Realist, not conformist analysis of the latest financial, business and political news

Idiocy About The Keystone Pipeline

There really are times when head in hands is the correct way to read a British newspaper:

After years of applications, scientific studies, court cases and regulatory assessments, Calgary’s TC Energy announced that it will begin construction on the $11.5 billion pipeline. The Keystone XL should ship 830,000 barrels of crude a day by 2023 from Hardisty, Alberta, to Steele City, Nebraska, where it will join existing pipelines to refineries in Texas.

OK, that’s cool. Now, what do we know about the price of fungibles, commodities? That’s right, as David Ricardo pointed out with the law on one price – back in 1817 – they will be the same price everywhere, subject to the costs of transport.

Oil in Hardisty is worth rather less than oil at the Texas refinery. Because it costs money to transport it there. The price of oil at the refinery in Texas is the price of oil from anywhere in the world at the refinery in TX. The price at the wellhead is the price of oil at the refinery in TX minus the transport costs of getting it to the refinery in TX.

OK, not wholly and entirely, there are different grades of crude, it’s not entirely fungible. But as a first stab attempt at explaining the market it’s good enough.

We also have two different measures of the oil price. West Texas Intermediate – WTI – is the sort of oil drilled up in West Texas (well, D’Oh!) and that’s $20, $22 a barrel right now. Western Canadian Select – WCS – is the price of the sort of oil n Alberta. It’s about $4 a barrel right now. No, the technical difference in specifications does not explain that price difference. The transport costs do. Largely, Warren Buffett and his Burlington Northern railway making out like bandits because of the absence of pipeline capability.

So, we add the pipeline and when it’s finished we’ll get that discount of WCS to WTI narrowing. Cool.

The plan, facilitated by a $1.5 billion investment and $6 billion loan guarantee from Alberta’s provincial government, run by the cowboy-hat wearing conservative Jason Kenney, who doubles up as Mr Trudeau’s unofficial opposition, comes at a dismal time for Canada’s vital oil patch, amid the economically ruinous oil price war between Saudi Arabia and Russia.

Mr. Kenney is thus doing that winning bigly thing by getting the pipeline up and running.

TC Energy and the Alberta government insist its construction will create 6,800 jobs in Canada and provide a much-needed boost to the province’s dire economy. Mr Kenney’s supporters chant “build that pipe”, but on his watch Albertan oil sank to a demoralising $4 a barrel on Monday.

At which point, head in hands. Because the approval of the pipeline is the solution to the $4 a barrel which is Mr. Kenney winning bigly, isn’t it?

Sigh. Journalism is people explaining things they don’t understand to people who don’t care.

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Vern Cooke
Vern Cooke
3 years ago

Well said, Tim! I’m especially impressed that you have such an accurate grasp of the situation here, given that you are located “across the pond”! I’m in Alberta, and this pipe, coupled with the Trans Mountain pipe, will help getting Alberta oil to tidewater. The economy here has been hit hard over the last few years. I’d also like to point out that Alberta can be the poster child for the folk lecturing us about “inequality”. Most of the high-income jobs have vanished in Alberta, thus reducing the quantity of higher-income folks, in turn making Albertans more equal. Poorer, but… Read more »

3 years ago

Mr. Kenney’s activism is not just a good response to a $4 price drop in Albertan oil, but is certainly not the CAUSE of the drop, as it tends to provide a second path to making that product usable and thus marketable.

3 years ago

It is important to know, also, that Alberta funds much of the country’s government through discriminatory and hateful taxes on its activities.

3 years ago

Since I feel we’re all better off if we have nothing to do with the Middle East and its oil, I’m naturally a big fan of non-Middle Eastern oil production.

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