Oil markets and pipelines: the big picture
Oil Change International released a report yesterday asserting that much of the oil to be delivered by the proposed Keystone XL pipeline will be refined into diesel and exported. We seem to have touched a raw nerve with some people as we have been accused of all sorts, from untruths to being unfamiliar with the global oil market.
Neither could be further from the truth.
We at Oil Change have studied the oil market for many years and have come to understand, among other things, that the industry is misleading the American public regarding the Keystone XL pipeline and US energy security.
I wrote a report in May 2010, which detailed how gulf coast refiners were facing a shrinking U.S. market and we’re increasingly looking to export markets. Much of what I described in that report has materialized. US diesel exports are increasing to historically unprecedented levels. The EIA confirmed this just this week:
Gasoline demand in the U.S. is shrinking due to vehicle efficiency standards, slow economic growth and persistent high oil prices. Again the EIA confirmed this only this week:
Many commenters have asserted that somehow more Canadian oil will ease oil prices and prices at the pump. But that has not and will not be the case. Oil prices are set in a global market and rising Canadian oil production has done nothing to ease them. Tar sands production has been rising since 2000. Think about what oil prices have done in that time. They have risen steadily, only declining when economic growth declines first.
Will Canadian oil deny market share for Mideast or OPEC oil as Valero claimed in its response to our report? No. The more we pump the less they need to. OPEC has over 70% of the world’s reserves and is not affected by a bit more Canadian oil in the market. The International Energy Agency has shown that even with maximum production of tar sands, OPEC’s share of the oil market is going to rise.
Indeed if you take the time to read the IEA’s World Energy Outlook, you will find that the only way to reduce revenue flows to OPEC countries and increase energy security is to reduce the demand for oil to a level that would keep CO2 emissions within safe limits, this is the IEA’s 450 Scenario. They calculated that this would reduce OPEC revenues by $5 trillion dollars by 2035 and cut US imports of all oil by 45%.
Doing this would also cut tar sands production at least 28% because the resulting lower oil price would make a lot of tar sands projects uneconomic.
We are a long way from achieving that demand reduction but we would be better served by making a bid for it rather than maintaining the status quo. Recent progress on vehicle efficiency has begun to set us on the right path but we need to do a lot more.
That we have started on that path is the reason the refiners are looking to export Keystone XL oil. They know that US gasoline demand is in permanent decline and rather than shut a refinery or two to improve the efficiency of the system they are looking to export markets to maintain their profits.
Perhaps that’s a wise strategy for them, but they can’t then claim that we need the Keystone XL pipeline for energy security.
As we said in the report. The Keystone XL pipeline feeds refineries that are well located for export and will refine as much of it as they can into diesel for the export market. But I beg our critics not to take our word for it. Follow the references in the report and see for yourself.
Download the full report here and a brief response to Valero’s response here.