Keystone XL pipeline may raise U.S. gas prices

TransCanada Corp. (TRP)’s Keystone XL oil pipeline, a project backers including Republican Presidential candidate Rick Santorum say will create cheaper U.S. gasoline, instead risks raising prices as much as 20 cents a gallon in the Midwest, Great Plains and Rocky Mountains.

The line would create a new way to carry Canadian imports outside the Midwest and reduce an oil surplus that’s depressing prices in the central U.S. Spot gasoline was 55 cents cheaper in Chicago than in New York on June 1, the second-highest ever. Nationwide, retail gasoline set its highest February average at $3.55 a gallon, data compiled by Bloomberg show.
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Philip Verleger, principal of PK Verleger LLC. said “the Canadian plan was to use their market power to raise prices in the United States and get more money from consumers.” Photographer: Melissa Golden/Bloomberg

The purpose of the $7.6 billion Keystone is to move 830,000 barrels of oil a day from landlocked Alberta to the Texas Gulf Coast, obtaining new customers and a higher price for heavy Canadian crude, Canadian regulators said in a 2010 report. The oil sold for $23.38 less per barrel in 2011 compared with heavy grades of Mexican crude, according to data compiled by Bloomberg.

“The Canadian plan was to use their market power to raise prices in the United States (UNG) and get more money from consumers,” Philip Verleger, founder of Colorado-based energy consulting firm PK Verleger LLC, said in an interview. Prices may gain 10 to 20 cents in central states, he said.

Producers including Exxon Mobil Corp. (XOM), Suncor Energy Inc. (SU) and Cenovus Energy Inc. (CVE) may reap as much as $4 billion more in annual revenue if prices rise as expected following the construction of the 1,661-mile (2,673-kilometer) Keystone XL conduit, the 2010 report says.

Such a change would erase the cost advantage for refiners such as Marathon Petroleum Corp. (MPC) and HollyFrontier Corp. (HFC), whose Midwest plants profited on cheaper oil supply.

Political Touchstones

The Keystone pipeline has generated a political debate before the U.S. November presidential election.

Republicans including presidential candidates Santorum, Mitt Romney and Newt Gingrich have criticized President Barack Obama’s Jan. 18 rejection of Keystone XL after Nebraskans raised concerns about the pipeline polluting their groundwater.

The three candidates and U.S. House Speaker John Boehner have said that approving Keystone, eliminating environmental regulations of hydraulic fracturing, known as fracking, and opening up new areas for drilling would lower the cost of gasoline for American consumers.

Clinton Backs Pipeline

Former President Bill Clinton backed construction of Keystone yesterday in comments at a Washington-area energy conference. As long as the pipeline avoids environmentally sensitive land, “the extra cost of running it is infinitesimal compared to the revenues” the pipeline could produce, he said.

Oil supply concerns have grown as the U.S. and Europe tightened sanctions on Iran, pushing U.S. crude prices for future delivery to $109.77 on Feb. 24, the highest in 9 months, according to data compiled by Bloomberg.

TransCanada said Feb. 27 it would reapply for a permit to build Keystone and proceed separately with a $2.3 billion segment of the pipeline that will carry crude from the storage hub at Cushing, Oklahoma, to the Texas coast.

Oil flowing through the Oklahoma-to-Texas segment of the Keystone pipeline would help remove excess supply in the Midwest and bring cheaper crude to refiners on the Gulf Coast, TransCanada Chief Executive Officer Russ Girling said in a telephone interview after the announcement.

“It will help to reduce pressure on gasoline prices,” he said.

Declines Offset Increases

As more crude flows to markets such as the Gulf Coast, prices should decline there and balance out increases seen in other places, Stephen Schork, president of the Schork Group industry consultants in Villanova, Pennsylvania, said in a telephone interview.

“Bringing these barrels to the Gulf would certainly have a dampening impact,” Schork said. “Getting more high quality, cheap oil to the market is the direction we need to go to see lower gasoline prices.”

