The Northern Gateway Pipeline from Alberta to Kitimat will send Albertan oil to the Pacific Rim, in which the largest market in the current discussion is China. In a simple exercise in supply and demand, this will raise the price of crude oil for Canadian refineries, and lower the sale price realized in Chinese sale of Canadian crude oil, according to Gil McGowan, President of the Alberta Federation of Labor, in his interview with CBC’s Carol Off (“As It Happens, The Tuesday Edition,” 4 September 2012).
Canadian oil producers are currently attracted to selling crude oil in China because of the “Asia premium,” higher prices on crude oil sold in China in particular, presumably even with transportation costs under consideration. This would reduce supply for Canadian refineries and processors, therefore raising the domestic sale price of domestic crude oil. These higher raw materials costs will mean higher production costs and likely lower employment rates in the Canadian oil processing and refining sectors.
Although it seems counterintuitive that exporting Canadian oil can lower profits in both domestic and international markets, the global market is a fascinating circus, as always. McGowan also explains that the Saudi Arabian oil producers who currently supply most of China’s oil can readily lower their prices to compete with the Canadian oil at “Asia premium” prices, therefore eliminating that Canadian premium and reducing profits.
One reply on “Gateway to domestic price hikes”
Hi Annie,
It really seems that the Gateway pipeline would be costly for the local refineries because of a higher production cost which results from reduction of raw materials and a higher price. It is estimated that over a 35-year period, the higher prices for crude oil feedstock would cost refiners in Canada about $12 billion (Edmonton Journal Sept. 5, 2012). And, also Canadian refineries will be forced to carry the additional cost because of pressure to sustain competition with gasoline imports.
http://www.edmontonjournal.com/business/Enbridge+questioned+about+pipeline+projected+economic+benefits/7196352/story.html#ixzz25q05xUwc
Although it is said that the additional cost on Canadian refineries has been included in the forecast, indeed, there is no guarantee that prices for crude oil will remain high and Asian market will continue paying “Asian premium” since there are other suppliers of feedstock in the world market.