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A curious thing happened on the way to the Great American Oil Boom.
I know what you’re thinking…
Isn’t it great that we can now produce vast amounts of our own oil again?
The classic supply and demand price mechanism works like this:
As supply of oil grows relative to domestic demand, then the prices for a barrel of oil will fall and our gas prices will fall.
No more oil shortage/war threats/political risk oil prices to worry about…
‘Cause with the new American oil boom, we’ve got it made, right?
Well hold on there just a minute, slick...
That makes sense if you’re a consumer tired of paying $4 for a gallon of gas...
The bottom line is the bottom line
But if you’re an oil producer, well, the bottom line in business is still the bottom line…
And if you can find a way to goose that bottom line, then by all means, you do so.
Which brings us to the XL Pipeline project, which was--and is--meant to transport Canadian oil down the middle of America to the oil refineries in the Gulf of Mexico.
As we are all aware, the XL Pipeline project was denied approval by this administration for environmental reasons…
Which is to say, for political reasons. The administration was just serving the environmental left by denying the project and potentially tens of thousands of jobs were not allowed to come about.
But the latest word is that even though the administration’s rejection of the proposal looked like it would result in Canada building a pipeline west, across Canada to the Pacific to be shipped to Asian refineries…
There may indeed be another round of negotiations or reviews by the State Department.
This of course, makes perfect political sense…
Where is the environmental left going to go in the upcoming election?
Nowhere; and everyone knows it.
The political play is to put the project back under review as a nod to independents before the election.
But with oil prices falling recently, a nod may be all that is necessary from that perspective.
That price drop is due to lower demand on the world market as Europe and China both slide into recessions; it will go back up as OPEC brings production inline with world demand. But know this: it has nothing to do with greater domestic productivity.
In fact, there is real doubt that the XL Pipeline would bring us lower fuel prices; we are already exporting oil for the first time in 62 years as it is. (Unfortunately, we are not stopping imports from Venezuela and other foreign sources. But there are other reasons for that.)
The key point about the XL Pipeline project is that if it is built, it will definitely provide much needed jobs to Americans…
But it may not lower gas prices. In fact, it may well raise them. I know it sounds wrong, but it isn’t.
Why would that be?
Right now, there is a glut of oil in the middle of the country. In the past two years, US oil production has raced upwards.
But at the same time, there has been a limited ability to get that oil to the Gulf of Mexico refineries that process oil to be sold and shipped to foreign buyers who pay world market prices…
Lack of pipelines to the Gulf of Mexico has meant that nearby refineries in Oklahoma and elsewhere have been able to get the oil cheaply, refine it, and sell it to domestic markets because it’s had nowhere else to go.
But, when more pipelines come on line, that oil glut in the belly of America will go away…
It will go straight to Gulf of Mexico refineries and be sold on the world market at world market prices.
When that happens, Americans will have to compete with the rest of the world to use our own oil.
See how that works?
But what about supply?
Since the US is producing greater supplies relative to the rest of the world, prices still should fall, shouldn’t they?
You would think so…
Changing the goal posts
But there’s a little detail about the pricing of oil itself that even the oil boom in the Bakken fields of North Dakota and Montana will not be able to impact…
It has to do with the way in which gas is priced. It has changed as of 2011.
Before the change in pricing last spring, gas prices were based on the price of US produced crude oil…
Today, gas prices in the US are based upon Brent crude oil, which is a heavier, more costly type of oil.
How much more expensive?
Around $20 per barrel more expensive.
But wait; shouldn’t US oil be sold to Americans based on our own lower cost advantage? Isn’t that the whole idea of “energy independence?”
Perhaps it should be, but it isn’t.
Oil producers—even in the US—want to make the highest profit possible. No surprise there, I’m sure…
So where are they going to sell domestic oil?
Answer: the world market.
Who will they sell it to?
The highest bidder of course.
The fact is, it costs less to produce a US barrel of oil than it does to produce a barrel of Brent crude…
But $20 bucks a barrel is a lot of money to leave on the table isn’t it?
The reality with the XL Pipeline and others leading to the Gulf of Mexico is that huge amounts of oil will be shipped abroad and sold at the higher world market prices.
The American consumer won’t get any long-term relief from oil prices.
Just because the oil is here in the US, costs less to pump out of the ground, is cheaper to refine, and carries almost no shipping costs or geopolitical risk associated with it…
Doesn’t mean we’ll pay any less than say, China or Latin America will pay on the open market.
What were you thinking?
And those are…The Gorrie Details.