Facing growing political and environmental opposition in the U.S. to the proposed Keystone XL pipeline, Canada's landlocked options for exporting its oil have never appeared more costly.
Not only has deadheaded oil in Cushing Oklahoma, the present terminus of the pipeline, put a crimp on expansion plans in the oil sands, but the ballooning price spread between West Texas Intermediate (WTI) and world oil prices has cost Canadian producers more than $1-billion a month in lost petro-dollars.
It's not U.S. motorists pocketing the difference at the pumps. Midwest refineries have been quick to recognize a gift horse when it is staring them in the face.
The only thing bigger than the gap in oil prices between Cushing (where WTI is priced) and the Gulf Coast is the gap in refinery margins. Refinery margins, or crack spreads as they are known in the oil industry, refer to the price difference between what refineries pay for their feedstock (crude or bitumen) and the price they charge for the products they, in turn, sell such as gasoline or diesel.
While refineries in Cushing pay WTI prices for their feedstock, refineries 400 miles south pay about $20 per barrel more for Light Louisiana Sweet, which like all fuels heading into U.S. ports, trades at or near the Brent-based world oil price. Incidentally, those prices have been in triple digit territory since the beginning of the year.
That is a great deal for the refineries in Cushing that get a crack spread of around $25, compared to a spread of about $5 for those that have to pay Brent-type world oil prices for their fuel.
But for Canada's oil patch, which exports more than two million barrels a day to the U.S., the $20 or more price discount that has prevailed all year amounts to $40 million a day, or about one and a quarter billion dollars a month in lost petro-dollars.
I bet shareholders of Canadian oil producers, not to mention provincial and federal governments in Canada, would like to see their share of the rich crack spread that mid-western refineries are getting on their Canadian feedstock.
Without pipeline access to the Gulf, or to the Pacific to supply Chinese customers, Canadian oil producers get what Midwest refineries will give them. And that's a huge discount to what the rest of the world will pay, including U.S. refineries along the Pacific, Atlantic or Gulf coasts.
It doesn't make sense for Canadian oil to flow to the market that values it the least. If Canadian oil exporters can't get to world prices through the proposed Keystone XL pipeline to the Gulf of Mexico, they must find another route for their oil to flow.