Of the many myths about the Trans Mountain Pipeline Expansion project (TMEP) project, none is more fatuous than the false hope that it will necessarily reduce British Columbians’ gas prices.
More pipe = more capacity = greater supply of light oil and refined products = lower gas prices, is their pitch, on behalf of Alberta’s tarsands producers.
Makes sense, on the surface: like skimming a bitumen slick with an oil boom.
If you really believe that pumping more tarsands crude across B.C. will reduce your gas pains, Donald Trump has a Make Alberta Great Again hat with your name on it.
Trouble is, that supply-side argument for twinning the Trans Mountain Pipeline (TMP) has a lot of intuitive appeal, like all logical fallacies.
Fighting back on that myth in theory and reality ain’t easy, but I’ll give it a layman’s go, if you have the time and inclination to entertain this long and deep dive into this issue.
If anything, the TMEP stands to increase the price the gasoline, diesel, and other refined products for British Columbians, if it serves its intended purpose.
Because the costs of the TMEP will be far greater than its proponents imagine, if and when it ever gets built.
And because the laws of supply and demand are not always what they appear at first blush.
Especially when one confuses what the TMEP is actually designed to supply with what is really demanded to help ease pressure on B.C. gas prices.
Clearly, pipeline capacity issues and B.C.’s deteriorating refining capacity have played a major role in driving up B.C. refining margins and pump prices. No one is arguing they haven’t.
But the reason that has become such a relatively more expensive problem for B.C. motorists than for other Canadians is not because the existing TMP lacks sufficient capacity to serve their needs, as such.
Rather, it is because of how British Columbians’ interests have been increasingly discounted and shortchanged by a broken free market system that gives priority to the oil companies’ vested interests in padding their profits.
B.C.’s pump problems are largely the result of the unwanted effects of unregulated supply and demand in an unstable, unduly volatile oil market that can and must be consciously corrected as part of any plan going forward. With or without the TMEP.
The West Coast’s only oil artery has been deliberately “hardened” over the years with diluted bitumen bound for export markets.
The “capacity” problem has only become acute because the “lifeblood” it was built to pump—i.e. refined products and light oil—has been slowly displaced with heavy oil, and no one lifted a finger to stop it.
That is the root cause of B.C. motorists’ heart attacks at the pumps, dizzy in disbelief as their gas bills shoot up and up.
There is no guarantee that that problem will be fundamentally alleviated by the TMEP, absent new regulatory intervention by the federal and B.C. governments.
What the TMEP will do is raise B.C. gas prices if there isn't a concerted plan to prevent that from happening.
Exhibit A: higher shipping tolls = higher gas prices
The capital costs of building that new multibillion-dollar pipeline will be repaid over several decades through higher shipping tolls for oil producers who send their products through the TMEP.
Those oil companies will recover their higher shipping toll charges, as far as possible, with higher prices for their piped products.
They, too, will want to cover their higher toll-related costs with higher gas prices.
Economist Robyn Allan pegged that added cost at about 2.2 cents a litre a couple of years ago, back when the capital cost of TMEP was estimated at $7.4 billion. A year ago, it stood at $9.3 billion.
But as she also subsequently stressed, that price will surely go up.
“By the time the expansion is built, the price tag for nationalizing the existing assets and building the expansion will cost Canadians upwards of $15 - $20 billion,” Ms. Allan predicted.
Lest we forget, Parliamentary Budget Officer Yves Giroux estimated that “the TMP and TMEP have a value of between $3.6 billion and $4.6 billion. As such, the government negotiated a purchase price at the higher end of PBO’s valuation range. PBO’s financial valuation assumes that the pipeline is built on time and on budget.”
Giroux also reported that “a delay in completing construction by one year would reduce the value of the TMEP by $693 million. Similarly, a 10 per cent increase in construction costs would lower its value by $453 million.”
The project is already delayed by at least a year and will certainly be further held up (or ultimately killed) by environmental and Indigenous rights protests and by new legal challenges.
Construction costs will obviously be far higher than originally projected when all is said and done, pushed up as well by labour shortages and new competitive realities, compounded by other huge infrastructure projects in B.C.
