Opinion

Why Keystone Pipeline Will Weaken the US

It's just a 'tar sands road to China'. Nikiforuk lays out a surprising analayis in this, his latest Energy & Equity column.

By Andrew Nikiforuk, 27 May 2011, TheTyee.ca

KeystoneMap

Proposed path of Keystone pipeline carrying oil sands crude south to US Gulf coast. Source: NRDC

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In the oil business few endeavors promise more bluster than a pipeline.

And TransCanada's grandiose and troubled proposal to ship 1.1 million barrels of Canadian bitumen to the U.S. Gulf coast ably illustrates a good batch of petroleum hubris.

Keystone's boisterous defenders, and there are many, include the American Petroleum Institute, the Canadian government and U.S. Republicans, or what wags now call the Grand Oil Party. This oil-on-the-brain crowd swears that the massive $16-billion project will deliver lower gasoline prices, improve energy security, create jobs, save mankind, butter toast and even mix a better martini.

By law the U.S. State Department must ponder whether the project is in the national interest. It must also consider the impact of importing the world's most energy-intensive oil, an extreme and low-grade asphalt-like crude, that comes with production emissions that are 17 to 23 per cent higher than conventional oil.

Proponents, however, don't want any thinking or planning: they just to want to pump, baby, pump. They even vow to introduce legislation to force President Barack Obama to grant or deny a permit by November.

Ed Whitfield, a Kentucky member of the Grand Oil Party, explained why: "In a time of oil hovering at $100 due to geopolitical unrest, high unemployment and $4 gasoline, a pipeline that can eliminate our Middle East imports and create tens of thousands of jobs should be a top priority for any administration." And on goes the lobbying.

Unfortunately, not a word is true.

Blunt reality exposed by an expert

Big, long pipelines don't create resilient communities let alone healthy energy appetites for that matter. And in the case of Keystone XL the pipeline will actually raise, not depress prices at the pump. Nor will it improve energy security by one gallon. In the end the pipeline will simply become a Tar Sands Road to China. That's right, China.

That blunt analysis comes from the internationally celebrated oil and gas consultant Philip Verleger. The U.S. economist has studied the behaviour of oil markets for decades, recognizes hubris when he sees it, and has written 100 articles and books on the weird world of energy economics.

The MIT graduate has also worked for the president's Council of Economic Advisers, the US Treasury, the Institute for International Economics and now presides over his own consulting firm, PKVerleger LLC based in Carbondale, Colorado. He also teaches at the Haskayne School of Business at the University of Calgary in his spare time.

In a snappy 16-page analysis published this month, Verleger takes a hard look at the economics of the Keystone XL and guess what, it's not what it seems. For starters, the money only looks grand if you work for TransCanada. It gets nasty if you drive a car or farm in the U.S. Midwest.

In fact, Verleger draws from an overlooked Purvin & Gertz study that shows "how the pipeline would allow Canadian producers to manipulate U.S. crude oil prices to extract another $2 billion to $4 billion from U.S. consumers."

How the pipeline will raise US prices

The economics work like this. By running bitumen from Hardisty, Alberta to Houston, Texas, the line bypasses the great U.S. Midwest refinery market, which due to oversupply, can now discount Canadian Heavy Crude.

By eliminating this glut the pipeline will increase the price of heavy crude in the Midwest to the equivalent cost of imported crude, say, from Saudi Arabia. As a consequence TransCanada "will be able to use its market power to raise the heavy crude to Midwest refiners above the level that would prevail in a competitive market."

This exercise of monopoly power, something John D. Rockefeller of Standard Oil fame perfected, will bleed anywhere between $3.9 billion to $6 billion from U.S. consumers.

Verleger didn't mince words in an editorial for the Minnesota Star Tribune: "Millions of Americans will spend 10 to 20 cents more per gallon for gasoline and diesel fuel as tribute to our 'friendly' neighbours to the north.”

But the completion of the line would also create a different economic story in the U.S. Gulf coast. There the pipeline will flood the market with heavy oil. According to Verleger, most Gulf refiners now have deals with Mexico, Saudi Arabia or Venezuela. These refiners can't simply break their long-term supply agreements in order to gobble up Canada's bitumen, one of the world's most expensive hydrocarbons.

As a consequence refiners owned by the likes of Conoco, Citgo, ExxonMobil, Marathon and Shell won't be lining up for heavy Canadian crude. Moreover the ever-savvy Saudis will keep as much bitumen off the market as they can by offering discounts on their light oil, argues Verleger.

Kill the competition

In fact the Saudi's are masters at killing competition. They've done it for years by pricing crude on a just-in-time whatever-works basis. "Saudi Arabia's commercial entity, Aramco, has the power to offset any discounts offered by Canadian producers," explains Verleger.

