Blogs & Comment

High U.S. gasoline prices should be a boon for the Keystone: Erica Alini

But some people have the wrong idea.

Americans aren’t paying particularly high prices at the pump. In fact, the relatively low cost of gasoline helped retailers last month, as consumers spent more on items other than fuel. But anyone who expected the shale oil boom to forever consign the expression “pain at the pump” to the history books must be disappointed.

Americans filling their gas tanks are paying slightly more today than they did on average for the past decade. How can that be after U.S. oil production increased 13.8 per cent between 2011 and 2012 alone? The stubbornly high prices are even more perplexing if one considers that U.S. consumption of gasoline dipped during the recession and is on a long-term downward trend thanks to high fuel efficiency vehicles.

Bloomberg BusinessWeek set out solve this puzzle this week in a provocative article that’s making the rounds among energy traders and analysts. The authors expose some quirky, outdated rules that are working against lower prices. One law predicated on the now disproved idea that U.S. oil supplies were headed for inexorable decline requires that refiners mix in gasoline with given amount of ethanol. This, naturally, drives up costs for refiners, who pass it on to consumers. Another law, dating from 1920, bars foreign vessels from transporting cargo between U.S. ports, which effectively created a maritime transportation bottleneck between the Gulf Coast refineries and the gasoline-starved North East.

The magazine’s main thesis is, though, is that gas prices haven’t fallen because the U.S. is increasingly exporting the stuff rather than selling it to the home market.

That conclusion is puzzling. And insofar as it reinforces the idea that more gasoline exports mean less relief at the pump, it is dangerous for Canada’s Keystone XL. Tom Steyer, the former hedge fund billionaire turned environmental advocate, and a number of high-ranking Democrats have argued that a pipeline linking Alberta’s oilsands to Gulf Coast refineries wouldn’t benefit the U.S. because most of the oil is likely to be exported as a result of increasing U.S. domestic production.

The concern about exports, though, is misplaced.

First of all, as the U.S. Energy Information Administration (EIA) noted in a recent report, it isn’t clear that selling U.S. gasoline abroad is having an effect on domestic prices. Reducing such exports even might back-fire:

Were gasoline exports to be constrained, global gasoline supply would likely decline, and U.S. gasoline importers, especially in the Northeast, would face additional competition for supplies from buyers in other countries that would have otherwise been supplied from U.S. refineries, which would tend to raise the price of imported gasoline.

Second, while gasoline prices are very volatile and tend to be affected by a number of local factors like the weather or refinery maintenance and breakdowns, the rule of thumb is that the most important factor is the price of crude oil. And while that can also be quite volatile, in the long run it depends on the equilibrium between global demand and global supply.

The main reason why the U.S. shale oil boom hasn’t resulted in much cheaper U.S. gasoline is that American motorists are competing with drivers in South America and Asia. Growing demand from emerging economies pushed up crude prices and spurred the development of unconventional oil resources, such as North Dakota’s Bakken shale reserves, but the latter hasn’t been large enough to offset the upward pressure on prices. The Great Recession, which depressed fuel consumption worldwide, has provided some respite, but as global growth picked up again, so did crude prices.

That’s why making it easy for Canada to develop the oilsands is a better way to go about easing the U.S.’s gasoline price problem. As I argued before, even our vast, sandy oil riches wouldn’t insulate North American from price shocks. But they would be enough of an addition to global supplies to conceivably soften the punch of such swings by lowering crude prices, if only a little bit.

Of course the Keystone XL would be only one stepping stone in the development of the oilsands. And of course the effect of the oilsands on global oil prices would be the same whether Canada exports its heavy crude to the U.S. or Asia. But a rejection of the Keystone could be a serious setback. According to a recent report by the Royal Bank of Canada, it could wipe out $2.4 billion in investment. Killing the pipeline would not keep the oil in the ground, as some environmentalists seem to believe, but it would slow things down. American gasoline would stay as pricey as ever for a while longer.

Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.