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The Great Keystone Debate

President Obama’s veto of the Keystone XL project last Tuesday rekindled the debate that has surrounded the TransCanadian pipeline project since its inception in 2008. The Keystone XL project (the fifth piece of pipeline to be added to the already existing four) proposes to streamline the route of the existing pipeline to run from Hardisty, Alberta and ending in Steele City, Nebraska. This would be the final piece to finish the Keystone project which is a span of 3,800 miles of pipeline all together. The 36 inch pipeline is capable of transporting 830,000 barrels of oil per day, significantly higher than the capabilities of transporting by train and truck.

The Republican-supported project has predicted a large increase in American jobs, strengthening of the economy, and more permanent energy security for the U.S by reducing dependency on Venezuelan and Middle Eastern oil by up to 40 percent. The Keystone XL will allow the growth of American oil producers by granting them more access to the large markets in the U.S. Midwest and Gulf Coast. However, the delay of this project has been largely due to the overwhelming concern for the climate change and environmental effects the pipeline will have. Environmentalists oppose the project because of the amount of carbon emissions related to the carbon stored in the Canadian oil sands being released into the earth’s atmosphere from the extraction and processing of the oil and transportation of the crude oil through the pipeline.

One aspect of the project that cannot be challenged, however, is the potential impact on crude oil prices for both Texas and Midwest refineries. Currently, the massive crude oil reserves in Southwest Canada have limited options for transport to refineries in the United States - much of the current product is shipped through the existing phases of the Keystone Pipeline to Steele City, Nebraska, and then transported by pipeline, rail or truck to refineries in the Midwest and Plains States, with some continuing to hubs in Cushing, Oklahoma and further south. Nearly 75% of Canadian heavy crude ends up in the upper Midwest. As a result, it is significantly cheaper for northern refineries to import crude from Canada than their larger counterparts in Texas. Construction of this phase of the pipeline would lower the transport costs to Oklahoma and Texas, expanding the market for Canadian heavy crudes, increasing returns to Canadian heavy oil producers, and reducing costs to Gulf Coast refineries, by reducing the amount of more expensive global crudes those refiners will require. At the same time, the expanded market for Canadian crude will increase prices paid by Midwest refiners.

The price impact of this addition is potentially massive. Case in point - the Seaway pipeline reversal. In 2011, it was leaked that a company wanted to purchase a pipeline running from Freeport, Texas to Cushing, and reverse the flow so that 150,000 barrels/day of crude could be shipped from Cushing to Freeport (later to be increased to 400,000 bbl/day), relieving an oversupply of oil in the mid-continent. Immediately, the global market responded, causing the American benchmark crude (West Texas Intermediate, or WTI) to jump $4 a barrel almost instantaneously. Since US refiners process roughly 16 million barrels of crude oil a day, that is a revenue difference of some $2 billion a month. Thus, while the debate over Keystone’s impact on the overall American economy is best discussed in a different platform, this information is worth noting.

President Obama will make his final decision on the Keystone XL project in the next few weeks after the State Department finishes its review. However, this issue will likely remain a hot topic in Washington politics for the foreseeable future.

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