High U.S. gas prices? Forget gasoline exports, approve the friggin' Keystone - Macleans.ca

High U.S. gas prices? Forget gasoline exports, approve the friggin’ Keystone

Crude oil prices are key


This article appeared first on CanadianBusiness.com

Americans aren’t paying particularly high prices at the pump. In fact, the relatively low cost of gasoline helped retailers last month, as consumers spent more on items other than fuel. But anyone who expected the shale oil boom to forever consign the expression “pain at the pump” to the history books must be disappointed.

Americans filling their gas tanks are paying slightly more today than they did on average for the past decade. How can that be after U.S. oil production increased 13.8 per cent between 2011 and 2012 alone? The stubbornly high prices are even more perplexing when you consider that U.S. gasoline consumption dipped during the recession and is on a long-term downward trend thanks to high fuel efficiency vehicles.

Bloomberg BusinessWeek set out solve the puzzle this week in a provocative article that’s making the rounds among energy traders and analysts. The authors expose some quirky, outdated rules that are working against lower prices. One law predicated on the now disproved idea that U.S. oil supplies were headed for inexorable decline requires that refineries mix in gasoline with given amount of ethanol. This, naturally, drives up costs for refiners, who pass it on to consumers. Another law, dating from 1920, bars foreign vessels from transporting cargo between U.S. ports, which effectively created a maritime transportation bottleneck between the Gulf Coast refineries and the gasoline-starved North East.

The magazine’s main thesis, though, is that gas prices haven’t fallen because the U.S. is increasingly exporting gasoline rather than selling it to the home market.

That conclusion is puzzling. And insofar as it reinforces the idea that more gasoline exports mean less relief at the pump, it is dangerous for Canada’s Keystone XL. Tom Steyer, the former hedge fund billionaire turned environmental advocate, and a number of high-ranking Democrats have argued that a pipeline linking Alberta’s oilsands to Gulf Coast refineries wouldn’t benefit the U.S. because most of the oil is likely to be exported as a result of increasing U.S. domestic production.

The concern about exports, though, is misplaced.

First of all, as the U.S. Energy Information Administration (EIA) noted in a recent report, it isn’t clear that selling U.S. gasoline abroad is having an effect on domestic prices. Reducing such exports even might back-fire:

Were gasoline exports to be constrained, global gasoline supply would likely decline, and U.S. gasoline importers, especially in the Northeast, would face additional competition for supplies from buyers in other countries that would have otherwise been supplied from U.S. refineries, which would tend to raise the price of imported gasoline.

Second, while gasoline prices are very volatile and tend to be affected by a number of local factors like the weather or refinery maintenance and breakdowns, the rule of thumb is that the most important factor is the price of crude oil. And while that can also be quite volatile, in the long run it depends on the equilibrium between global demand and global supply.

The main reason why the U.S. shale oil boom hasn’t resulted in much cheaper U.S. gasoline is that American motorists are competing with drivers in South America and Asia. Growing demand from emerging economies pushed up crude prices and spurred the development of unconventional oil resources, such as North Dakota’s Bakken shale reserves, but the latter hasn’t been large enough to offset the upward pressure on prices. The Great Recession, which depressed fuel consumption worldwide, has provided some respite, but as global growth picked up again, so did crude prices.

That’s why making it easy for Canada to develop the oilsands is a better way to go about easing the U.S.’s gasoline price problem. As I argued before, even our vast, sandy oil riches wouldn’t insulate North American from price shocks. But they would be enough of an addition to global supplies to conceivably soften the punch of such swings by lowering crude prices, if only a little bit.

Of course the Keystone XL would be only one stepping stone in the development of the oilsands. And of course the effect of the oilsands on global oil prices would be the same whether Canada exports its heavy crude to the U.S. or Asia. But a rejection of the Keystone could be a serious setback. According to a recent report by the Royal Bank of Canada, it could wipe out $2.4 billion in investment. Killing the pipeline would not keep the oil in the ground, as some environmentalists seem to believe, but it would slow things down. American gasoline would stay as pricey as ever for a while longer.