Keystone XL might lower the average cost of gasoline across the U.S. by up to 4 cents a gallon, Ray Perryman, a consultant hired by TransCanada to assess the economic impact of the project, said in an e-mail.

The net impact of Keystone XL on gasoline prices would be minimal, said Perryman, whose research has been cited by TransCanada to back up claims on potential job growth and market impacts from the pipeline.

Consumers in Colorado and Wyoming currently pay less for gasoline than anywhere in the nation because of the supply glut in the Rocky Mountains caused by stranded Canadian imports and growing oil production from onshore fields. Denver’s average price of $3.13 a gallon today was 43 cents lower, or 12 percent, than Houston’s $3.56 average, according to AAA.

Charging More

Canadian producers will be able to charge more for their oil after Keystone XL is built, boosting revenues by $2 billion to $3.9 billion, Canada’s National Energy (TAQA) Board said in the 2010 report approving of TransCanada’s pipeline plan.

The discount on Canadian crude “should be avoided in the future” if the pipeline were built, according to the report.

Completion of the entire 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.
Gasoline Prices

Retail gasoline in Chicago today averaged $3.91 a gallon, 13 cents lower than the $4.04 New York price and more than double the 6-cent difference between the two cities a year ago, according to AAA. The average gasoline price of $2.99 a gallon in Cheyenne, Wyoming is the same as a year ago and the price in Minneapolis is $3.65, according to AAA data.

Canada exported 66 percent of its total crude production in 2010, almost all of which went to U.S. markets, according to the C.D. Howe Institute, an Ottowa-based think tank. The biggest pipeline systems moving crude southward include Enbridge Inc. (ENB)’s mainline system and TransCanada’s first Keystone line, both of which transport oil to refineries in the Midwest, including in Wisconsin and Illinois.

17 Comments

  1. Albertan

    The current price spread between WTI and Brent couldn’t last forever. Keystone XL will bring 510 thousand bpd (of new oil) into Cushing and remove up to 830 thousand for delivery to the coast. The 510 thousand will be new oil, not taken from current deliveries. The net 320 thousand bpd removal will raise prices in PADD 2 but the addition of 830 thousand to PADD 3 will lower prices there. The reversal of the Seaway line and its expansion to 800 thousand bpd will have a greater impact on both prices than Keystone XL will.

    #1
  2. txloanguy

    Is this a competitor or just another Dem? Do nothing or create more gas? Obama wants $5 gas to make the Volt viable. Headlines like this are deceptive. Somebodies opinion is framed like a fact.

    #2
  3. BarksintheCountry

    It is true. When a commodity is stranded because of government forces and those forces are removed or minimized and the market becomes more effective, imbalances in supply and price will be reduced. Of course those benefiting from the imbalance may see a price increase, just as those penalized by the imbalance may see a price decrease. Mr Verleger needs to broaden his horizons beyond Colorado.

    #3
  4. Locked

    That’s not what the supporters of the pipe line argue.

    #4
  5. independent66

    Obama BS numbers.

    #5
  6. Dr. Dave

    Philip Verleger, principal of PK Verleger LLC, is all wet. It sounds like his position is nothing more than a political agenda to stop the pipeline. Why does he assume that Marathon and other refiners will no longer buy less expensive imported oil? That assumption is a fallacy.

    #6
  7. AGEX80

    This analysis is nonsense. Canadian oil sands production is increasing rapidly due to huge investments by a number of companies and needs additional export capacity to the US. The market for heavy crude is better in the US than it is elsewhere, so it is likely to stay here and displace Venezualan crude oil. Not only will it make gasoline cheaper, it will hurt Hugo Chavez badly.

