April 5, 2011

Keystone Pipeline: 'Just Say No' Could Mean $7 a Gallon at the Gas Pump (Guest Post)

By Bob van der Valk

Consumer studies by researchers at Harvard’s Belfer Center for Science and International Affairs suggested a year ago that in order for the Obama administration to meet their target to cut greenhouse gas emissions, Americans will soon be spending $7 per gallon. That day may now come sooner than most Americans think.

The Opinion page of the Sunday April 3, 2011 edition of the New York Times (NYT) carried an editorial against approving the TransCanada Keystone XL pipeline, which was scheduled to transport crude oil from the Athabasca Oil Sands in northeastern Alberta, Canada to refineries in Illinois, Oklahoma, and to the lucrative U.S. Gulf Coast by the end of 2012.

The NYT suggestion is not only at odds with the Obama Administration, but also will be bad for the fuel consumer, while benefiting alternative energy producers.

The following chart obtained from the EIA website shows the top 15 countries of petroleum imports of the U.S. where Canada ranks number one with increasing volume from 2010 into 2011:


This increase in imports shows the importance and U.S. reliance on Canada--the friendly neighbor to the north--to replace the more volatile crude oil supplies from countries in the MENA (Middle East and North Africa) region.

The Keystone XL pipeline, an expansion project that would raise the line's capacity by 500,000 barrels of crude per day, has already been approved by various state agencies in the U.S. through which it runs. Two major obstacles to receive the necessary rights of way were eventually overcome with, at times, heavy negotiations.

The first obstacle was the local crude oil producers obtaining ramp access into this pipeline for crude oil currently being hauled by rail car and trucks to refineries for processing into gasoline and other fuels. The second one was meeting with constituents in each of the areas being affected with their concerns not only about the interruption of their daily lives, with a massive construction project, but also by ongoing operational problems with the pipeline after it is completed.

The current administration’s Department of Energy now says the pipeline will have a minimal effect on prices since there is already sufficient pipeline capacity to double United States imports from Canada. They are thereby affirming President Obama’s campaign promise of making the U.S. less reliant on the imports of crude oil.

The proposed Keystone XL pipeline will cut across the Bakken and Three Forks oil shale fields in North Dakota and Eastern Montana, through South Dakota, Nebraska and Kansas ending up at the major crude oil terminal hub of Cushing, Oklahoma.

Both Montana and North Dakota governors became involved early on in the approval process and addressed local environmental concerns.  TransCanada executives have met with various private and public officials and hammered out agreements to have local oil producers gain access to this much needed pipeline to make the shipping of crude oil more economical.

In some cases, due to the lack of takeaway capacity, crude oil is being sold at $10 a barrel discount off the WTI crude oil posting, which is one of the main reasons Montana and North Dakota have some of of the lowest prices for gasoline and diesel fuel in the US.  The Keystone XL would greatly improve the logistic issue in the Bakken and Three Forks oil shale basins.  None of the states involved have put up major objections.

Early this year, Secretary of State Hillary Rodham Clinton initially came out, after the State Department report was issued, and said she was “inclined” to support the project. However, after criticism from environmental and alternative energy groups she called for additional environmental impact studies to be reviewed.

President Obama, in his April 2, 2011 Saturday morning radio address, said that even if we used every last drop of all the oil the U.S. has, it wouldn’t be enough to meet the long-term energy needs. So, real energy security can only come from energy efficiency and investing in cleaner fuels and greater efficiency.

The folly involved in President Obama’s approach comes from the fact that only $7 gasoline prices will ultimately justify the cost for those alternative energy projects. Meanwhile, they are supported by the taxpayers in the form of subsidies to the ethanol and wind machinery manufacturers.

The Canadian government has been a staunch supporter of the Keystone XL pipeline project, and perhaps has an even greener approach to their environment and clean air issues than does the US.

The U.S. is now being boxed in from all sides on the energy front. Concerns about the future of nuclear energy, the instability of governments in oil producing countries in MENA, have all contributed to crude oil prices spiking to their highest level since September 28, 2008.

What stands in the way of any major decisions to make the US energy secure are politicians not willing to make tough decisions in an orderly and efficient manner. Meanwhile, the environmental organizations have been trying to block the Keystone XL pipeline at every turn even threatening court actions to stop the start of the construction.

The State Department will have to make the final decision on Keystone XL, since it crosses the Canada-U.S. border.  But it probably will be the end of 2013 at the earliest to having any of the crude being shipped in the proposed pipeline, even if approval is received from the Department of State by July 1, 2011. By then, there’s a good possibility that gasoline prices would be reaching a record high and the discontent from consumers would be at a fever pitch.

Article Correction:
A correction to a paragraph of my original March 7, 2011 article published on EconMatters - "Breaking Up With OPEC?" as follows:
"The start of the break up may have been on September 10, 2008, after an OPEC negotiating session in Vienna where the organization voted to reduce production.  Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. One of their delegates was quoted as saying “Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed.” [Source: The New York Times, Sep. 11, 2008]"
Related Reading: U.S. Consumers Have Big Banks To Blame For High Gasoline Prices

About The Author - Bob van der Valk is a Petroleum Industry Analyst with over 50 years of experience.

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters.

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