At the end of the day Canada's heavy oil will most likely not displace Saudi crude whatever the Grand Oil Party might say. In fact a surplus of heavy crude will depress prices and force the extreme product offshore at a healthy discount.

"By forcing Canadian crude to China, Valero and other refiners will drive U.S. Gulf crude prices down significantly," adds Verleger. So if the pipeline gets built, it will become a "Tar Sands Road to China." In other words Keystone XL, as even a US Department of Energy study concluded, is no Yellow Brick Road for U.S. oil consumers.

Not a security necessity

Verleger also debunks the tired security argument. He notes that the United States has invested billions to create a 700 million barrel strategic reserve and all for energy security. Why should Americans pay an additional $5 billion per year to further reduce the risk of market interruptions?

Instead of entertaining economic dead ends like building an insanely long pipeline across the U.S. Midwest and largely for China's benefit, Verleger suggests an alternative economic course. In a lively essay the oil analyst bravely suggests that the U.S. must stop subsidizing its oil and gas producers and embrace free trade.

The U.S., he says, will never be energy independent. In fact the quest for home-grown hydrocarbons has become a ruinous enterprise that pollutes groundwater, contaminates the Gulf of Mexico and removes the tops of mountains.

He notes that the primary result of this misguided enterprise has been "the accelerated environmental rape and pillage of much of the United States, which has heaped economic benefit on a few while offering nothing to the nation as whole."

The incredible subsidies and low taxes granted to the U.S. hydrocarbon industry, he argues, has retarded the U.S. economy. Oil companies, he notes, simply don't create much. Nor do they innovate in the way Apple, for example, does, explains Verleger. "Yes, they discover, transport, transform and deliver energy. In general they profit, not through ingenuity, but through commodity price increases."

Divert money to innovators

Smart governments such as Norway and Israel have recognized this fundamental energy truth. So they capture as much as 50 per cent of resource revenue from their oil and gas producers and then reward the real economic innovators in the market place.

The analyst admits that such a policy will result in higher energy prices for sure. But high prices can also cure high prices and drive innovation. "We have lived in a fantasy world, failing to acknowledge the possibility of much higher energy costs," says Verleger.

Moreover, increased energy production taxes can be used to lower the crippling U.S. deficit. And with the vain focus removed energy producers as the shapers of U.S. destiny, innovation could once again renew the American experience.

So there you have it: a Canadian pipeline, that will disturb two thousand miles of farmland and place at risk the great Ogallala aquifer, will actually deliver a much more complicated economic story to the United States than that promised by its well-lubed lobbyists. And all to bring what the U.S. National Wildlife Federation calls "tar sludge" to China, the world's next global empire.

If the U.S. State Department rejects TransCanada's proposal to tax Midwesterners, the decision could signal a new era in U.S. energy economics. But by saying no to a pipeline, the government must also say yes to rewarding innovation; embracing free trade in energy; and capturing a good portion of the revenue now generated by U.S. oil and gas producers.

Verleger has no doubts about the radical outcome: "The country would be stronger today had it followed this path." [Tyee]

This is the latest of Andrew Nikiforuk's weekly Energy and Equity column for The Tyee. Nikiforuk is an award-winning author and journalist, and a contributing editor to The Tyee. Read his previous Tyee stories here.

20 Comments:

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  • Fiat lux

    38 weeks ago

    Our whole economic system,

    Our whole economic system, not only the oil part, is based on a fantasy world, thanks to the idiotic garbage taught in our universities as "economics", with Harper the best example.

    Ed Deak.

  • Jeffrey J.

    38 weeks ago

    Salute to Nikiforuk

    More great writing, setting out plain facts and logic, from Canada's greatest energy journalist.

    So as real people suspected, the Keystone pipeline has nothing to do with helping citizens, reducing prices or creating jobs. Nada. Zip. Zero.

    Instead, its all about a monopolistic corporation increasing prices and its market share. To the detriment of citizens, prices and jobs.

    What incredible symmetry! We get exactly the opposite of what they promise.

    Seems to be a running theme with energy corporations, if not all large multinationals.

    A great essay. Thank you Mr. Nikiforuk and the Tyee.

  • RickW

    38 weeks ago

    What is with the "magic" number $16 billion?

    Alberta pipeline: $16B
    Keystone " : $16B
    Gateway " $16B?
    The latter is just a guess. But then, so are the first two when all the hoopla goes away.....

  • middleclass

    38 weeks ago

    why not celebrate that Canada earns more from the oil?

    OK, so the pipeline will raise prices at the pump for mid-western Americans (10-20 cents per gallon is only 4-7 cents per litre, big deal). But who gains? Canadian producers. So we gain an export market (and we do want to reach China with our oil, so whether it goes south or west doesn't really matter) and higher revenues. How is this bad for Canada? We have no reason to arrange our trade policies and business to advantage citizens in other countries.

