What Determines The Price Of Gasoline; Did Killing The Keystone Bring Us To Current High Price of Gasoline?

Updates

March 1, 2013: just surfing around the net for something else, and I happened to run across this paragraph in an article about the price of gasoline posted back in January, 2012:

But first, the oil needs to get to market. There, we’ve often seen economics trumped by politics – even as the U.S. economy remains weak. The recent moratorium in the Gulf of Mexico, as well as the decision to deny the permit for the Keystone XL pipeline from Canada to U.S. refineries, are just two examples of U.S. political decisions that serve to keep supplies out.

February 21, 2013: RBN Energy post this date suggests more evidence that killing Keystone XL 1.0 is, more than any other factor, responsible for the soaring price of gasoline.

February 20, 2013: Bloomberg's response to faux environmentalists regarding the Keystone XL 2.0.
Canada's oil and Venezuela's oil have the same CO2 profile. Canadian oil: $60/bbl; Venezuelan oil: $120/bbl. Canada: closest ally; Venezuela: OPEC. Canadian oil: American jobs; Venezuelan oil: no American jobs, and money to Chavez.

February 19, 2013: I haven't look at the poll results -- and won't until I'm ready to post the results, but I assume most folks (99%) are blowing me off as a nut with regard to the Keystone and the price of gasoline. That's fine. Listen to this video -- link sent by Don -- there are three parts to the long interview. Pay attn to Daniel Yergin only (the other two have to do with futures trading which I am not interested in and does not add anything to the question at hand). Daniel Yergin is a very, very credible "talking head." I read his book, The Prize, several years ago and is at my bedside; it is a phenomenally good book. Now it's simply a history book, not a book to be read by investors. But if you listen to what Yergin has to say about pipelines, he supports the argument in the original post below. Yergin practically yelled this: CO2 profile of Canadian oil sands oil is the same as Venezuela oil. Canadian oil sands oil: $60/bbl; Venezueal oil: $120/bbl. 

Later, 10:45 a.m.: two stories being reported --

• CBS is reporting: $5.00 gasoline "returns" to the Southland. Predictable.
• CNS reports: price of gasoline doubles under President Obama.

Later, 8:00 a.m.: CNN headline story:  Gas prices have risen for 32 days straight, according to AAA. That means that the average price for a gallon of regular unleaded gasoline has increased more than 13% over that period to $3.73.


Later, 8:41 a.m.: this is really quite amazing. No sooner had I posted the note below, that Don sends me a Billings Gazette story that Nebraska won't get the power lines in place for the Keystone XL before the end of 2015. Cue up Connie Francis. More of that story here.

Original Post

Background: over the weekend, I posted a new poll. It was "confusing" to some. I promised that I would post a bit of background explaining the thinking behind the poll. As usual, just some data points. I will let others connect the dots, fill in the gaps, but as you go through this, it all comes back to this:

• US refineries are predominantly heavy oil refineries, and can't switch to light oil overnight
• Canadian oil sands oil is selling for $60/bbl -- but choked because of policy decision to kill the Keystone XL; original plans to have it completed by 2012 - 2013
• to make up the Canadian oil sands shortfall, US refineries are buying Venezuela oil (OPEC) with Brent priced at $120
• the math: Canadian oil ($60); Venezuela oil ($120); the US shuns Canadian oil

*************************

On February 11, 2013, The Christian Science Monitor reported that the price of gasoline had hit a historic high for this time of year, and then asked the question: what is driving up the price of gasoline? According to the article:

A combination of high crude prices, refinery shutdowns, and early speculation has sent gas prices soaring to seasonal highs earlier than usual this year, with no signs of prices at the pump falling until spring, according to recent estimates. -- The CSM

The article mentioned these factors contributing to the high price of gasoline, in this order:

• higher crude price, which in turn due to expectations of improving global economy*
• seasonal changes, as refineries convert from winter blend to summer blend
• speculation 

But those factors are always there. An expanded list of factors that contribute to the price of gasoline might be:

• price of oil
• strength/weakness of the dollar; inflation
• refinery expenses/refurbishing/maintenance/fires
• seasonal: switching from winter to summer blend
• summer blends more expensive than winter blends
• state-mandated blends
• ethanol/EPA requirements
• transportation (from refinery to pump)
• demand destruction
• economy in general (gasoline demand)

But again, those factors are always there. The question that one needs to ask, is it just the "same old same old" or is there another reason for the record-breaking price of gasoline (this early in the "season")?

Facts:

• many American refineries rely on heavy oil (too long to go into; background posted earlier)
• Canadian oil sands oil is selling at a discount of $60 to Brent (i.e., Western Canadian Select/WCS)
• WTI/WCS spread is almost $40
• WTI/Brent spread is about $20
•  "heavy oil refineries" cannot substitute light oil for heavy oil
• sources of heavy oil: Brent, OPEC (Venezuela), Canadian
• there are two bottlenecks associated with Canadian heavy oil: a) pipeline; and, b) diluent
• US refineries unable to obtain Canadian WCS oil at $60/bbl, are paying for OPEC oil at Brent prices, $120/bbl

I've always said that killing the Keystone would not be the reason for higher gasoline prices.

However, it is becoming more and more difficult to make that argument when Canadian WCS oil is pricing at $60/bbl, and in lieu of that, US refineries are buying heavy oil at Brent crude prices, $120/bbl.

One wonders what the price of gasoline would be if US refineries were buying Canadian WCS oil at $60/bbl rather than paying Venezuela $120/bbl.

From wiki: The Keystone XL was expected to be completed by 2012–2013, however construction has been overcome by events.

One can discuss all the reasons for the price of gasoline, and go through the lists above, but the one thing that jumps out at me: Canadian crude oil: $60/bbl. Venezuelan crude oil: $120/bbl.

I think one can make an argument that the policy decision to kill the Keystone XL back in February, 2012, is the single biggest factor contributing to what The Christian Science Monitor says is the record-breaking price of gasoline, with no sign of improving.

And that's the reason for the poll. I assume, the polling will be 100% "no" -- the Keystone XL was not the primary factor. I'm beginning to wonder.

[*Saying the high price of gasoline is due to the high price of crude is almost tautological.]

[Someday, looking back on the history of this, someone will note -- TransCanada's plan was to have the Keystone XL completed by 2012 - 2013. Faux environmentalists held up this project so long, and the politicians delayed so long, it was not even until February, 2012, when the president made the decision to kill the Keystone XL. Now a year later, February, 2013, we are being told that the decision for Keystone XL 2.0 will not be made before mid-2013 (June, 2013).]

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