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

Big Oil Is Gaming the System to Raise Domestic U.S. Prices

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.

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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.

***

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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  • Dee

    I’m a big fan of Washington’s Blog, and I love most of your articles.. but this one, not so much, it seems a little too narrowly populist and at odds with itself. You want to preserve beautiful places , but want cheaper gas? How does that work? You talk about patriotism in the oil market as cheaper gas and saving our oil, American oil for Americans? seems a little jingoistic. You are pretty far off on what the WTI and Brent price difference is and address that difference as being strictly storage and not any difference in the “crack” , the division of the products that can come from different grades of crude as well as the cost of reconfiguring refineries to handle different grades of crude and the ability of different grades to supply a mix of products more closely aligned to demand for those products.. and different markets have different demands.. even more so now that we have a shot at heavy trucks doing much cleaner nat gas rather than the ever popular diesel in Europe and South America.
    Oil is a global market.. the grades available don’t always conveniently or economically supply the product mix in demand where the oil is found.. and economically we have paid a heavy price in foreign trade deficits for decades, that we now have a fair chance of recouping to some degree, benefiting the whole economy and creating significant jobs.
    We want oil demand to go down in the US , less pollution, we need infrastructure to get the maximum return on our natural resources … you totally fail to mention the 2 Billion dollars worth of Nat Gas that has to be flaired off up in the Bakken because we have no way to distribute it or store it and unburnt, nat gas/methane is 20 times worse for global warming than the CO2 from burning it. and we get no economic or industrial advantage from flairing it off.
    I don’t want to seem too hard on you guys.. you are writing a story about energy in a nation with no cohesive or coordinated energy policy in the middle of a technological revolution in access to the resource, at a time when that resource could very well be the one thing that can save the economy by creating jobs and making our manufacturing sector more competitive world wide, and provide a much needed boost to exports to balance the trade deficit, and if full exploited could destroy the atmosphere sooner by providing more carbon than even the most apocalyptic prefrakking models predicted.
    Helluva situation.. IMHO deserves a less populist, less jingoistic , more nuanced report.. just saying..

  • joe rice

    I got a great idea to bring gas prices down… Lets limit the speculative oil markets to only those who are in the production and distribution if oil like it was before 2000… The markets are volitale because we allow a handfull of wallstreet gambling attics to create a false demand on a commodity that dictates the entire stability of the economy …. limit speculation to only those taking delivery…Then we will see that all these supposed fears of supply loss is nothing more than a billionares ruse to raise gas prices, and suck what little disposable income us in the middle class have left.

  • BusProf

    This article is a demonstration of political posture and little understanding of the relevant facts.
    1) Pipelines are more efficient at moving oil than rail cars.
    2) Warren Buffet has significant investment in rail cars.
    3) The refining of pipeline oil could happen anywhere along the pipeline (as the market demands) – but not important to Canada’s need to get its oil to a port.
    4) Fuel prices in the “Midwest and Rocky mountains” are going to be low for a very long time – MT and ND have reserves for decades and are not places that take a NIMBY stance on refineries – not related to Canada moving oil to a port.

    • kimyo

      none of your points refute the premise of this article. providing canada with the ability to sell to more customers is certainly not going to reduce our costs.

      as for the americans who live alongside keystone, realize that in transcanada’s eyes, you’re all nigerians. you’re an inconvenience to be bribed until you shut up.

      how many permanent jobs? if the number i’ve heard is correct, that’s why you’ll never hear keystone proponents putting it forth.

 

 

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