Energy

Why the Keystone Pipeline Won't Ease Pain at the Pump


President Obama at a TransCanada pipe yard in Cushing, Okla., on March 22.

Photograph by Larry W. Smith/EPA/Landov

President Obama at a TransCanada pipe yard in Cushing, Okla., on March 22.

President Obama’s March 22 speech at the site of a TransCanada (TRP) pipe yard in Cushing, Okla., was an attempt to highlight his administration’s energy policies as both economically sensible and environmentally sustainable. Its political symbolism was even more significant. Rising gas prices have eroded the president’s approval ratings, with some 23 percent of Americans blaming him for the spike. In particular, Republicans have hammered Obama for his rejection of TransCanada’s application to build its Keystone XL pipeline from Alberta to Texas, claiming that by passing up the opportunity to increase the flow of oil from Canada’s tar sands, the administration has directly contributed to higher gas prices.

Obama’s appearance in Cushing was intended to blunt those attacks. He promised to expedite the building of the “southern” portion of the Keystone pipe, which runs from Cushing to the Gulf Coast. The administration, he said, will “cut through the red tape, break through the bureaucratic hurdles, and make this project a priority.” In the process, the White House hopes to show it’s doing what it can to ease pain at the pump.

If only it were that easy. In reality, building the southern portion of the Keystone XL pipeline might help to alleviate supply bottlenecks and get more domestic oil to refineries. But it won’t bring down gas prices.

After Obama turned down TransCanada’s application to build the Keystone XL pipeline, the Canadian company realized that the portion of the pipe that doesn’t cross the Canadian border could be built without White House approval. It announced last month it would seek permits from the Army Corps of Engineers for a section running from Cushing to the Gulf Coast.

TransCanada’s new plan is significant to the current political debate because a recent ramp-up of production from North Dakota, Montana, and Colorado has created a glut in supply at the big oil depot in Cushing. The spread between the price of oil that changes hands at Cushing and Europe’s grade of crude has increased in recent years, partly as a result of this oversupply. (One reason the company is pursuing “Keystone south” is that it knows the pipeline will be easy to fill.)

Just as supporters of the pipeline project claim that building it will bring gas prices down, opponents argued last fall that Keystone XL would eliminate this oversupply of oil feeding Midwestern refineries, leading to higher gas prices in the region. In fact, the relationship between local oil supplies and gas prices is weak because many factors affect the price of gas. Americans, for instance, pay less than Europeans because our taxes are lower. Californians pay more than other Americans because of stringent air-quality requirements.

In fact, week-by-week gas prices in the Midwest, compared with the rest of the country, have not tracked the spread between West Texas Intermediate crude and Brent crude. In November 2011, Enbridge (ENB), a second Canadian oil-and-gas infrastructure company, bought an interest in an existing pipeline that runs between Cushing and the Gulf and announced it would now be moving oil from the Midwest, rather than to it. Since then, the WTI-Brent spread has narrowed—but the Midwest’s discount at the pump has almost doubled, to 6.8 cents a gallon.

So what’s going on? Ken Green, who studies environmental science and policy at the American Enterprise Institute, a conservative think tank, says supply and perceived future supply is more of a factor in oil prices than in gas prices, where more variables come into play. “A lot of variables can eat up a small difference in the local price of gas: weather, the cost of electricity the refiners pay, and other factors.” Although reliable data are sparse, Green says industry analysts think the margin is being “eaten up by the downstream supply chain of refiners—whose profit margin is notoriously low—transporters, blenders, etc.”

In his speech in Cushing, President Obama said that “producing more oil at home isn’t enough by itself to bring gas prices down” because “the price of oil will still be set by the global market.” Economists agree that this is true. Indeed, even as domestic production has increased, gas spikes in the U.S. have become an annual occurrence: They’ve come earlier—and abated less—during every year since 2009.

All of which is to say that for the immediate future and maybe longer, high gas prices are here to stay. Neither presidents nor pipelines can do much about it.

Tullis is a Bloomberg Businessweek contributor.

Cash Is for Losers
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • TRP
    (TransCanada Corp)
    • $49.43 USD
    • -0.12
    • -0.24%
  • ENB
    (Enbridge Inc)
    • $46.97 USD
    • 0.49
    • 1.04%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus