The Key to Big Oil's Sky-high Price Play: Keystone Export XL

The Keystone XL Export Pipeline is the next move in a complicated chess game by the oil and gas industry to assure sky-high future prices for its products -- and unaffordable fuel for the rest of us. (In their minds the devastating environmental legacy is collateral damage -- but the economic hit is a key ingredient in their model. They want us to pay too much.)

American natural gas and Canadian oil producers have cartel envy; they can't get the outrageous prices that gas and oil fetch in Europe and Asia where OPEC has and used its monopoly power to keep oil above $100 and then effectively tied the price of natural gas to this artificially exorbitant price of oil.

North American producers are landlocked. Tar sands oil can't get to deep-water ports, and natural gas doesn't have export capacity so they must be satisfied with U.S prices. Oil in the Midwest runs about $15-$20/barrel less than OPEC gets. Natural gas is arguably underpriced; currently about $3/mcf, but a more stable $5-6 is still a fraction of the $19 OPEC extracts in Tokyo for LNG.

Exporting Canadian oil is the first step towards importing higher OPEC prices. The second step, already underway, is to obtain permission and build facilities to export U.S. natural gas to Asia. And the third step, being teed up, is to allow the direct export of U.S. crude oil to Asian and European OPEC markets, currently banned by U.S. law.

Keystone is the linchpin to the whole strategy. In addition to giving Canadian producers, including folks like the Koch Brothers, global markets and OPEC prices, Keystone also solidifies the alliance between the multinational oil majors, Canadian production and U.S. refiners -- creating an intimidating North American 'petroblock.' And, conveniently, it soaks up excess refinery capacity in Texas, thereby helping make the bogus case for allowing domestic U.S. tight oil -- from the Bakken or Eagle Ford -- to be exported, on the grounds that there isn't enough refinery capacity in the U.S.

I say the bogus case because there is lots of refinery capacity on the East Coast -- but Canadian and U.S. oil companies don't want to ship oil around Florida to be refined in New Jersey, because that would require them to hire U.S. tankers and U.S. crews. These not-so-patriotic multinational players have no use whatsoever for using the U.S. except as a location out of which -- or across which -- to extract oil and gas. Indeed, in sourcing steel for the Keystone, its owners didn't even allow us or Canadian steel manufacturers to bid; only the Indians and Chinese were allowed to apply.

So what the oil and gas industry want is a bit hard to follow:

  1. We will import Canadian tar sands bitumen we don't want or need.

  • In order to lock-up refineries that domestic producers in the U.S. will require, creating an artificial refinery shortage, and then exporting the refined gasoline and diesel. We will simultaneously sell low carbon natural gas cheaply to be converted to high carbon and expensive Asian LNG. This will raise U.S. natural gas prices, giving away our current biggest competitive edge in manufacturing and raising costs for businesses and homes and electrical utilities.
  • By raising natural gas prices and exporting it, we will also foreclose the option of using cheap domestic gas to replace expensive imported oil as a transportation fuel.
  • Because of the refinery shortage created in (2) we will then allow the oil industry to export U.S.-produced tight oil from North Dakota or Texas to Europe.
  • This avoids hiring U.S. ships and crews to ship it to New Jersey to be refined by American workers. Once it gets to Europe, this oil will be able to command OPEC prices, but without paying any U.S. wages.
  • More expensive gasoline refined from either Canadian or U.S. oil, or from the Middle East, will be shipped back, fully marked up, to the U.S., to fuel cars and trucks. These vehicles could have filled up with Canadian oil (at pre-Keystone, lower Midwestern prices), or powered with North Dakota tight oil refined in Gulf Coast refineries not clogged with export designated tar sands bitumen, or even equipped to burn much cheaper, lower carbon domestic natural gas.
  • If this seems crazy, notice the common thread -- oil and gas wants OPEC prices, and they can't get them in a North American market. Only by linking to OPEC controlled global markets can industry get the excess profits it wants. This is a sophisticated high-price set of moves -- and they could easily work.

    Washington is about to give oil its way. All signs suggest that the president is seriously considering, even leaning towards, approving Keystone, as a way to keeping peace with the Harper government in Canada, our northern neighbor's equivalent of the Tea Party, complete with its petro-funding and climate denial. The DOE EIS prepared on the pipeline a year ago actually argues that the fact that Keystone will raise oil prices in the Midwest by $20/barrel is a good thing, because it makes world oil markets more "efficient", by which DOE meant everyone pays the OPEC price. The recent federal analysis of exporting natural gas concluded that, hey, it couldn't hurt anything, because we don't have any way to use that gas in the U.S. For example, the DOE study ignored the question of whether it is a good idea to use natural gas in trucks, saying, "This sector (trucking) has limited ability to substitute other fossil fuels." Meanwhile, Daimler in Portland, Ore., says if we only built a natural gas distribution network, it could not keep its natural gas trucks in stock, because the fuel is so much cheaper than diesel.

    It's time for everyone to wake up. Transportation fuel doesn't have to cost $4 a gallon. The oil industry is terrified prices might fall. They want government to bail them out, and guarantee permanent high prices. That's what the phrase "North American Energy Independence" means -- unifying the U.S. and Canadian markets for export, so that OPEC prices can finally reach Denver.

    And the government is about to give them what they want.

    A veteran leader in the environmental movement, Carl Pope is the former executive director and chairman of the Sierra Club. Mr. Pope is co-author -- along with Paul Rauber -- of Strategic Ignorance: Why the Bush Administration Is Recklessly Destroying a Century of Environmental Progress, which the New York Review of Books called "a splendidly fierce book."