Will Keystone XL Pipeline Increase or Decrease Gasoline Prices

abarrelfullabarrelfull wrote on 29 Feb 2012 09:01

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The Keystone XL Pipeline Project has generated a huge amount of controversy, been the target of demonstrations and political wrangling and has suffered from propaganda, smears and lies. Each claim by the pipeline lobby has been countered by its opponents.

The rather thorny subject of gasoline prices has become a major area of disagreement between the two sides. The pipeline proponents claim that extra volumes of crude will lead to a reduction in prices, its opponents claim the opposite. Who is correct?

MSNBC wrote the following: Why the Keystone pipeline would boost pump prices

The proposed pipeline would relieve a glut of crude oil backing up in the Midwest and redirect those barrels to Gulf of Mexico ports. From there they could be shipped to world markets and repriced at higher global prices. But that likely would mean higher prices for drivers in the nation's midsection, who currently are enjoying an unusual discount stemming from a lack of pipeline capacity.

The Midwest has been enjoying a rather strange phenomenon whereby a surplus of crude has led to a big discount for US & Canadian crude oils in relation to similar quality crudes elsewhere. Cushing in Oklahoma has a surplus of crude arriving, but a shortage of pipelines available to transport it away.

Refiners with access to these cheap crude oils have been making huge profits, whilst selling gasoline at prices that would be loss making for refineries in other regions. So in the short term, this argument is undoubtedly right.

However, the Keystone XL Pipeline Project is not the only show in town. Back in November last year, a long expected announcement was made that the Seaway Crude Oil Pipeline was to be reversed, helping relieve Cushing of its surplus. The reaction was swift:

the spread between Brent and WTI has plummeted 18 percent to $10.66—a stark contrast to the record $28 a barrel just a month ago

Subsequent perceptions of delay to this project have once again led to an expansion of the WTI-Brent spread, but come closer to June, when the pipeline enters operations, this is expected to shrink again.

Meanwhile, Transcanada has decided not to wait for a Presidential signature.

The company also informed the DOS that what had been the Cushing to U.S. Gulf Coast portion of the Keystone XL Project has its own independent value to the marketplace and will be constructed as a stand-alone Gulf Coast Project, not part of the Presidential Permit process.

So the leg that will help ease the surplus at Cushing will now go ahead anyway. The company expects it to enter operations late next year.

So one way or another drivers in the Midwest will see higher gasoline prices.

However, this is not the complete story. First of all, whilst Midwest refineries have been making hay, North Eastern ones have been closing. Their crude is indexed to global prices, not to landlocked WTI. Without their local refineries, drivers are facing even higher gasoline prices.

Meanwhile global crude oil supply dynamics are leading to ever higher oil prices. Declines in production in major exporters are a major problem. The world needs new sources of crude to replace them.

Currently, the most important region of crude oil production growth is North America. Unless the growing volumes from North Dakota & Alberta can reach the global markets global oil prices will inexorably rise. So pipelines that bring these sources to market will, if only marginally, have a downward effect on crude oil prices.

So the opponents are right, gasoline prices will rise, at least in the short term, and at least for some consumers. However for those of us not living in the Midwest, the economic impact of Keystone XL will be all positive. Ironically, now that the part of the project needing Presidential permission will supply oil to Cushing rather than helping reduce stocks there, its contribution will undoubtedly help reduce prices, whilst the segment that is going ahead immediately will have the opposite impact

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