As D-day approaches for a decision on the TMEP, B.C. motorists deserve to know just how much more they should expect to pay in higher gas and diesel prices, just from higher toll charges on the TMEP.
It sure won’t be a very pretty penny.
I’m guessing that the structural price of gasoline in B.C. could easily rise by 3 to 5 cents a litre from those higher shipping toll charges alone.
We should all “just say no” to that. And Trudeau should commit to ensure it won’t happen, with measures I will suggest in my next article.
Exhibit B: higher prices for Albertan crude = higher gas prices
The real main purpose of the TMEP is to increase corporate profits by increasing the price of Alberta’s tarsands oil.
It stands to do that by tripling Trans Mountain’s capacity from 300,000 to 890,000 barrels per day and shipping that product to new markets that will be theoretically willing to pay more for it.
The whole point of that expanded pipeline is to sell more of Alberta’s oil—diluted bitumen and synthetic heavy crude especially—and to make others pay more for each and every barrel, including for its refined oils and lighter crudes.
Including the five refineries in Washington state that now buy a significant chunk of the dirtiest gunk, supplied by pipe or barge, and sell it back to B.C. as gasoline. About 10 percent of B.C.’s gas comes from those U.S. refineries.
Including Burnaby’s Parkland refinery, which buys its light oil feedstock from Alberta and now produces about 25 percent of B.C.’s gas and diesel.
The higher the cost to buy that unrefined oil from Alberta, the higher the price will be for gasoline in British Columbia from those refineries and from Alberta’s refineries alike.
Reducing the price discount on Alberta’s oils will only cut into the refineries’ margins if they can’t recover that entire price increase they will be obliged to pay for their feedstock.
They will want to do that by passing their higher costs along to gas retailers who, in turn, will pass those costs along to B.C. motorists via higher gas prices.
The entire rationale for the TMEP is to minimize the price discount on Alberta’s oil streams, usually focused on the price of Western Canadian Select as compared to West Texas Intermediate.
Alberta produces more oil than it can now readily export to and via the USA. That drives down prices for its diluted bitumen and synthetic crudes that are also more costly to refine.
You can read all about it in the NEB’s December 2018 report, Western Canadian Crude Oil Supply, Markets, and Pipeline Capacity.
As one expert noted, “There are 600,000 service stations in the world. There are only about 50 refineries that can handle bitumen."
Consequently, there is a limited North American market for would-be buyers of Alberta’s heavy crude, with too much supply for that demand and the pipeline capacity to service it.
With too many oil companies bidding to access that limited pipeline capacity, it creates a buyers' market that drives down prices and discounts the relative value of Alberta’s oil.
There are two ways to reverse that disparity.
One it to diversify the global export market base and to create new pipeline capacity to supply that hoped-for expanded demand. The argument for the TMEP.
The other is to curb Alberta’s surplus oil supply to its landlocked North American market.
Last December, then Alberta premier Rachel Notley ordered her province’s oil producers to cut their output by 325,000 barrels a day—an 8.7 percent production cut.
Prices immediately soared, even before those oil output cuts took effect on January 1.
Consequently, those production cuts have since been repeatedly eased, by some 150,000 barrels a day. As of this June, when the latest announced output lifts take effect, Alberta’s output will rise to about 3.71 million barrels a day.
Currently, that WCS heavy crude is worth almost $13 a barrel less than WTI oil, at just over $48 a barrel for the former, as compared to around $61 a barrel for the latter.
That’s a far cry from the $45 a barrel discount that existed last November, when WCS crude was selling for around $18 a barrel, as compared to almost $64 a barrel for WTI crude.
It represents a price jump of about $30 a barrel for Alberta’s heavy crude, give or take, mostly since Notley announced the production cuts.
Over that same period, Canadian light oil prices went up from as low as $21 a barrel, to as high as $60 a barrel—a jump of $39.
That’s the only stuff that Burnaby’s Parkland refinery can use as feedstock to produce B.C.’s gasoline and diesel, since it can’t process diluted bitumen or heavy synthetic crude.
The discount on Canadian light oil shrank from $37 a barrel on November 1, 2018, to less than $5 a barrel as of May 3, because the price of that product went up by 185 percent.