  • mallerb@shaw.ca

    38 weeks ago

    Why Keystone Pipeline Will Weaken the US

    This is absolute BS. This article and your support of it may just make me rethink why I support the Tyee. Garbage in it's entirety. Why don't you get some qualified people to write these articles and inform Canadians with facts instead of bunk?

  • blackie

    38 weeks ago

    argument for Gateway

    I really enjoy reading Nikiforuk's pieces because the writing is so colourful and entertaining. But please, this is not journalism. The piece is a very well written polemic. In the first three paragraphs alone, there are a dozen descriptive words that are pejoratives at best, and should have been blue pencilled out by a competent (and disinterested) editor. This does not reflect very well on the Tyee.

    Beyond that, the guy makes a first class argument for building Enbridge's Northern Gateway. Why ship all that China-bound oil to the US Gulf coast when a much shorter route is available?

  • anarcho

    38 weeks ago

    Don't bellow, mallerb!

    Saying something is bunk is not a worthwhile statement. Show us where the author is wrong, and furthermore, he IS quoting someone who is qualified to make a statement on this pipeline. I am not saying that Nikiforuk's article is correct - I don't know - but you have to offer evidence that he is wrong not just bellowing that it is BS.

  • Jeffrey J.

    38 weeks ago

    Oil Industry Owned by Non-Canadians

    The benefit we get from Alberta's tarsands is a tiny fraction of its value. The rest goes to the oil cartel. But even worse, we now know oil is destroying the planet. Time to shift gears ASAP.

    In the mean time, Harper is really getting in the way.

    "The Canadian government has been carrying out a secret plan in Europe to boost investment and keep world markets open for the Alberta tar sands, collaborating with major oil companies and aggressively undermining European environmental measures, documents obtained by The Dominion reveal."

    http://www.dominionpaper.ca/articles/3991

  • seth

    38 weeks ago

    Saudi ROTFLTAO

    The royalty rate paid by Big Oil to Canada and Alberta has the Saudi's rolling on the floor laughing their asses off. Why is it that our fascist politicians while claiming extreme patriotism are always the first to sell out their country in a exchange for some cheap campaign donation bribes and promises of lucrative post political job offers.

    Ya it costs about $30 a barrel to extract tar sands oil about the same as what you can make diesel for out of natural gas. Even the incredibly stupid fascist (is there any other kind?) might think at $100 oil the royalty take should be about the same as the Saudi's get at $80 oil.

    We are far closer to market and a far safer producer than the Saudi's so our oil should get a much higher royalty take on the delivered cost than do the Saudi's. Instead we get close to bupkis in comparison simply because our corrupt fascist governments and big media are bought and paid for by Big Oil.

  • Jerry Munro

    38 weeks ago

    Beef and Mallerb...

    "Why Keystone Pipeline Will Weaken the US
    This is absolute BS." Mallerb.

    Ditto, anarcho. Show us the beef mallerb. And "saying", which comes cheap, that you support Tyee adds nothing to your argument or credibility. We need evidence that is more quantifiable than raving here in the Tyee.

  • mirrorguy

    38 weeks ago

    @mallerb@shaw.ca

    Is this the kind of bunk you are talking about?
    (copy and past in browser)

    http://docs.google.com/viewer?a=v&q=cache:rLVvGu5fNGEJ:www.grassrootsoilworkers.com/NewFolder/Bmaller..pdf+mallerb%40shaw.ca&hl=en&gl=ca&pid=bl&srcid=ADGEEShMxmw0TkKzLjiQ0unVkdAf3-dLROGbwaQMaZUTKDnlpZpwDZq8UBtn5--IplKF06wkpK7qOOqTylfMbvZWU-NGDmDegmc3nl_-SPk-T5hPkl2QpuU95rHX00GLU3JkE22--6Hj&sig=AHIEtbR3YxVxPJXkXmASL6VLycDpNfpwoA

    Just wondr'in

  • reallife

    38 weeks ago

    Where is the harm?

    Having Americans pay a higher price for our oil does not sound like a negative for Canada. And sending the money to Canada instead of routing it to terrorists via Arab oil suppliers is probably not a negative for the US or the rest of the world.

  • mot

    38 weeks ago

    Pipelines

    The multis and the US have proven that they can pollute... first Alaska, then the Gulf of Mexico ( with ongoing pipeline incidents everywhere)

    So approve the AB-US route to wherever, and whatever end user...
    If more money is made along the way by non
    Canadian entities, then so be it.

    Way less expensive to the ecology of BC, Hecate Straight, Dixon Entrance and Queen Charlotte Sound.

    Don't even think "local jobs" for N.BC-AB.
    Local jobs are camp cleaners, flag men, and all equipment(leased from multinationals)& the "operators" at the lowest possible price.

