The Ultimate Fate of the Keystone Pipeline
Yesterday the Obama Administration decided not to approve the Keystone XL pipeline.
This has introduced another political firestorm into an already uncertain market.
If there is one subject that is likely to stimulate more angst over economic recovery prospects, it is the availability of energy.
Energy is central in everything that happens in the U.S. market.
And Keystone is designed to transport up to 700,000 barrels of oil a day from Alberta to refineries on the U.S. Gulf coast. It represents a new North American-centered initiative to lessen reliance on Middle Eastern imports and would create thousands of new jobs.
It also would create new opportunities for investors.
But the pipeline has had its detractors from the beginning.
Environmentalist Concerns Reign
Environmental concerns have been raised over the greenhouse gas emissions and passage of the pipeline through ecologically sensitive areas.
It is also opposed by those who view the current condition of virtually guaranteed crude oil price increases as an opportunity to invest in alternative and renewable energy technologies.
Some of the environmental issues can be resolved by simply moving the pipeline route.
But others are more difficult to counter.
The crude involved is very heavy oil, primarily from the Athabasca oil sands and similar deposits in Alberta and Saskatchewan. That raw material requires upgrading to synthetic oil and that is far more environmentally invasive than processing lightweight crude.
Therefore, proponents of the pipeline can't resolve environmental concerns simply by changing the route.
And then there is the added problem of a current U.S. statute, namely, §526 of the Energy Independence and Security Act (EISA) of 2007. This prohibits federal agencies from procuring (which includes importing) synthetic fuel unless its life-cycle greenhouse gas emissions are less than those for conventional petroleum sources.
The “life-cycle” considers the GHG emissions throughout the extraction and processing of the oil – that is, from the time it is taken out of the ground, through its transport and upgrading, to its delivery to a refinery (and its emissions there).
When originally passed, this section was designed to benefit domestic American producers over the import of heavier and higher sulfur content foreign oil. It was never intended to create a problem with our neighbors to the north.
Unfortunately, we sure have a problem now.
The Future of Canadian Imports
Whether Keystone XL is ultimately approved, Congress must change this legislation or the Alberta oil flow into the Lower 48 is not possible by statute.
But this is hardly the only matter that will put the pipeline issue squarely back into the center of the ideological divide that is Congress. In fact, the primary political impediment to the pipeline acceptance has actually resulted from actions pushed forward by project supporters.
The environmental vote is an issue in an election year, one which favors Obama.
Yet the pro-pipeline support is also being gauged as a political tool in a protracted campaign season by those on the other side of the aisle.
To put pressure on Obama, and require a decision prior to the election, Congressional Republicans insisted upon a presidential decision within 60 days.
The intent was for the White House to turn it down before the high-campaign season begins, thereby providing fodder for the Republican attacks on sacrificing U.S. jobs and economic stimulus.
Here's the problem with the strategy.
Everybody understands that the required environmental evaluation cannot be done in so short a time. It provided the president a reason to reject Keystone while still saying (as he made a point of doing with Canadian Prime Minister Stephen Harper) that the project could be accepted later.
By making a political move focused on the elections, the Congressional Republicans have allowed Obama to take the high ground with both the pro and anti pipeline camps… while not actually having to make a final decision on anything.
The Fate of Keystone XL Will Come Down to This
The environmental impact assessment (EIA) will conclude that, according to current law (§526 EISA), the crude flow and its processing exceeds allowances.
That then sets the stage for a compromise on changing the law.
The ultimate decision on Keystone will depend on the price of crude.
Oil prices are going to increase. Assuming the EIA after the revision in law provides no impediment, primary environmental opposition will have no substantive basis upon which to proceed.
Ultimately, Keystone will receive approval… regardless of political machinations inside the Beltway.
When that happens, I'll be sure to let you know how it will affect your investments.