First in an occasional series on petroleum pricing.
What do Libyan rebels, Wall Street traders, Federal Reserve bankers and anti-drilling greens have in common? Over the past year, members of Congress in both parties have variously blamed all four for the mercurial prices of oil and gas.
The villain changes with the season and the ideological leanings of lawmakers in search of a scapegoat to soothe voters riled by the economic toll wreaked by expensive fuel. But as 2012 begins with President Obama and the oil industry hailing the nation's rise as a petroleum powerhouse, Washington fingers are beginning to point at the web of pipelines that ship crude between the five American refining districts and the booming Canadian oil sands.
More crude flowing from the north will add supply to the market, oil interests and Republicans predict, lowering costs for consumers. Democrats, environmentalists and at least one vocal energy economist counter that more fuel from the north will have the opposite effect of driving up U.S. oil prices, particularly in the Midwest region, which lately has benefited from cheaper West Texas Intermediate (WTI) crude.
In this all-out war over oil and gas prices, Keystone XL is the big gun of the moment. While there may be a political victor in the gamesmanship over that pipeline -- pitched to help the Gulf Coast gain access to oil sands crude and U.S. fuel now locked in the terminus of Cushing, Okla. -- no one can guarantee how American consumers will fare.
"Economic theory says that what Keystone XL, or what any pipeline from Cushing to the Gulf will do, is raise crude prices for Gulf Coast refiners but not necessarily affect gas prices," Lynn Westfall, executive vice president at the Dallas-based firm Turner, Mason and Co. and a former chief economist for Tesoro Corp., said in an interview.
"So, in essence, it reduces the profits of Gulf Coast refineries."
Veteran energy economist Philip Verleger, an adviser to the Ford and Carter administrations, questioned whether that prediction is realistic. In a 2009 report to Canada's National Energy Board, he noted, pipeline sponsor TransCanada Corp. estimated that a path to the Gulf would be worth as much as $3.9 billion in annual profit increases for Canadian oil companies.
"If the Canadians are saying it's not going to raise prices at the pump, that's trying to reverse what people have been saying all along, which is that higher crude prices are being passed on to consumers," Verleger said in an interview. "It defies comprehension that they could assume refiners are just going to absorb the cost."
Republicans and other supporters of Keystone XL, for which President Obama denied a permit this month, frequently say building the pipeline would create cheaper gasoline. A Keystone XL bill offered yesterday by 44 senators aims "to help control prices at the pump," according to its chief sponsor (Greenwire, Jan. 30).
A thread in a tapestry
What often sounds like a debate over Keystone XL is in fact a microcosm of the broader dispute over oil supply and demand that dominates federal energy policymaking.
Those who oppose importing more oil sands crude describe it as the wrong goal at a time when static or flagging fuel consumption in the United States presents a historic opening to diminish the nation's long-running reliance on fossil fuels.
Conversely, boosters of more Canadian crude tend to also back expanded domestic drilling, believing that more oil coming into the United States will help drive down the price of a commodity long seen as set on a world market.
"How in the heck can you bring up [crude volumes by] 800,000 barrels a day" and raise gas prices, said Rep. Ed Whitfield (R-Ky.), a top House Energy and Commerce Committee lieutenant. "Demand is the same, supply goes up."
Keystone XL critics, the Kentuckian charged, "are looking at every reason to oppose this and willing to make up reasons."
Those critics point to the admission within the oil industry that Midwest refiners located in the so-called Petroleum Administration for Defense District (PADD) II region are currently benefiting from WTI crude prices that have lately lagged behind the world price of oil, known as Brent. Few in either camp doubt Keystone XL would bring WTI, often used as a benchmark for Canadian as well as domestic crude, more in line with Brent -- the key question, then, is how closing that gap would affect U.S. gasoline costs.
New Canadian and Midwestern oil flowing to the Gulf, also known as the PADD III refining region, would raise WTI prices while lowering Brent prices, Energy Department analyst Carmine Difiglio wrote in June to Keystone XL reviewers at the State Department.
