Warm Up Assignment

Warm Up Assignment, September, 2012

“Why will the creation of the Gateway pipeline from Alberta to Kitimat BC will raise the price of crude oil for Canadian refineries?”

At first glance it may seem that creating a new pipeline in Alberta leads to more oil supply and as we all know, an increase in supply leads to lower prices. However, according to Gil Mcgowan, President of the Alberta Federation of labor, this is not the case.

On their website[1], Enbridge claims that the creation of the pipeline will allow Canada to access the growing Asian economies. Canadian producers would then have access the “Asian” premium. In an interview with CBC’s As It Happens[2], Mr. Mcgowan states that Asian nations, mainly China, are willing to pay more for crude oil. He argues that allowing Canadian producers to access the “Asian” premium will result in higher prices here in Canada.

Mr. Mcgowan further argues that adopting the higher “Asian” premium price of crude in Canada would lead to a long run increase of oil prices for refineries and for all of us. Assuming most Canadian Producers will adopt this higher price, Canadian refineries will be competing with countries that are willing to pay more for crude oil leading to less supply locally resulting in higher prices.

In a nutshell, the creation of the Northern Gateway pipeline on its own will not increase prices of crude oil for Canadian refineries. It is the fact that they plan on redirecting the crude to Asia where they are willing to pay a higher price that will increase the feedstock cost to Canadian refineries.

[1] http://www.northerngateway.ca/economic-opportunity/benefits-for-canadians/

[2]Sept. 4, 2012 Part 3 http://www.cbc.ca/asithappens/episode/2012/09/04/the‐tuesday‐edition‐45/

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