When the global oil prices were soaring, West Texas Intermediate (WTI; a type of crude in the U.S.) was trading at a discount in the U.S. This changed overnight when it was declared that a pipeline, which originally was meant to supply oil to the Cushing refinery in Oklahoma, now can also be used for supplying oil to other geographies of the country. This pushed prices of WTI to $100 a barrel. However, the role of speculators, regulations, and present global market conditions cannot be ruled out as contributing factors in this development.
The Keystone XL Pipeline was supposed to bring oil from the Canadian oilfields and distribute it to various parts of America. Cushing was one of the important hubs in this entire process. To be built in four phases, the project walked into trouble when environmentalist groups protested that the pipeline may pollute the freshwater aquifer in Nebraska. Aquifer or not, many people environmentalists would find any excuse possible to oppose this pipeline. TransCanada, the company which was building the pipeline, thus decided to reroute the pipeline and still retain Cushing as one of its important hubs.
What Analysts Say
Analysts at JP Morgan were quick to revise the annual forecasts for WTI made earlier. The revised figures indicate that prices of oil in the U.S. will touch down around $110 (earlier $97.50) in 2012 while in 2013; the prices will touch $114 per barrel. This is $4 higher than the earlier estimate of $114 for 2013. Though this may be good news for commodity investors, it surely is going to affect the economic recovery. Industrial output for October 2011 in the U.S. exhibited an upward trend, but higher crude prices may prove to be a cog in the wheel and give rise to inflationary pressures. Europe is still reeling under a double-dip recession and if crude prices hover around three-digit figures, a further financial bloodbath is entirely possible.
Three Positive would be Developments
The sad thing is, this is all entirely fixable; we are doing this to ourselves. If America could obtain extra oil from the tar sands of Canada and utilize the oil that sits off its coasts, 3 outstanding and positive things would happen instantly. The first is oil prices would drop for all Americans; the second is Americans would create tens of thousands of jobs overnight; and third thing is that America would not be as dependent on Middle Eastern oil (giving money to groups/countries that are not America’s allies).
How the Reverse Pipeline would Work
The refinery at Cushing was piling up inventories of oil due to inefficient transport systems. Though trains and barges were used extensively, this was not quite enough; because of logistics, the industry was and is unable to process the oil inventory and send it to Gulf of Mexico fast enough which could lead to a fall in WTI prices. Post regulatory approvals, the pipeline can be used to transport oil to the connected locations, ending the bottleneck that was plaguing the Cushing refinery for months altogether. The pipeline is capable of transferring 150,000 barrels per day, either way.
The Key Players
The Canadian firm Enbridge, Inc., in a statement, said that it will be acquiring a 50 percent stake for a consideration of the $1.15 billion in the pipeline that currently is owned by ConocoPhillips and transfers oil from Cushing, Oklahoma to the Gulf of Mexico. Once the acquisition is complete, the company will seek regulatory approvals to reverse the flow and transfer excess oil from the refinery to the Gulf of Mexico for further distribution. Cushing primarily receives oil from the Texan oil fields. Once the refinery is capable of transporting WTI to the Gulf of Mexico, the U.S. crude will be able to derive the same price as Brent crude in the international market.
Several oil firms have bases in the Gulf of Mexico; that includes: Exxon Mobil, Chevron, BP, among others. BP is suspect for past events but the other oil companies want to safely bring more oil online for the American consumer but is having trouble doing so because of environmentalists led by actress Daryl Hannah. Enbridge, Inc. has noble intentions but the future is uncertain. If they cannot work with Americans, then they will just work with the Chinese.