I suggest it is no coincidence that Metro Vancouver gas prices also soared from about $1.24/litre to as high as $1.72/litre since February, along with that surging price of Canadian light and heavy crude.
What has happened over the last six months should be instructive.
First, it shows that Alberta already has the ability to largely minimize the price discount on its heavy crude, if it opts to curtail its oilsands production.
[Parenthetically, someone should calculate the material side benefits in associated reduced carbon emissions for Alberta and Canada that are being realized because of those oil production curtailments. Those avoided emissions should be reflected in Canada’s national emissions inventory for 2019, to show all Canadians how even a modest cut in that fossil fuel production can help to reduce Canada’s carbon emissions, and vice versa.]
Second, I contend it suggests that when Alberta commands a relatively higher price for its light and heavy oils as compared to an also rising WTI benchmark price, British Columbians should expect to see their pump prices to also go up faster.
Because that base oil price is obviously the key determinant of the cost and margins of refining the fuels that are sold to us as gasoline and diesel, whether it is processed by Alberta’s huge refineries or by those in B.C. and Washington state.
And also because both the refineries and the gas retailers adjust their prices—without colluding, we are assured—to not only recover those higher base oil costs, but to further profit from them.
I will be shocked if the pending B.C. Utilities Commission review into gas prices that Premier John Horgan has just initiated doesn’t confirm that fact.
You think that that reality won’t also result in relatively higher gas prices if the TMEP is built and “succeeds” in driving up Albertan oil prices as the discount on its products is reduced?
That new pipeline to tidewater is even more important to Alberta’s tarsands diversified supply-and-demand plan because of the limited and potentially shrinking rail-shipping capacity.
Notley had planned to invest $3.7 billion to expand Alberta’s crude-by-rail capacity. Kenney has promised to kill that, fortunately. He rightly regards it as being too risky for taxpayers.
It would have ramped up rail-based oil exports by 120,000 barrel-a-day shipments over the next year, via an additional 80 locomotives and 7,000 rail tankers bought by the Alberta government.
It was aimed at allowing for annual shipments of over 131 million barrels of oil down the Columbia River. Thankfully, it is also toast.
To be clear, I’m not suggesting that we should all expect and demand Alberta to accept less for its oil than it might hope to receive if the TMEP is built.
Truth be known, I’m not especially fussed about paying a bit more for gasoline to the extent that it will expedite fuel switching and behavioural changes that are critical in combatting climate change.
Indeed, my opposition to that project is mainly related to the threats it poses to our marine and terrestrial habitats, to its impacts on upstream and downstream carbon emissions, and to Indigenous rights and title.
My purpose in making this argument is merely to suggest that relatively higher prices for Albertan oil most likely means higher refining costs that will lead to relatively higher gas prices.
We didn’t hear about that in National Energy Board’s Reconsideration Report on the TMEP, which waxed on about the tens of billions more it will supposedly generate in annual GDP and related revenue benefits to governments.
Exhibit C: refiners’ profit gouging = higher gas prices
Somehow I doubt we will hear Jason Kenney blaming the refineries for profit gouging, despite the persuasive historical evidence to the contrary that Navius Research flagged four years ago.
Navius found that between 2010 and the end of 2014, B.C. consumers “paid a premium of $2.7 billion for gasoline and diesel because of refinery margins [a near proxy for refiners’ profit] that are higher than the Canadian average.
“This premium corresponds to a cost of $1,500 per household over that period, or a markup of roughly 7 cents for each litre of fuel.”
Why? Because “of a decoupling of crude oil input costs from fuel prices, driven by the discount on crude oil in Alberta relative to the rest North America and the world”.
“As well,” Navius reported, “more fossil fuel infrastructure would not break the oligopoly in the refining market and there would still be less than ideal competition amongst fuel providers.”
In the Pacific Northwest, “most fuel production [is] being concentrated amongst very few firms. Even without collusion, this situation can result low competition for market share, higher margins and higher fuel prices.”
In other words, anyone imagining that the TMEP will lower the exceptionally high refinery margins in B.C. and Washington state—aggravated by the lack of competition in that region—is in for a rude awakening.
