Approve the Keystone XL Pipeline for what’s ailing the oil industry and consumers alike
February 24, 2014
February 24, 2014
I don’t understand instant replays. If we just saw it, why do we need to look at it again and again and again? Then, to break the monotony, let’s look at it in reverse angle, slow motion.
In ten of the last eleven years gasoline pump prices begin to start their painfully predictable climb every mid-February. This is much to the horror of the consumer and morbid delight of the media, which of course reports on the stories that affect consumers most.
This year will be no exception, but the prices may be exceptional. There are nine reasons for price changes at the rack, and at the pump, some or all of which can come into play at any time.
There are three in play causing all sorts of problems right now: the weather; the Loonie and politics. This is “normally” the time of year when the refining industry goes into planned maintenance mode. This means that “normally,” this is the end of the heating oil season when inventories are usually sufficient to carry us through the balance of the winter. The shutdowns allow for the refining industry to re-tweak their facilities to process a higher yield of gasoline for the driving season, which starts at the end of May.
The problem is that this has been an abnormally cold winter for the mid-west and eastern portions of both Canada and the U.S. This has driven down inventories of diesel/heating oil, as well as propane, to well below their five-year averages with the obvious result on prices.
So serious is the inventory situation that diesel futures prices are actually influencing the WTI crude price, whereas they are not usually intertwined.
So the price of the refined products are high, and we are paying with the Loonie, which is performing a Kamikaze death spiral. A year ago the exchange rate was at virtual par to the USD at 0.9930. Today we are looking at an 8% drop to 0.9130. This means that when WTI crude is posted at $102/bb it costs us $112/bbl as all crude is transacted in U.S. funds.
The oil companies are creatures of habit as they are under the scrutiny of their shareholders. The profitability of the refining of crude into gasoline and diesel is termed the crack spread, which is the difference between the cost of crude and the wholesale prices of the refined product. When we compare last year to this year, the cracks on diesel are negligible.
But when we look at gasoline, we have a looming problem.
In order to maintain the gasoline crack, and in consideration of the flightless Loonie, rack and pump prices will have to increase by 8-to-10-cents-per-litre over the next six weeks.
Diesel prices will be dependent on a positive turn in temperatures, and should this occur then wholesale prices should retreat by about five-cents-per-litre over the same period.
The lack of supply infrastructure, meaning pipelines, falls directly on the desk of President Barak Obama.
With the release of the latest environmental impact study on the Keystone XL pipeline, the only excuse for further procrastination is not scientific, it’s political.
This was evident in President Obama’s meetings with Prime Minister Stephen Harper and Mexican President Enrique Pena Nieto in Toluca, Mexico last week, where the media replayed the one-day meetings, citing that they were obviously strained because of Obama’s indecision.
But I guess Obama makes up the rules as the years roll along. And they just keep on rolling.
~aka, The Grouch
Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada. All posts by Roger McKnight