According to Investors Business Daily: The 1,700-mile TransCanada Keystone crude oil pipeline from Alberta to the Gulf Coast is a no-brainer. Canada's oil sands are the largest source of crude oil outside the Middle East and the 700,000 barrels of black gold per day the pipeline would bring would mean hundreds of thousands of new jobs, lower gasoline prices, less U.S. dependence on Mideast oil and hundreds of millions of dollars in increased revenues for the states.
Oil and Energy Investor says that : [Keystone] represents a new North American-centered initiative to lessen reliance on Middle Eastern imports and would create thousands of new jobs.
Jack Gerard, CEO of the American Petroleum Institute, spoke to Fox News Radio about the possibility that, if the pipeline isn’t approved, all that crude will go to China, saying, “It makes the United States more vulnerable to rely on outside sources for our energy.”
And Mark Green, over at EnergyTomorrowBlog upped the ante with this line: “[In] his rejection of the Keystone XL the president is rejecting jobs – 20,000 of them in the pipeline’s construction phase and up to a half-million more over time.” Where did the half-million number come from? He quotes Jack Gerard: “But the Keystone XL pipeline would create 20,000 new U.S. construction-related jobs over the next two years. More importantly, it would help support the creation of half-a-million new jobs by 2035.” There does not seem to be any other source or evidence for this number.
So, the arguments for the pipeline are:
• It would create thousands, tens of thousands, hundreds of thousands, half-a-million jobs,
• It would reduce our dependence on “outside sources” of energy, also referred to as Mideast oil,
• And it would lower gasoline prices.
There are already lots of analyses of those jobs numbers, all of which agree that the reality would be a few thousand jobs for the two years of construction followed by maybe a couple of hundred long-term maintenance jobs. I want to look at the other two arguments, both of which are very effectively and convincingly disproved by a rather interesting source: The corporation proposing to build the pipeline.
TransCanada Keystone Pipeline GP Ltd. argues that the pipeline will have no impact on imports from the Mideast and would simply displace US imports from Mexico and Venezuela with imports from Canada. (Yes, Mr. Gerard, Canada is an “outside source”.) Not only that, but the sale of Canadian crude to refineries in the Gulf Coast will also displace the refining of US produced crude in those facilities, forcing domestic producers to transport their product over greater distances and thereby increasing the cost of domestic energy supplies. They further state that this will increase the price of gasoline for US consumers. Where do they say all this? In their application to the National Energy Board of Canada for a permit to go ahead with the project.
First, let's tackle the question of our dependence on “outside sources” of energy.
Let’s just gloss over the fact that Canada actually is a foreign country and accept that ‘foreign’ and 'outside' here are actually code for ‘Arab’. The Gulf Coast refineries are pretty busy, and no one is building new ones, so where do the Canadians think the capacity for processing all their crude is going to come from? Will they be displacing imports from the Middle East? Not so much. Here’s their explanation of where the processing capacity comes from:
Heavy crude runs fell from 2004 to 2007 due to reduced supply of heavy crude, especially from Mexico, as shown in Figure 7. In the first eight months of 2008, heavy crude supplies from Mexico and Venezuela fell another 300,000 B/D (31.8 103m3/d) approximately. Heavy crude imports from other countries increased, but there was a net reduction in heavy crude use of approximately 200,000 B/D (31.8 103m3/d).
Their projections show Canadian heavy crude replacing imports from Mexico and Venezuela, leaving the amount of crude from ‘other’ foreign sources unchanged. So there is no anticipated reduction in US dependence on oil from the Mideast, just a switch from Latin American sources to Canadian ones. Net impact on our dependence on “foreign” oil = zero.
Now onto the question of domestic gasoline prices.
We'll need some vocabulary for this one:
• USGC = United States Gulf Coast
• PADD = Petroleum Administration for Defense Districts
• PADD II = the Midwest (15 states, from the Canadian border down to Oklahoma and from the Dakotas to Ohio)
• PADD III = the Gulf Coast (6 states)
Let’s start with a key takeaway from the summary section at the top of the report:
Existing markets for Canadian heavy crude, principally PADD II, are currently oversupplied, resulting in price discounting for Canadian heavy crude oil. Access to the USGC via the Keystone XL Pipeline is expected to strengthen Canadian crude oil pricing in PADD II by removing this oversupply. This is expected to increase the price of heavy crude to the equivalent cost of imported crude. Similarly, if a surplus of light synthetic crude develops in PADD II, the Keystone XL Pipeline would provide an alternate market and therefore help to mitigate a price discount. The resultant increase in the price of heavy crude is estimated to provide an increase in annual revenue to the Canadian producing industry in 2013 of US $2 billion to US $3.9 billion.
In other words, the Midwest currently gets cheaper gas because they get their Canadian crude at a discount, based on an excess of crude available in the area. If the pipeline goes through, that excess will disappear and the price of Canadian crude will, therefore, go up, increasing revenues.
If you look into the more detailed body of the report (developed for Keystone by independent experts), you find that there are a number of projections as to the impact on PADD II, in most of which supplies actually increase. But, the only one that the Keystone management considers is the one that maximizes their revenues. Is this legitimate? Actually, yes. The only variable that affects the supplies to PADD II in these projections is the amount shipped to the Gulf Coast. Since Keystone will control the pipeline that does the shipping, they can choose the scenario that makes them the most money by restricting supplies and raising gas prices for the American Midwest.
But what happens to the Midwest? They've got that covered: “With lower Canadian deliveries, PADD II refineries would need more domestic crude or other imports to sustain crude runs.” And where does all this crude come from? “The PADD II refineries also use U.S. domestic crudes produced mainly in PADD II, Texas and Louisiana, and they import crudes via pipelines from the USGC.” Unless they have some way of increasing production in their own states, they're going to be piping it in from the Gulf Coast. That's the plan. To pipe Canadian oil all the way South to the Gulf Coast and have Gulf Coast crude be piped North to the Midwest
Why does any of this make sense? Because Title 50a of the US code, section 2406d, bans the export of domestically produced crude. In other words, crude that is pumped out of the ground in the US cannot leave the country in any form. The Gulf Coast refineries can make more money refining Canadian crude piped in from thousands of miles away than they can from crude originating in Texas, because they can export it.
Today, Canadian crude is piped a relatively short distance to PADD II and most Gulf Coast crude is refined locally. Under the Keystone plan, Canadian crude will get piped to the Gulf Coast and Gulf Coast crude will get piped to PADD II states. That’s a whole lot of unnecessary transportation, which takes energy, making the total energy production less efficient. Nor is the oil in question is destined for US markets. But both Keystone and the Gulf refiners will make more money, while consumers in the American Midwest will pay the price. Not to mention that, with increased energy costs, all the agriculture in the Midwest will become more expensive, raising the cost of food for the whole country.