It is a problem that the Canadian Centre for Policy Alternatives' Marc Lee recently also profiled in a recent policy note.
Based on data published by the U.S.-based Kent Group Ltd., Lee found that the refining margin for Vancouver gas soared from under 20 cents a litre a decade ago to almost 55 cents in late April.
That compares to refining margins that ranged from only 18 to 32 cents a litre last month in Toronto and Calgary—a difference that is hard to account for based on pipeline constraints.
“The bottom line: Vancouver drivers are paying 20–30 cents more per litre to refiners. This translates into an extra $500–750 million per year flowing from Vancouver drivers to Big Oil for gasoline (not including diesel),” Lee reported.
That cost-driver is central to the broader concern about surging gas prices that Premier Horgan has now essentially directed the BCUC to investigate.
In his letter to the BCUC, he pointed out that the historic gap in the wholesale price of gasoline (i.e. not including taxes) between lower-priced Edmonton and Vancouver has soared from about 2.5 to 4 cents a litre in Vancouver to almost 24 cents a litre over the last couple months.
Don’t tell me that gouging is not an issue.
Will the TMEP help or hurt in that respect?
The latter, I say, at least as things stand, absent new measures to increase guaranteed pipeline capacity for refined fuels.
And even that won’t help all that much if the Horgan administration fails to capitalize on the opportunity at hand to newly regulating gas prices, so as to stabilize gas prices, to smooth price bumps as far as practicable, and to prevent fuel refineries and retailers from price-gouging.
Exhibit D: no dedicated pipeline Albertan refined fuels and light oils = higher gas prices
Complicating matters is the phenomenon known as the “marginal price of fuel”, which Marvin Shaffer has so clearly explained.
He maintains that Horgan’s call to add more refining capacity in Alberta won’t do much if anything to reduce gas B.C. prices.
Because what matters, he explains, is “what economists call the ‘marginal source of supply’—the source BC has to turn to when Alberta supply plus the limited local production is not sufficient to meet provincial requirements.”
“Because Puget Sound refiners are the marginal source of supply, they effectively set the market price. Shippers from Alberta can charge the delivered Puget Sound price, even if it is well above their own cost, because they are still competitive with the only available alternative. And Puget Sound is the only available alternative because of limited pipeline capacity for additional deliveries from Alberta.”
For all intents and purposes, Husky Energy’s 12,000 barrel-a-day refinery in Prince George doesn’t alter that equation.
It is a tiny operation that really only serves regional needs and is separately fed by the Pembina pipeline that runs from Taylor in northeastern B.C. and south to Kamloops. In any case, it may shortly be up for sale, along with Husky’s 500 retail operations.
Thus the argument for the TMEP that its proponents like Shaffer and the media’s most usual suspect expert on gas pricing—former Liberal MP and current GasBuddy.com analyst Dan McTeague—all make.
Build that pipe, they suggest, to gain new pipeline capacity for refined fuels, of which Alberta already produces plenty, and the forces of supply and demand will solve that problem for B.C.
“The new pipeline would be entirely devoted to heavy oil, but the existing pipeline would be expanded by 50,000 barrels per day," McTeague told the Globe and Mail.
In theory, they rightly argue, that could free up more space in the existing TMP to transport more gasoline, diesel, and jet fuel to B.C. And that could make British Columbians a little less vulnerable to price hikes caused by the “marginal price of fuel”.
Not so fast, the Globe’s Justine Hunter also wrote:
“Jason Parent, managing director of the Canadian fuel analytics firm Kent Group Ltd., cautions that more pipeline capacity doesn’t ensure lower prices and it may not ease supply at all.
“It’s not that simple. Trans Mountain is part of the issue, but expanding Trans Mountain is going to take some time to have an effect on the market," he said, “and there is no guarantee it actually increases the amount of space on the line for refined product.”
Here’s the problem: the added supply capacity that the TMP/TMEP will provide is not actually aimed at helping B.C. meet its demands for lower-priced gasoline.
It was never a major consideration for building that expanded pipeline.
