the Canadian National Energy Board testimony.
“While the full nature of the arrangements agreed upon by the Canadian shippers is unclear, there is clear indication that there is a coordinated ‘strategy’ among Canadian suppliers to gain higher prices,” Senator Wyden wrote Jonathan Liebowitz, chairman of the FTC in an April 6, 2011, letter. “This will have the effect of manipulating supply levels allowing prices of oil refined in [the Midwest oil market] to rise and ultimately benefitting the Canadian companies with higher prices.”
On Thursday, it was Wyden who put forward an amendment to the transportation bill that would have prohibited the sale of the Keystone oil overseas and imposed other regulatory requirements. His amendment was defeated 64 to 34.
Reacting to Obama’s previous decision to bar approval for Keystone XL, TransCanada made it clear it considered the project too vital to delay for long.
“Until this pipeline is constructed, the US will continue to import millions of barrels of conflict oil from the Middle East and Venezuela and other foreign countries who do not share democratic values Canadians and Americans are privileged to have,” Russ Girling, TransCanada’s president and chief executive officer said in a statement.
“This project,” he continued, “is too important to the US economy, the Canadian economy and the national interest of the United States for it not to proceed.”
This story, “Inside the Keystone pipeline: How much would it really help US consumers?,” first appeared on CSMonitor.com
© 2012 Christian Science Monitor