Canada produces about 2.8 million barrels of crude oil per day, much more than it needs. Most of that comes from the country’s western provinces –primarily Alberta. But Canada’s industrial and population centers are primarily in the eastern part of the country.
Canada’s eastern provinces are right now importing European oil. It would seem logical that Canada should ship its western crude to its eastern cities. There are two reasons that this doesn’t happen. First, there is no pipeline between Canada’s western and eastern centers. Second, the refineries in the eastern part of the country are not able to handle the thick tarsands crude that is mined in the west.
The solution that Canada came up with to solve this problem was to build a short pipeline that connects the Alberta tarsands with its west coast ports in British Columbia. This would allow the oil to be sold in the more lucrative Chinese and European markets. (As I’m writing this, the price difference is about $20 per barrel.) The problem is that the Canadian environmental movement was able to stop the construction of this pipeline.
So what was Canada’s Plan B? Sell the oil to the United States. There are some problems with this idea, too. The refineries in the United States are all the way down in Oklahoma, Colorado, Wyoming, and Texas. There are some small pipelines that could get the oil to the Oklahoma, Colorado, and Wyoming refineries, but none that would bring it all the way down to the refineries in Texas. (There are also existing pipelines that bring tarsands oil to Illinois refineries.)
So maybe the solution is to send tarsands oil to Oklahoma, Wyoming, Colorado, and Illinois, and forget about trying to send it to Texas. It would seem that this solution, using existing pipelines, would be sufficient, and that is the solution that is currently being used. But there are two related problems with this solution. First, the market in the western United States can only absorb so much crude. Canada is producing about 3 million barrels per day. All that crude sitting in the western U.S. is starting to lower the price of gasoline. The lowest gas prices in the U.S. right now are in Wyoming, Colorado, and Oklahoma. This is because that’s as far as the pipeline goes. The oil companies in those states are filling storage tanks as fast as they can, rather than sell the excess at lower prices. Shipping it to the markets in the eastern U.S. is impractical for the same reason that it is impractical to ship to Canada’s eastern markets.
Now we have plan C. Build a pipeline from Canada right down to the refineries in Texas. You might wonder how this would solve the problem. After all, Texas is still in the western U.S., and it’s even farther from the population centers and industrial markets in the east. To understand the logic behind Plan C, you have to understand a little about the oil market.
You’ve probably heard people quote the per-barrel price of oil. Right now the price of oil, or more specifically the Brent Crude benchmark, is at about $125 a barrel. The Brent Crude benchmark is the most often quoted price for a barrel of oil. It actually represents the price of a barrel of oil on the international market, but that doesn’t matter, because usually the different oil benchmarks go up and down together. There is a benchmark that represents the price of a US barrel of oil. It isn’t quoted as often as Brent Crude because usually the two are close in price and go up and down together. So the Brent Crude Index works just fine for most purposes. At least it did until recently.
That oil glut in the Midwest has been driving down the price of oil in the US. The American index, more properly called the WTI or West Texas Intermediate benchmark, has lately had a mind of its own. For the first time in a long time it has been lower than Brent Crude. The WTI is currently at $105 per barrel. Phrased another way, oil executives can make $20 more per barrel selling their oil in China or in Europe than they can in the U.S. That brings us back to Plan C.
The idea of building a pipeline from Canada to Texas has nothing to do with bringing oil to US markets. The oil is already in US markets. It has everything to do with bringing Canadian oil to a deepwater port. The idea is to refine the oil in Texas and then ship it out to foreign markets. This idea also has nothing to do with lowering gas prices in the US. If oil executives wanted to lower gas prices here, they would sell all that oil that comes through Oklahoma, Wyoming, and Colorado instead of frantically building storage tanks to hold the oil until there’s a pipeline to Texas. Currently, the refiners are buying their oil at WTI prices and selling it to the American market at Brent Crude prices. Bloomberg Business recently ran a story saying that if the pipeline to Texas were completed, gas prices in the Midwest would rise by 20 cents a gallon.
So the upshot of all this is that Canada has a lot of oil to sell. Canadians won’t let them build a pipeline in their own country, so they’re going to build a pipeline in our country and sell tarsands oil to American oil companies. Those American oil companies will then sell it in foreign oil markets. Americans will suffer all of the environmental harm that the pipeline will bring and will enjoy none of the benefits. Shouldn’t we get something in return for all those subsidies we’re paying to petroleum corporations?
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