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High U.S. gas prices? Forget gasoline exports, approve the friggin’ Keystone

  1. “…. the rule of thumb is that the most important factor is the price of crude oil.”

    Globe/Mail – May 2013:

    “Europe is investigating suspected manipulation of global oil markets, staging raids at some of the world’s biggest energy companies to gather evidence of possible collusion … Because Brent contracts are less liquid, traders say they can be more readily manipulated than WTI contracts. The EC probe may be examining whether allegedly distorted pricing on the Brent index warped the value of futures contracts on ICE.”


  2. A bunch of hand-waving, I think.
    Rule # 1 … maintain and/or improve profit margins.
    Rule # 2 … in a closed market, if you’re selling less
    product charge more for it.

  3. I oppose the Keystone XL pipeline. The solution to high gas prices is alternative energy, not more pollution.

    • Yes, and we should all ride Unicorn’s to work every day.

      • I was thinking about a Prius or a Tesla, actually. There’s also Zen Motor Company, too, they make excellent cars.

        Or as you call them “unicorns”.

        • My unicorn’s a bicycle!

          • Have you named your unicorn yet?

        • I’m currently driving a Toyota hybrid….I’d never go back

          Waiting for electric, or better yet fuel cell

          • Yaaay!

          • Clean diesels, such as VW TDI, are better than hybrids. They do not require big batteries which are full of hazmat that have to be replaced during the life of the car.

          • Again you display your ignorance.

          • Do you call David Schindler,Killam Memorial Professor of Ecology at the University of Alberta, who said Clean Diesel is better than Hybrids on CBC’s Sunday Edition last Sunday? I am sure he knows better than you and me.

          • He said that years ago.

            Is this your version of ‘appeal to authority’?

          • He said that on May 26 2013 on CBC radio Sunday edition

          • He also said it years ago….he’s retired now.

            Lots of options now, and people like different things. So?

          • speaking of years ago (mid to late 90’s) Ballard Power Systems was supposed to be the next big thing with their fuel cell technology. In 2007 they pulled out. The problem was never, “Could you build a fuel cell that would consume hydrogen, produce electricity, and fit in a car?” The problem was always, “Can you make hydrogen fuel at a price point that makes any sense to anybody?” And the answer to that to date has been “No.” Their stock traded at over $100 per share (adjusted for a 3 for 1 split in 2000. Now you can buy it for $1.75 and its EPS (earnings per share) is -$0.45. A Chevy Volt MSRP is $42,000 and while that may appeal to the green people, I’d bet most people spending 42K on a car would rather hop into a Lexus, BMW, Merc or Cadillac, or anything else for that matter.

          • All new tech is expensive at first….think what you paid for your first computers.

            If we had been using some other fuel all this time and decided to switch to oil…..think of all the costs involved starting from square one. We just see it as cheaper because it evolved over time and now we’re used to it

  4. The author’s analysis is missing crucial factors. The stated (by the oil industry) reason that the Keystone XL pipeline is seen as a priority is that there is a glut of western Canada and Bakken oil at the western terminals such as Cushing, Oklahoma which is depressing the price of crude by 20-30% in the west. The intent is to use the XL pipeline to provide a way to get the oil sands product to the coast and onto ships for transport to foreign markets. There is almost no oil from the pipeline destined for the US market, and this will continue until the local price approaches or reaches the world price.

    Thus, unless you believe that gasoline prices won’t respond to a 20% or greater hike in the cost of the feedstock, the conclusions reached by this article are 180 degrees from reality. The completion of the XL pipeline and also the Northern Gateway pipeline will benefit the oil producers and to a lesser extent the government royalty coffers and politicians campaign accounts, to the detriment of the consumer and the overall economy.

    I have yet to hear a response to any question put to the Alberta and Federal governments detailing the effects on the greater economy from the extraction of the purchasing power given the reasonably expected rise in fuel prices. It seems that they are only concerned with getting their own piece of the pie from their royalties. Completion of either of these pipelines will mean higher fuel prices in the US and Canada, which is ironic since the resource is owned collectively by the citizens of these two countries. If the goal was to benefit these citizens through the exploitation of their resources then this discussion would be taking place on different terms and the pipelines would look very different.

  5. Friggin?