In the oil business few endeavors promise more bluster than a pipeline.
And TransCanada's grandiose and troubled proposal to ship 1.1 million barrels of Canadian bitumen to the U.S. Gulf coast ably illustrates a good batch of petroleum hubris.
Keystone's boisterous defenders, and there are many, include the American Petroleum Institute, the Canadian government and U.S. Republicans, or what wags now call the Grand Oil Party. This oil-on-the-brain crowd swears that the massive $16-billion project will deliver lower gasoline prices, improve energy security, create jobs, save mankind, butter toast and even mix a better martini.
By law the U.S. State Department must ponder whether the project is in the national interest. It must also consider the impact of importing the world's most energy-intensive oil, an extreme and low-grade asphalt-like crude, that comes with production emissions that are 17 to 23 per cent higher than conventional oil.
Proponents, however, don't want any thinking or planning: they just to want to pump, baby, pump. They even vow to introduce legislation to force President Barack Obama to grant or deny a permit by November.
Ed Whitfield, a Kentucky member of the Grand Oil Party, explained why: "In a time of oil hovering at $100 due to geopolitical unrest, high unemployment and $4 gasoline, a pipeline that can eliminate our Middle East imports and create tens of thousands of jobs should be a top priority for any administration." And on goes the lobbying.
Unfortunately, not a word is true.
Blunt reality exposed by an expert
Big, long pipelines don't create resilient communities let alone healthy energy appetites for that matter. And in the case of Keystone XL the pipeline will actually raise, not depress prices at the pump. Nor will it improve energy security by one gallon. In the end the pipeline will simply become a Tar Sands Road to China. That's right, China.
That blunt analysis comes from the internationally celebrated oil and gas consultant Philip Verleger. The U.S. economist has studied the behaviour of oil markets for decades, recognizes hubris when he sees it, and has written 100 articles and books on the weird world of energy economics.
The MIT graduate has also worked for the president's Council of Economic Advisers, the US Treasury, the Institute for International Economics and now presides over his own consulting firm, PKVerleger LLC based in Carbondale, Colorado. He also teaches at the Haskayne School of Business at the University of Calgary in his spare time.
In a snappy 16-page analysis published this month, Verleger takes a hard look at the economics of the Keystone XL and guess what, it's not what it seems. For starters, the money only looks grand if you work for TransCanada. It gets nasty if you drive a car or farm in the U.S. Midwest.
In fact, Verleger draws from an overlooked Purvin & Gertz study that shows "how the pipeline would allow Canadian producers to manipulate U.S. crude oil prices to extract another $2 billion to $4 billion from U.S. consumers."
How the pipeline will raise US prices
The economics work like this. By running bitumen from Hardisty, Alberta to Houston, Texas, the line bypasses the great U.S. Midwest refinery market, which due to oversupply, can now discount Canadian Heavy Crude.
By eliminating this glut the pipeline will increase the price of heavy crude in the Midwest to the equivalent cost of imported crude, say, from Saudi Arabia. As a consequence TransCanada "will be able to use its market power to raise the heavy crude to Midwest refiners above the level that would prevail in a competitive market."
This exercise of monopoly power, something John D. Rockefeller of Standard Oil fame perfected, will bleed anywhere between $3.9 billion to $6 billion from U.S. consumers.
Verleger didn't mince words in an editorial for the Minnesota Star Tribune: "Millions of Americans will spend 10 to 20 cents more per gallon for gasoline and diesel fuel as tribute to our 'friendly' neighbours to the north.”
But the completion of the line would also create a different economic story in the U.S. Gulf coast. There the pipeline will flood the market with heavy oil. According to Verleger, most Gulf refiners now have deals with Mexico, Saudi Arabia or Venezuela. These refiners can't simply break their long-term supply agreements in order to gobble up Canada's bitumen, one of the world's most expensive hydrocarbons.
As a consequence refiners owned by the likes of Conoco, Citgo, ExxonMobil, Marathon and Shell won't be lining up for heavy Canadian crude. Moreover the ever-savvy Saudis will keep as much bitumen off the market as they can by offering discounts on their light oil, argues Verleger.
Kill the competition
In fact the Saudi's are masters at killing competition. They've done it for years by pricing crude on a just-in-time whatever-works basis. "Saudi Arabia's commercial entity, Aramco, has the power to offset any discounts offered by Canadian producers," explains Verleger.
At the end of the day Canada's heavy oil will most likely not displace Saudi crude whatever the Grand Oil Party might say. In fact a surplus of heavy crude will depress prices and force the extreme product offshore at a healthy discount.
"By forcing Canadian crude to China, Valero and other refiners will drive U.S. Gulf crude prices down significantly," adds Verleger. So if the pipeline gets built, it will become a "Tar Sands Road to China." In other words Keystone XL, as even a US Department of Energy study concluded, is no Yellow Brick Road for U.S. oil consumers.
Not a security necessity
Verleger also debunks the tired security argument. He notes that the United States has invested billions to create a 700 million barrel strategic reserve and all for energy security. Why should Americans pay an additional $5 billion per year to further reduce the risk of market interruptions?
Instead of entertaining economic dead ends like building an insanely long pipeline across the U.S. Midwest and largely for China's benefit, Verleger suggests an alternative economic course. In a lively http://www.pkverlegerllc.com/TIE_W11_-_Forty_years_of_Folly.pdf titled “Forty Years of Folly"target="_blank">essay the oil analyst bravely suggests that the U.S. must stop subsidizing its oil and gas producers and embrace free trade.
The U.S., he says, will never be energy independent. In fact the quest for home-grown hydrocarbons has become a ruinous enterprise that pollutes groundwater, contaminates the Gulf of Mexico and removes the tops of mountains.
He notes that the primary result of this misguided enterprise has been "the accelerated environmental rape and pillage of much of the United States, which has heaped economic benefit on a few while offering nothing to the nation as whole."
The incredible subsidies and low taxes granted to the U.S. hydrocarbon industry, he argues, has retarded the U.S. economy. Oil companies, he notes, simply don't create much. Nor do they innovate in the way Apple, for example, does, explains Verleger. "Yes, they discover, transport, transform and deliver energy. In general they profit, not through ingenuity, but through commodity price increases."
Divert money to innovators
Smart governments such as Norway and Israel have recognized this fundamental energy truth. So they capture as much as 50 per cent of resource revenue from their oil and gas producers and then reward the real economic innovators in the market place.
The analyst admits that such a policy will result in higher energy prices for sure. But high prices can also cure high prices and drive innovation. "We have lived in a fantasy world, failing to acknowledge the possibility of much higher energy costs," says Verleger.
Moreover, increased energy production taxes can be used to lower the crippling U.S. deficit. And with the vain focus removed energy producers as the shapers of U.S. destiny, innovation could once again renew the American experience.
So there you have it: a Canadian pipeline, that will disturb two thousand miles of farmland and place at risk the great Ogallala aquifer, will actually deliver a much more complicated economic story to the United States than that promised by its well-lubed lobbyists. And all to bring what the U.S. National Wildlife Federation calls "tar sludge" to China, the world's next global empire.
If the U.S. State Department rejects TransCanada's proposal to tax Midwesterners, the decision could signal a new era in U.S. energy economics. But by saying no to a pipeline, the government must also say yes to rewarding innovation; embracing free trade in energy; and capturing a good portion of the revenue now generated by U.S. oil and gas producers.
Verleger has no doubts about the radical outcome: "The country would be stronger today had it followed this path."