Gult Coast refiners could pass on discount from Canadian crude

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March 31, 2011 - 7:00pm

As the U.S. State Department considers whether to approve TransCanada's proposed Keystone XL oil pipeline, it will be looking beyond environmental issues to energy policy and economics. Energy economist, Philip Verleger, thinks a pipeline to the Gulf Coast could cause a small increase in gas prices. Keystone's Jeff Rauh tells NET News' Grant Gerlock that it's more likely that less costly oil from Canada would ease gas prices as it displaces foreign sources from farther away.

RAUH: Bringing new product into the market itself helps to put downward pressure on prices. But especially when you look at the fact that Canadian oil typically trades at a discount of about $20 to West Texas Intermediate and with Mid-East turbulence now an even higher discount compared to world market prices, the oil that Keystone XL would displace will be significantly more expensive which will cause downward pressure on price at the gas pump.

GERLOCK: Canadian prices in Oklahoma, in the Midwest - there's a bit of a discount for Canadian oil in those areas?

RAUH: There is a long-standing discount for Canadian oil compared to other sources of oil. So this less expensive oil, bringing it into the market is the very thing that helps drive the price down. There is also a structural disconnect between Cushing, Oklahoma and the Gulf Coast in that there's inadequate pipeline transfer capability so that artificially is holding prices down to a certain extent in Cushing and there may be some effect on the price for crude oil, but the net effect on the price for gasoline is not dependent upon that minor increase in the commodity price for crude oil. The gasoline price will be driven by the fact that this oil is much, much less expensive than the oil it's replacing. The availability of Canadian oil at a lower cost to displace the higher cost supplies currently utilized will exert downward pressure on the price at the pump.

GERLOCK: Do producers, customers of TransCanada, expect to get a better price when it gets to Houston? And if that oil can get to Houston, do they then expect to get a better price in the Midwest and in Oklahoma?

RAUH: I can't really speak for their expectation but I can tell you that we're talking about commodity pricing and so the refineries along the Gulf Coast represent nearly 50% of the total U.S. refining capacity. So being able to get low-cost oil into that market really helps drive their price down. As with any commodity if you're supplying into a market where the product is in greater demand that can have an effect on the price. And so that represents a win-win situation. It represents lower cost crude oil, and ultimately potentially lower cost gasoline for consumers at the same time that the producers get a good price for their product.

GERLOCK: So refiners in the Midwest, should they expect to pay higher prices for Canadian oil if Keystone XL is built?

RAUH: I can't speak to exactly what there arrangement is, but what I can say is as the market in the Midwest is tied more closely with the market in the Gulf Coast you may see some elimination of some of that discount. It's estimated at $3/barrel which still leaves more that $20/barrel below market prices. But from the consumer perspective this represents a huge win because the lower cost oil is being supplied into the market that provides nearly 50% of the refined products used in the U.S.

GERLOCK: The adjustment in that discount, the possible adjustment there for refineries in Oklahoma and the Midwest, that wouldn't translate to higher prices for gas in Nebraska?

RAUH: Absolutely not. Because much of the gas and refined product in Nebraska comes from those Gulf Coast refineries, so their higher cost structure is reflected in the pricing. Ultimately if you're able to bring that cost structure down you exert downward pressure at the gas pump in Nebraska and throughout the Midwest.

GERLOCK: In a filing with the Canadian government, TransCanada referred to studies that show producers could expect to earn more money from their oil if Keystone XL were constructed, almost $4 billion. Can you explain what they meant when they were referring to those numbers.

RAUH: That's the win-win scenario I'm talking about. You've got a low-cost product and you're supplying it into a market with high demand. That enables the producers to get a good price for their product. But the refiners from Texas are using that lower cost Canadian oil to replace high cost oil purchased at world market prices which are 20% plus higher than the Canadian oil is available for.

GERLOCK: Is there actually enough capacity in Houston right now to refine all the oil that would come down there from Keystone XL or is a portion of it likely to go overseas and be exported?

RAUH: No, absolutely not. No portion of it is likely to go overseas at all. This oil is being shipped for refiners in the Gulf Coast. And recognize that this is the largest refining market in the United States. There are more than 50 refineries in this area that produce refined product and Nebraska like other states is dependent upon the output of those refineries for their refined product - for the gasoline, the diesel fuel that helps drive economy and well as local households in Nebraska. So the oil is destined for those refineries to help meet demand from U.S. refineries to meet refined product needs in the U.S.

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