Keystone oil pipeline could hike gas prices in MidwestThe 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 United States.
By: BRADLEY OLSON, Bloomberg News
HOUSTON — TransCanada’s Keystone XL oil pipeline, a project that 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 United States. 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.
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 and get more money from consumers,” Philip Verleger, founder of Colorado-based energy consulting firm PK Verleger, said. Prices may gain 10 to 20 cents in central states, he said.
Producers including Exxon Mobil, Suncor Energy and Cenovus Energy may reap as much as $4 billion more in annual revenue if prices rise as expected following the construction of the 1,661-mile Keystone XL conduit, the 2010 report says.
Such a change would erase the cost advantage for refiners such as Marathon Petroleum and HollyFrontier, whose Midwest plants profited on cheaper oil supply.
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 Obama’s Jan. 18 rejection of Keystone XL after Nebraskans raised concerns about the pipeline polluting their groundwater.
The three candidates and House Speaker John Boehner have said that approving Keystone, eliminating environmental regulations of hydraulic fracturing, known as fracking, and opening new areas for drilling would lower the cost of gasoline for American consumers.
Former President Bill Clinton backed construction of Keystone in comments Wednesday 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 United States 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.
“It will help to reduce pressure on gasoline prices,” he said.
As more crude flows to markets such as the Gulf Coast, prices should decline there and balance out increases seen in other places, said Stephen Schork, president of the Schork Group industry consultants in Villanova, Penn.
“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 nationwide by up to 4 cents a gallon, said Ray Perryman, a consultant hired by TransCanada to assess the project’s economic impact.
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 on Thursday was 43 cents lower, or 12 percent, than Houston’s $3.56 average, according to AAA.
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 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.
Completion of the entire pipeline would raise prices at the pump in the Midwest and Rocky Mountains 10 to 20 cents a gallon, said Verleger, the Colorado consultant.
The higher crude prices also would erase the discount enjoyed by cities including Chicago, Cheyenne, Wyo., and Denver, Verleger said.