    All the "pipe" work will be done by "certified" union workers from across Canada, and the US.

    Bottom Line:

    The benefit of the Enbridge pipeline is limited to E's shareholders, and the Chinese.

    No benefit, and great liability to BC.

  • Fiat lux

    38 weeks ago

    No benefit either way,

    No benefit either way, because the sale of resources is not an income.

    Especially when it costs more energy to produce them, than we get out out.

    But then, this is the result when we have a so called "economic system", forced on us, and the world, by degenerate maniacs, where the debits and liabilities are accounted as GDP and benefits,

    Ed Deak.

  • spartikus

    38 weeks ago

    Heh...

    The punchline is at the end of mirrorguy's link.

  • pwlg

    38 weeks ago

    mirror guy

    Thanks for the reference as it reinforced my thinking regarding oil subsidies either direct or indirect (through reduced royalties).

    From the Wild Rose "letter":

    "In July 2008 when oil peaked at $ 147 US/Bbl, and 6 months prior to the NRF being enacted, the Alberta rig count was 219 rigs working out of 674 total rigs. These statistics show that since the Royalty Review Panel was put in place, 103 rigs have left the Province and the number of active rigs has been cut in half. Drilling and servicing rigs were moving from Alberta to BC, Saskatchewan and to the USA. These jurisdictions had lowered their royalty rates and introduced drilling incentive programs designed to attract capital investment into their Provinces and States and away from Alberta. And that is exactly what has happened."

    "Many companies that may otherwise have not considered acquiring lands in BC, Saskatchewan, the USA and internationally, were now in a mad rush to move capital into a fiscal environment that provided a better return on investment."

    If we haven't realized it yet, the energy market is no longer based on national boundaries. Our electrical and oil and gas resources are being combined into a continental system with surpluses being shipped to non-continental markets.

    What hasn't changed is the royalty system where provinces and states compete for investment and limited drilling rigs in a time where even the smallest pool of oil is being exploited. Its the old story, a mad rush to the bottom. This in turn robs the owners of these resources, the people. Pardon me, in Canada, these resources are owned by the "crown".

    The above quoted statement from the "other" conservative party of Alberta makes it clear that when Alberta attempted to raise its royalties the industry responded by moving a large portion of its drilling rigs elsewhere where governments were more sympathetic to oil industry objectives (profit taking). BC rushed in and lowered its royalties hoping to make another windfall from selling resources cheaply in order to have a surplus available for the next general election. A strategy used successfully twice before.

    It's not as if the oil companies need lower royalty rates. Chevron, Shell, Exxon Mobil all have reported net incomes from 36-64% above last year. We are talking billions of dollars earned from consumers which is basically a wealth switch from other sectors of the economy to the oil and gas industry. Just whose money are these oil companies handing out to their executives as bonuses.

    Until there is a just continental royalty rate for the people's resources then any attempt to build a continental energy production and distribution system will be yet another giveaway of the public wealth to the corporate few.

  • pwlg

    38 weeks ago

    real life

    I think you may have missed the part of the article where the Saudis have such a control on the market that they can adjust prices to make their oil more advantageous for refining than heavy tar from Alberta.

    Do Canadians profit from higher prices in the US? Since most of the major players in tar sands development come from foreign owned companies, mainly the US, Canadians may get some jobs but the profits go elsewhere to benefit other economies and help shift wealth to fewer and fewer pockets.

    The downturn in the economy so well illustrated that putting your eggs in one basket can lead to disaster. The shock to Alberta when 20,000 construction workers working on tar sands developments were given their pink slips was far reaching as suppliers of goods and services also saw their bottom lines going red.

    Why the rush to remove resources from the ground as quickly as possible?

  • RickW

    38 weeks ago

    middleclass, mallerb@shaw.ca, blackie, reallife

    Quote:
    How is this bad for Canada?

    It's bad for Canada because we are shipping our CAPITAL out - and real countries don't do that.

  • Fish-counter

    38 weeks ago

    The Alberta Tar sands cost over $100 per barrel plus the world's

    largest pump site. Northern Alberta used to be a great place to live. It isn't now and it will be a millstone around the necks of the next seven generations of Canadians. Good Luck with that, boys.

  • Jeffrey J.

    38 weeks ago

    Plans Long Time Coming

    Elite rule over Canada's wealth has gotten even more concentrated. Unless we decide to become a democracy, go back to watching Fox News and go shopping.

    "In 2008, while Warren Buffett (of Berkshire Hathaway) and Microsoft's Bill Gates viewed the immense strip-mined bitumen fields and the vast infrastructure for Alberta tar sands development, much of the business press made it seem as though this was just another celebrity tour of a region. However, two of the richest men in the world were not there to marvel at the size of the tires on the big yellow trucks, but as business speculators."

    http://www.watershedsentinel.ca/

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