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Keystone Pipeline Could Raise Gas Prices

Apr 28 2014, 1:41am CDT | by

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Keystone Pipeline Could Raise Gas Prices
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Keystone Pipeline Could Raise Gas Prices

There’s two things we can say about the effect of the Keystone XL pipeline on gas prices. One is that it will, if built, have no effect at all upon gas prices and the other is that it might actually raise them. Which ends up being the final effect depends upon quite what you want to believe about the way the market operates at present.

The standard view is that the absence of the Keystone pipeline makes gas a little cheaper in the mid-West. I’m not quite sure that this is true but as I say it is the standard view:

In Keystone’s weirdonomics, the pipeline would actually increase prices of gasoline for much of the country, according to at least three studies that have looked into it. Keystone would divert crude from Midwest refineries to Gulf Coast refineries, where it would then be shipped to more expensive markets. Bypassing heartland refineries could drive up prices at home.

For people living in the Midwest, Great Plains and Rocky Mountains, it could add 20 cents a gallon to the price at the pump.

The assumption underlying this is that there is indeed a discount on crude delivered to the mid-West. There’s so much of it floating around, there’s not enough pipeline capacity to send it elsewhere, that WTI (the reference price for which is delivered Cushing OK) trades at a significant discount to Brent and other global oil indices. That much is absolutely true. However, how much effect this has on gas prices is a little more difficult to determine.

For there’s something else about the US markets that needs explaining. It is not legal to export US derived crude from the US, not under usual circumstances. But it is entirely legal to export crude derived products, like gasoline, from the US. So, to some extent, that discount on WTI means that the refiners can buy crude more cheaply, yes, but then when they’ve refined it into gas then they can export that and it doesn’t make gas any cheaper for US consumers. It just fattens the refiners’ profit margins. As is usual in matters economic there’s probably a bit of both going on. But it’s simply not true to say that all of that WTI discount goes to US based consumers. At least some of it is fattening the refiners’ margins as they export.

What Keystone will do is move some of that excess crude down to the Gulf, that’s true. So the WTI discount can be expected to shrink if it’s ever built. But how that affects the gas market depends upon how much of that discount is currently flowing through to consumers and how much is sticking in the refiners’ profit margins.

We can say much the same about the mooted lifting of the export ban on crude as well. It’s most unlikely to change gas prices much, it’ll just impact on the margins of the drillers and refiners. Currently that US crude trades at a discount to world crude precisely because it cannot be exported. But the refined products can be exported and at world prices. So, currently the drillers are receiving less than world price for their crude and the refiners are making above world average margins on their refining. Lifting the export ban would simply mean that drillers are getting the world price and so too will the refiners be. It’ll make very little difference to consumers whatever the decision over allowing or not crude exports.

 

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