"Crude costs to PADD I [East Coast] and PADD III refiners would be lower," he added. "Gasoline prices in all markets served by PADD I and PADD III refiners would decrease, including the midwest."
Difiglio also predicted that Midwesterners' continued advantage of avoiding extra pipeline tariffs, an upside worth about $2.50 per barrel, would help cushion the effect of higher oil prices if Keystone XL were built. Yet his analysis was written at a time when WTI traded at upward of $20 per barrel less than Brent, a spread that has since dipped by nearly half on several occasions.
If the WTI-Brent spread were further narrowed by alternative pipelines to carry Canadian and Midwestern crude to the Gulf, such as Enbridge Energy Partners' plan to twin its now-reversed Seaway link, refiners in the middle of the country could take a bigger hit from the loss of their discounted prices.
"Most of the lower value in the acquisition cost [for WTI-priced crude] has showed up in higher [profit] margins for midcontinent refiners," Lucian Pugliaresi, president of the industry-backed Energy Policy Research Foundation, said in an interview. When the Seaway pipeline was first reversed to go from Cushing to the Gulf, he added, "you could see those margins coming down" for Midwestern companies.
Export -- a four-letter word?
Despite a tendency in Congress to describe them as wholly in line, energy analysts can disagree on how strongly oil costs affect pump prices. Westfall, the veteran refiner, projected that about 50 percent of gasoline prices are determined by oil, while Pugliaresi countered that feedstock cost "drives almost all" of a motorist's fuel bill.
But both Cassandras and connoisseurs of Canadian crude don't dispute that at least some of the oil coming through Keystone XL would be exported.
"Is it all going to be used in the U.S. by U.S. consumers? No," American Fuel & Petrochemical Manufacturers (AFPM) President Charles Drevna said in an interview. "Most of it will be, but it will be available for export. We wouldn't want Whirlpool to stop exporting washing machines."
In a sense, his urging that politicians embrace the new boom in U.S. fuel exports is coming at the right time. Obama touted the nation's natural gas reserves in his State of the Union address last week, just as Drevna's refining-industry group formally adopted a new name that subtly underscores gasoline's role as an American-made product.
But the prospect of crude flowing from Canada through a massive, 36-inch pipeline only to leave the United States on tankers also provides a compelling image for critics of Keystone XL and oil sands crude development. The projected closure of several East Coast refineries could compound this problem for the oil industry, driving up pump prices in that region no matter what happens to the pipeline.
"Once they have access to global markets" through a Canada-Gulf link, National Wildlife Federation Vice President Jeremy Symons said of oil producers, "they will manipulate prices much more freely than they're able to do now."
Among greens' most active critics of new Canadian oil links, Symons encapsulated his camp's strategy in slamming Keystone XL as "an export pipeline."
Liberal Democrats have taken up that banner on Capitol Hill, warning that large-scale new Canadian crude imports would have little upside to Americans who must grapple with the potential risk of a spill from new pipelines. But red-state Democrats who do not fear the prospect of more exports through Keystone XL challenge the industry's view that it would bring down U.S. gas prices.
"That's not going to happen," Rep. Charles Gonzalez (D-Texas), who voted last year to fast-track the pipeline, said during an Energy and Commerce panel hearing last week as he urged colleagues "to acknowledge that it's a world market, and the leading export for the U.S. last year was fuel."
Opening the way to the Gulf for more crude, including Keystone XL's 100,000 barrels from the booming Bakken Shale formation in North Dakota, is poised to further boost those exports. Westfall, the former Tesoro economist, warned that restrictions on transportation to the East Coast soon could create a "political football" of a gas-price outlook.
"If we keep producing crude domestically and bringing it to the Gulf [until] refiners can't run any more of it," he said, "we're going to be importing crude to the East Coast and exporting crude from the Gulf Coast."