Keystone will reduce U.S. reliance on high-priced imports
On May 22, 2012 the Natural Resource Defense Council (NRDC) released a report that was essentially a compilation of rehashed talking points that made the claim “Keystone XL will increase gas prices,” based on the ludicrous assumption that Keystone XL is intended to export oil from the U.S. Nothing could be further from the truth and basic economic reasoning proves this.
The irony of the NRDC cloaking itself in the guise of protecting motorists’ rights to cheap gasoline deserves its own accompanying laugh track, but let’s focus on the factual and logical errors made in their report. First, the last time I checked, it still remains a fundamental tenet of economic theory that adding incremental supply of a good to a market with fixed demand can only lower prices.
Second, there is a fundamental, factual error in the NRDC’s argument. It claims Keystone XL would “divert oil away from refineries in the U.S. Midwest.” We have signed contracts with Midwest refineries for 18 to 20 years to deliver over 500,000 barrels of oil per day on our existing Keystone pipeline. Those contracts are binding and will not be broken. All oil delivered through Keystone XL will be new supply — separate from the oil transported to the Midwest. We have long-term, binding contracts for that oil as well.
It is a fact that the Midwest does not have enough refining capacity to meet the needs of Americans in this region. As a result, petroleum products like gasoline and diesel are imported from the Gulf Coast into the Midwest, and the cost of those imports and the associated transportation costs set the price for gas in the Midwest.
While prices can be volatile in the short term, in an average year, the cost of gasoline in the Midwest is higher than the cost in the Gulf Coast, with a difference that corresponds to transportation costs. Keystone XL will allow Gulf Coast refiners to buy cheaper American and Canadian crude instead of higher-priced foreign imports (WTI versus Brent), which should lead to the competitive pressure needed to lower gasoline prices, certainly not increase those prices.
The U.S. consumes 14 million to 15 million barrels of oil each day — forecasts recently released by President Barack Obama’s U.S. Energy Information Administration suggest this will not change for decades.
Not a fan of NRDC but look at the logistics and a little recent history. For years, WTI and the more global Brent crude price tracked in a narrow range. For the last coupld of years, the spread between the two has widened to over $25 a barrel at times. Production from the US (which has increased its crude production quite substantially) and Canada likely drove this. The only reason I can think of for this gap in prices is that there is no efficient way to get that crude on the global market, particularly the far east. By the time the Keystone pipeline is done, the Panama Canal will be widened so the price will be leveled. Also, keep in mind that the US became a net exporter of refined petroleum products last year. So once the pipeline is complete, there will be an efficient way for most of the crude in north America to reach the gulf coast refiners. Offshore imports for crude will fall because the crude will be sourced more locally and the refiners add value to that crude in the form of refined products and be shipped all over the world. This will reduce the gap between WTI and Brent but I suspect Amercans in the middle of the country will probably see prices rise a bit as a result.
Sean, that’s exactly what I’ve heard predicted. There will be a localized price increase to national levels, but a national price reduction.
Of course, the scare is feeding on economic ignorance (all too common, even in the halls of Congress), and they are trying to call exports a bad thing.
Greens don’t use reason, logic, or common sense in their thinking process. For many of them, this is difficult, causes confusion, and/or a headache. Better to use the emotional center of their psyche to construct their own dream world where they are always correct.
In one sense it’s true that Keystone XL is not a magic bullet on gasoline prices. If overseas prices are good enough, Keystone crude/refined products *will* be exported. To a great extent, US consumer prices of gas are determined by world demand and world prices.
Another and related factor is the value of the US dollar. As a currency, its value is going down because of Grecian deficit spending. So it takes more dollars to buy a barrel of crude, or a gallon of gasoline. Keystone can’t fix dollar inflation either.
With the NRDC involved, the questions are, who is paying them and what are the intended results. These people don’t work for free.
Sorry OT, but,
I just noticed that Discovery has quietly dropped their Planet Green HD channel. It’s now Destination America HD. That won’t make greenies happy.