On the contrary, the TMEP is only aimed at sending more of Alberta’s diluted bitumen, synthetic crudes, and other oil blends to whomever and wherever they will command the highest price.
Mostly, to new offshore buyers in northeast Asia, whom the oil companies hope will be willing to pay more for their products.
The space in that new pipeline is already 80 percent contractually committed to shippers.
One hundred percent of that new capacity will be dedicated for shipping diluted bitumen and other heavy crude.
Because unlike the existing TMP, that new pipeline won’t be intended to move various oil blends and refined products in batches. It will be filled with tarsands crudes.
By contrast, only 18 percent—or 54,000 barrels per day of the TMP’s 300,000 Bpd capacity—is currently subject to long-term shipping contracts.
As envisioned, none of the TMP’s capacity will be expressly reserved for added refined products, including gasoline, to reduce the supply and demand imbalance that makes B.C. so vulnerable to gas spikes.
“There is zero capacity allocated for gasoline in the Trans Mountain Expansion project. Zero,” I pointed out in a recent CBC radio panel discussion. “If the new pipeline is built there will be zero more capacity added to the existing pipeline.”
“Actually, that could be solved,” I also suggested. “Trudeau could regulate that and say what has to go through that pipe is more refined product. He’s not doing that. And that’s not something Andrew Wilkinson’s calling for.”
Happily, the next week Horgan started also driving that point home.
In question period he observed that “over the past two years, the amount of diluted bitumen coming into the Lower Mainland has gone up 11½ percent, and the amount of refined product has gone down 10 percent.”
He then started speculating about negotiating for more refined fuel capacity in the TMP as one possible action to counter runaway gas prices.
As I will argue in my next installment in the Straight, that could indeed help to alleviate supply pressures if the oil companies were essentially obliged to fill that pipeline space with gasoline, diesel, and other refined products.
I certainly agree with Shaffer that building more refineries as Horgan has urged Alberta to do is not the answer.
Vaughn Palmer rightly suggested that Horgan does his own credibility no favours with that hypocritical and disingenuous appeal, or by pointing fingers at Ottawa.
New refineries are a crazy-expensive proposition in search of business case that has no takers, with the notable exception of David Black.
Nothing makes that clearer than Alberta’s North West Redwater Partnership’s Sturgeon diesel refinery. The first refinery built anywhere in Canada since 1984.
The cost of that monstrosity doubled from $5.7 billion in 2012, to $9.7 billion by the time it was completed over a year ago. And it still isn’t able to utilize bitumen supplied by the Alberta government as its feedstock, which was its chief purpose.
It currently only runs on the partially upgraded heavy oil known as synthetic crude.
The Sturgeon experiment is costing Albertan taxpayers an estimated $750,000 a day in tolls. It will put Albertans on the hook for some $26 billion in fees to process their beloved bitumen over the next 30 years.
Some estimates put the cost of a building an average refinery at about $15 billion, without even accounting for the added costs of carbon capture technologies that the Sturgeon refinery incorporated.
Fact is, Alberta already has more than enough refined oil products to supply its and B.C.’s needs.
As Bloomberg News reported, refineries take at least five years to build and adding another one might only serve to change Alberta’s oil glut to a gasoline glut instead.
It takes several decades to recover the cost of any such investment.
That will make no sense whatsoever, if the GreeNDP’s laudable “zero-emission vehicles” vision by 2040 takes Canada by storm. That train has long left the station, south of the border as well. Building more refineries anywhere in North America is a fool’s rush to an end-line.
By the time any such new refinery could be up and running, B.C. would already be well on its way to effectively outlawing gas-powered vehicles.
Yet it is true, with or without the TMEP, dedicating a greater portion of the TMP for refined fuels in the interim could help to mitigate rising gas prices, especially if they are regulated.
In the absence of such guaranteed reserve capacity, B.C.’s limited supply of gasoline could just as easily be further pressured and/or displaced—not increased—by Alberta’s intended increased offshore oil exports.
Greater pipeline capacity will not necessarily end the practice of apportionment, whereby the oil companies’ “nominations” for oil shipments are proportionately allocated when the demand for that pipeline space is greater than it can handle.
