Sometimes when you connect three dots, the line you get is not what you expect. In this case, the line is Keystone XL pipeline. This pipeline's primary purpose is the unexpected; it may not help energy prices.
The first dot is the political posturing over the proposed pipeline. Much has been said about the benefits and costs of this huge project, as if this were the first pipeline to cross the Canadian-American boarder. Keystone XL is actually an expansion and an extension of an existing pipeline, the Keystone Pipeline. "XL" might mean supersize or just "extra large."
According to TransCanada (TRP), the existing Keystone Pipeline is a 3,460-kilometer pipeline that transports crude oil from Alberta to markets in the U.S. Midwest. The Canadian portion of the pipeline runs from Hardisty, Alberta, east into Manitoba, where it turns south and crosses the border into North Dakota. From North Dakota, the pipeline runs south through South Dakota and Nebraska. At Steele City, Neb., one arm of the pipeline runs east through Missouri for deliveries into Wood River and Patoka, Illinois; another arm runs south through Oklahoma for deliveries into Cushing, Okla. Deliveries to Wood River and Patoka began in the summer of 2010, and deliveries to Cushing began in February 2011. The pipeline currently has the capacity to deliver up to 590,000 barrels per day.
The Keystone XL Pipeline is similar. One leg also originates in Hardisty, Alberta, and connects to the existing Keystone pipeline at Steele City, Neb., but takes a shorter and more direct route. This leg is the only piece of the Keystone system that is controversial.
A second leg is of the proposed Keystone XL Pipeline is known as Cushing MarketLink. It originates in Cushing, Okla., and terminates in Nederland, near Port Arthur, Texas. It does not require the approval from the U.S. Department of State, and it is ready for construction.
The second dot is Texas. Port Arthur is undergoing an economic boom. Billions of dollars are flooding the area to expand refineries and build export terminals. Motiva Enterprises, for example, invested $10 billion to expand its refinery to increase capacity to 600,000 barrels per day, making it the largest refinery in the U.S. and one of the top 10 in the world. (Motiva is a joint venture between affiliates of Royal Dutch Shell (RDS.A) and the Saudi Arabian Oil Company). Valero Energy (VLO) recently completed an $800 million expansion at its Port Arthur facility. And Total (TOT) completed minor upgrades in 2006 in its Total Port Arthur Refinery.
Houston is joining the party. A short leg is also proposed to connect the Keystone XL Pipeline in Liberty County, Texas, to Houston's refineries. This link would also be outside of the purview of the U.S. Department of State. This short leg would compete with another: Enbridge's (ENB) $2 billion pipeline, which will run from Cushing, Okla., to Houston.
So, here is the big picture for the first two dots. Keystone's entire pipeline system and, to a degree, Enbridge's proposed pipeline system, are designed to move Canadian oil to major refineries in Texas. Most of the companies involved are foreign-owned entities.
The third dot was discussed in my March 9, 2012, article, "The Road to Energy Independence." In that article, it was reported that, for the first time since 1949, the U.S. has become a net exporter of refined products, including motor gasoline, diesel, jet fuel and kerosene.
Connecting all three dots gives us a pipeline that will provide thousands of construction and permanent jobs. It will also provide a tax base for dozens of states and hundreds of counties. On a global basis, it will have negligible environmental impacts; if U.S. refineries don't consume Canadian oil, somebody else will.
Connecting all three dots also gives us pipeline systems that will likely increase exports and improve the nation's balance of payments.
On the other hand, if a politician or a special interest group claims these pipelines will automatically lower retail gasoline prices, you're being lied to. If the U.S. is exporting refined products at an accelerated pace at the same time that gasoline prices are increasing, adding more pipeline capacity to exporting refineries does not necessarily mean consumers will benefit. There is no concrete evidence that new pipelines from Canada will lower retail gasoline prices.
Keystone and Keystone XL do provide the U.S. with additional energy security. But they do not lessen the West's need for oil from the Middle East. Economies are linked together, so thinking that these pipelines are a material solution to West's challenges in the Middle East is a mistake.