    #7
  8. xanegrey

    what is even crazier is that a country as rich and smart as the US is still using a dirty outdated fuel to power its economy and not doing anything to R and D new fuels. Like the invasion of Iraq- which has massive proven reserves- did not make our fuel costs any cheaper now did it ? and we spent over $1 .5 trillion on that little “freeedom” war. Oh and there is over $50 billion in cash missing from the ‘rebuiulding’ funds.

    another screw of a problem which should have been addressed and resolved in 1974 during the 1 oil embargo.

    #8
  9. mark

    While the US would benefit from the pipeline. I don’t see why Keystone doesn’t build a large refining operation in Canada. Is it because the Gulf can ship it overseas much more effectively than ports in Canada.

    #9
  10. oldcheme

    Mark & Xane
    wake up, if we had some viable alternatives to fossil fuels, any start-up company would be all over it.
    the inconvenient truth is that the laws of thermodynamics can not be avoided. live with it.

    and mark, explain how canadian crude would be exported when we still IMPORT over 8 million bpd.
    where would it go saudi, venezeula, mexico, africa, or indonesia, all these places export their own crude.
    other importers such as europe, india, japan, and china are closer to saudi than the USGC. If Chavez falls, some canadian crude may get to china, but shipping it to the USGC first makes zero sense.

    #10
  11. Oilman MBA

    Oldcheme-

    Apparently you don’t understand the finer points of economics, although with a moniker like “old chem e” it seems strange that you wouldn’t understand the fact that all crude is not the same. Some crude is laden with a much higher fraction of gasoline components while other blends (yes, all crude on the market is a blend) favor plastics production, or asphaltene products for road-building or even oil-well drilling, etc.

    The reason alternative fuels haven’t made gains is that they haven’t been made economically feasible- yet. Sure, you can make switchgrass into gasoline, but show me the line for folks waiting to fill up at $100 a gallon. When the scalability part of manufacturing alternative fuels manages to be economically perfected, people will toast to a well-anticipated victory for all.

    Until then, stop picking on the clueless idiots like xanegrey and mark who obviously don’t have better than a third-grade, media-fed understanding of what the oil and gas business is all about anyway, and what would happen to the cost of fuel if all the eco-zombies had their way.

    #11
  12. redpill_bluepill09

    ‘The purpose of the $7.6 billion Keystone is to move 830,000 barrels of oil a day from landlocked Alberta to the Texas Gulf Coast, obtaining new customers and a higher price for heavy Canadian crude, Canadian regulators said in a 2010 report.’
    ~~~~~~~
    Hmmmmm…. any clues to who’ll be paying more for the Canadian crude?
    Won’t be us Americans, eh?

    #12
  13. Todd

    Am I the only one that seen the Senate Hearings on (C-SPAN) , The Keystone Pipeline is not for US consumption at all, In fact not only is is for Export only ,the USA will not even get any tax revenue from it, Just the waste product, If you want to see the price of gas plummet just put a 60 day moratorium on US gas and Oil, and it will be at 170 per gallon and stay there!, Now, ask yourselves why a gallon of gas cost more than a thousand cubic feet of Natural Gas.

    #13
  14. Oscar Juan Carlos

    What a stupid headline!
    Obama is the one causing gas prices to sky rocket. Not that the big banks’ gas futures idiots on Wall Street aren’t appreciative of the help.
    The pipeline fast tracks crude to Gulf Coast refineries so how is that bad for us???

    #14
  15. george

    The 4 billion Transcanada reaps from this pipeline will be taken taken from your wallets at the gas pump.

    If you want higher gas prices, & to hurt the US economy, and be the enemy of the United States,
    then by all means support the foreign corporate Transcanada’s pipeline.

    End of story.

    #15
  16. oldcheme

    oilman mba
    how did you conclude from my post anything concerning variations in crude quality. i forgot more about crude assays than you’ll ever know.

    #16
  17. oldcheme

    and george

    how is a pipeline tariff paid to transcanada or endbridge any different than ocean freight paid to ship Saudi Crude to Port Arthur or Convent, LA?

    #17