Without some form of prescribed guarantee to reserve a slight surplus pipeline capacity in the TMP that can only be used to supply light oil to B.C. refineries and refined products to British Columbians, B.C. motorists might be even worse off tomorrow than they are today.
The oil companies will want to maximize that total new pipeline capacity to ship more of their diluted bitumen and also their refined products abroad at higher prices.
They will not hesitate to squeeze down harder on B.C. motorists to pay more for their gasoline and locally refinable light oils, if they have new options to sell those same products overseas for higher margins.
It is fanciful thinking, at best, to imagine that “added capacity = more refined fuels = low gas prices for B.C.”
That is, if the unwanted potential consequences of supply and demand in Alberta’s “brave new” dream-export world are not anticipated, prevented, and corrected by both Trudeau and Horgan.
Exhibit E: new export markets for Alberta crude and refined products = higher gas prices
As with any other product, the argument for diversifying Alberta’s oil export markets is great for the exporters and not so great for domestic consumers.
Again, it’s supply and demand: local consumers benefit from lower prices than what global markets can fetch and vice versa.
B.C. cherries aren’t getting any cheaper because they are now in demand and being exported at higher prices to China.
So it will be with Albertan oils and refined products that will become more expensive at home to feed global fossil fuel appetites abroad.
That’s not an argument to resist the TMEP, as such.
But it is a fact that runs contrary to the narrative now being fed to British Columbians about the supposed gas-price benefits that will flow from that project.
It also works in reverse, of course, for Canadian imports that have mostly become cheaper as they have displaced higher-cost domestic producers and suppliers.
But the expanded new oil port envisioned for Metro Vancouver isn’t a two-way street, as it were.
It is not intended to diversify and facilitate new capacity for gas and diesel imports, even to offset the annual price gouging that accompanies the gas supply pinches when refineries all curtail their output to conduct their seasonal maintenance and shift to different blends.
It is not intended to reduce B.C.’s exposure to price pressures imposed by refineries in Alberta or Washington state, with the potential for new imported fuel capacity.
It is not intended to afford B.C. new import supply options for meeting its refined fuel needs in the event of pipeline disruptions. Or for that matter, to protect British Columbians from new threat from The Punisher and his like in Alberta in limiting B.C.’s future oil supplies if they don’t get their way.
The expanded port is only aimed at shipping more of Alberta’s oil abroad and, if anything, increasing British Columbians’ dependency on Albertan crudes and refined products.
The more of B.C.’s light oil and refined products that proportionately come from Alberta, as the TMEP proponents urge us to embrace without any strings attached, the more vulnerable British Columbians will be to Alberta.
What future premiums might that province want to extract from our “hostage state” to help offset its mammoth subsidies to its oil producers and in meeting its financial obligations for the Sturgeon refinery or other costly experiments in social engineering?
Who’s to say that some future Albertan premier won’t want to tack on some form of new fee or excise tax on Alberta’s refined products, as a sneaky way of also indirectly raising gas taxes on their own citizens and us alike?
That, too, would increase B.C. gas prices relative to potentially sourcing new gas supplies from other markets that might create the competition needed to drive down domestic price gouging.
Indeed, the entire Pacific Coast is an isolated oil market that has few pipelines feeding its demands for refined fuels, even far south of the Canadian border.
I dare say, the biggest immediate beneficiaries of the TMEP and of the expanded new oil terminal in Burnaby will be Californians, who will gain new access to locally refined fuels that incorporate Alberta’s heavy oil.
I am certainly not advocating for increasing B.C.’s oil imports via tankers, trains, or trucks.
Although doing that would probably be less risky to B.C.’s coastal communities and marine environment than a seven-fold increase in oil tanker traffic to export so much more of Alberta’s diluted bitumen.
Which, as an oil-spill risk, would be so much more likely, more environmentally catastrophic, and more difficult to “clean up”, given how that diluted bitumen sinks in salt water under weathering.
Having said all that, there are steps that Trudeau and Horgan could take to alleviate British Columbians’ future pump pressures.
Most of them are not rocket science and many of those ideas are already being widely bandied about.
In my next article I will address those suggestions, along with a few new ideas for fighting back on runaway gas prices.