Northern Gateway Pipeline

http://www.cbc.ca/asithappens/episode/2012/09/04/the‐tuesday‐edition‐45/

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

The Northern Gateway pipeline that will transport crude oil from Alberta to Kitimat, BC is expected to double the size of the potential market for Canadian crudes (1), as it will allow the export of this oil to ports across the Asia-Pacific. The concern however, is that this will raise the price of crude for Canadian refineries.

The answer to why this will happen lies in the economics of international trade. There are essentially three players in this scenario: the Canadian crude producers, Canadian refineries (domestic consumers), and Asian or other foreign refineries (foreign consumers). As a producer of crude oil, Canada’s market clearing price of oil is lower than the world price. Once the pipeline is built, Canadian producers will be able to access foreign markets where refineries are willing to offer this higher world price for Canadian crude oil. Foreign refineries will therefore become more “attractive clients” (1) than domestic refineries for Canadian producers which will incentivize export of crude oil. Exports of oil will mean that less is available for domestic consumption. This will raise the former market clearing domestic price of crude to the world price and as a result, Canadian refineries will have to face this higher price.

1. http://www.ceaa.gc.ca/050/documents_staticpost/cearref_21799/4234/Attachment_01.pdf