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Monday, February 18, 2013

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 --


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).]

[My welcome/disclaimer page contains more background regarding my posts.]

13 comments:

  1. TransCanada is shipping something by rail. I sat and waited forever for a train yesterday, in Minnesota, but was enjoying the awesome spray paint art on almost all of the cars. Then Hotel California came on, and I said to myself that there is no way the song will finish while still waiting on the train, but I was. Many rusted looking or rust colored oil tank cars. 99% of the cars had Canada written somewhere on them. Canadian Government cars too.
    I only mention this because it was yesterday afternoon so current to this topic, probably not related, but current.

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    Replies
    1. Thank you for taking time to comment.

      Yes, very, very topical. These unit trains are incredibly long: 100 tank cars, up to 118 tank cars. Years ago there was a great story in The New Yorker many, many years ago on how sophisticated the computer technology needed to be to coordinate the movement of a 100-car train. Even a very, very slight grade (up or down) and half the train would be going up hill, and half the train would be going down hill. Huge amount of stress on the couplings.

      "Hotel California" -- that happens to be one of my granddaughter's favorite songs -- age 9.

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  2. Thank You Bruce for all the work you put into this post. Connecting the dots is so important. The Christian Science Monitor needs to read your analyses if they want an answer to the question they pose. To think we could import more crude from Canada at half the price payed for Venezuelan crude. The current situation makes no sense. Especially when the environmental concerns have been proven bogus. Where are the influential think tanks on this? Have they all been bought off by big powerful green lobby interests?

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    1. I agree. I don't get it. One could argue that flooding the market with Canadian oil could undermine the US oil and gas industry, but somehow I doubt that would happen. But, one almost wonders if the US oil industry is concerned about the Canadian oil....but then one starts to sound like a conspiracy theorist...whatever .... however it happened, we're seeing higher gasoline prices earlier than ever in the season....

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    2. The reasons cited by the Christian Science Monitor are adequate explanation for the soaring price of gasoline. The killing of the Keystone XL has nothing to do with it.

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    3. OK.

      These were the three Christian Science Monitor reasons for the soaring price of gasoline (and my response):

      High crude oil prices (almost tautological).
      Seasonal changes (happens every year).
      Speculation (the boogie man).

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  3. Irony. We gladly import oil from Hugo which is tar sands oil from the orinoco oil fields...but won't facilitate the same type of oil import from Canada...oh, Hugo hates us, while the Canadians at least tolerate us.

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    1. It would be a bit of irony if a Venezuelan sea-going tanker spilled heavy oil into the Gulf.

      Even if the price of Canadian oil and Venezuela oil (OPEC) went to parity, let's say $100/bbl, think of all the benefits of Canadian oil over Venezuelan oil: jobs for Americans laying the pipe; lease payments to surface owners where the pipeline is laid; money going to Canada, not Chavez; and, a message to the world that America is serious about an "all the above" energy policy.

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  4. Does anyone see the Gorilla in the living room? Limited refineries are the choke point with minor disruptions at the refineries causing major spikes in gas prices.

    Question is: Who is to blame? Obvious answer is a government, and an environmental lobby, that makes it nearly impossible to build a new refinery anywhere....but if you look at the bottom line, it seems that the right answer may be the refiners themselves are to blame as they seem just fine with limited refining options as their scarcity is inherently very profitable.

    Brett

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  5. That gorilla has been in the living room for several years now. The refinery issue was with us last year, the year before that, and the year before that.

    The question is: what is different about the refineries this year? The California refineries, I believe, are back up and running, and yet historic highs for gasoline for this time of year.

    What is different about the refinery issue this year compared to other years? How are refinery issues this year different than past years to explain the soaring prices that are setting new records for this time of year?

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    Replies
    1. Coincidentally, this was posted by the RBN Energy folks TODAY in their daily article:

      On January 1st, 2013, California’s cap-and-trade program for Greenhouse Gas emissions (GHG) went live and West Coast energy markets entered a whole new world. Wholesale electricity prices in California increased 20% as a result and other energy markets have felt the impact. For example, the new rules pushed up the average cost of refining oil by $0.78/bbl. For companies subject to the regulations, the bottom line is that if you generate GHG, you pay. But exactly who pays, how much you pay, and when you pay are all subject to a dizzying array of rules and regulations. Today we’ll navigate the turbulent and uncharted seas of California cap-and-trade markets.

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  6. You want to talk about spread..........EOG sold my December oil $108
    Brigham sold my December oil $78.11
    less than 8 miles from each other......Brigham sucks!

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    1. Thank you. Just be happy your well is not an OXY USA well.

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