Keystone XL pipeline approved! West Texas Intermediate and Brent spread falls to lowest in years! April Fool’s. Just kidding. What’s that? Not so funny?
I have a very finely tuned sense of humor — actually I find just about everything funny, so I understand if my hilarious commodity or Cam Jansen jokes go over your head.
Keystone XL? What’s that? A new extra−large can from that beer company with — always smooth — Keith Stone? Nope! Just a big pipe. Well, not just a big pipe, it’s one of the largest oil pipelines in the world, running from Alberta, Canada, to the Gulf Coast of Texas.
The current Keystone pipeline, a joint venture between TransCanada and ConocoPhillips, was completed in 2011. The pipeline currently carries roughly 500,000 barrels of crude oil a day from Canada’s oil sands facilities in Alberta to the crude oil hub of Cushing, Okla.
The “XL” extension would run from Cushing to seaports in Texas and would allow the glut of domestically produced oil to be shipped overseas more easily. You might be thinking “Hey Walt, aren’t gas prices already, like, really high and stuff? Why ship out our oil?”
Well, you’d be right — so here’s the fun part. The majority of the world operates on two standards of crude oil: Brent and WTI.
WTI refers to oil produced in Texas, but is used as the pricing benchmark for all domestic oil. After being pumped out of the ground at wellheads across the U.S. and Canada, the oil travels to Cushing, Okla., a town of 8,000 people and 30 million barrels of oil.
Brent crude, named for the Brent oilfield in the North Sea, does not have a central hub. Instead, Brent floats on tanker vessels that carry more than three million barrels of oil, allowing them to, theoretically, be delivered anywhere at a moment’s notice. Brent is used as the benchmark for pricing almost all overseas oil, from Russia to the Middle East.
Brent and WTI traded closely together for years; they are essentially the same grade of oil, so it made sense that their prices only differed by the higher delivery cost of Brent to the United States.
Yet as domestic oil production rose and demand fell, oil began piling up in Cushing and the market became depressed. Soon Brent traded at a $20 premium. You may be asking yourself, where is Cushing, Okla.? The short answer is that it’s in the middle of nowhere. Actually, that’s the long answer, too.
Cushing is the pipeline hub for WTI because of its location. Cushing links oil producers on the Gulf Coast with distribution points throughout the U.S. Thirty years ago, this made sense: The U.S. was hungry for oil and Cushing represented a midpoint with an established pipeline network. But now Cushing can’t get rid of its oil fast enough.
Enter the Keystone XL pipeline. With domestic oil production at its highest level since 2003, the U.S. can afford to ship out its excesses. Establishing a pipeline between Cushing and the Gulf Coast would put WTI closer to Brent’s level of deliverability.
The idea sounds like a win−win. Increase domestic oil production and ship out the excess at a more competitive market price. But like most oil projects, there are severe ecological effects that could come out of the Keystone XL’s construction. President Obama rejected the proposal earlier this year, stating that his administration did not have enough time to consider its environmental effects.
The oil needs to go, plain and simple. Cushing is no longer a viable hub for our nation’s supply. Gas prices would not instantly drop $2 if the pipeline was built, but it would be another step toward getting ourselves off of foreign oil. Isn’t oil fun?
Walt Laws-MacDonald is a freshman who has not yet declared a major. He can be reached at Walt.Laws_MacDonald@tufts.edu.