Keystone XL is a proactive project.

Historically, energy prices have been highly affected and influenced by regional instability and crises in regions producing oil, especially in OPEC dominated countries. Yet, despite record levels of unrest in the Middle East, the price of oil (and the products manufactured from it) has continued to decline.

Never before has geopolitical and armed conflicts resulted in lower pricing. While soft demand has also contributed, prices have never been decoupled from world events. So what has changed?

The change can be attributed to rising North American production, plain and simple. Opponents have suggested for years that ‘you simply can’t drill your way out’ of a bad situation. Clearly, the law of supply and demand is alive and well. The facts may be stated plainly. Increased domestic and North American production inoculates the U.S. against dependency on potentially unstable, and unfriendly regimes.

While oil is still making it to market, it is doing so via less efficient means. Delaying Keystone XL has not kept oil from getting to market but it has made oil, and the products made from it like gasoline, more expensive for consumers. Even worse, it has distorted the supply chain, added greenhouse gas emissions, and increased safety risks.

Approving new, state-of-the-art infrastructure must be a top administration priority in order for our Nation to remain competitive. Transportation bottlenecks rob us all of both safety and efficiency, and should not be tolerated.

Opposition to KXL simply undermines our national security, threatens our environment, decreases safety, and burdens us all with higher prices.

Do Falling Oil Prices Change the Math on Keystone? Probably Not

Keystone XL is a long term capital investment. As such, the economic decision to proceed with it, all other considerations aside, depends on the long term outlook for oil prices and alternatives. The current decline in prices is not likely to affect the decision to proceed unless they substantially reduced TransCanada’s capital spending. Even with the steep decline in prices that have taken place this year, oil sand production is still profitable and would remain so at prices lower than today’s.

Oil prices are cyclical. They neither rise indefinitely nor decline indefinitely. Rising oil prices are an incentive to use to use less, to use oil products more efficiently and explore lower priced alternatives.

Falling prices stimulate increased demand and restrain investments in new production. The effects of both forces lead to a new equilibrium price. Todays falling prices are mainly a result of the oil renaissance in the US and lingering consequences of the Great Recession. Our economic growth is well below the levels of the prior few decades. The economies of the EU are stuck and several countries, most importantly Germany, are on the verge of another recession. China, which had experienced the largest growth in oil consumption, is experiencing its on slower growth.

Nations and consumers are still carrying too much debt which limits increased spending. Additionally, the EU is pursuing wrong-headed climate policies that have been an additional brake on economic growth. Our economic and environmental policies, along with the Obama administration’s progressive agenda, have created unnecessary investment uncertainty for business investments that would lead to broader job creation. Meager economic growth is likely to continue as a result of too much personal debt and too high real unemployment.

Under circumstances like this, producing countries normally would consider reductions in production to put a floor under prices. That is not happening now for political reasons. In OPEC, Saudi Arabia is going for increased market share to further cripple the Iranian economy and its nuclear ambitions. Libya and Iraq desperately need the revenue from oil sales to keep their economies running and fight rebels attempting to impose new governments. Russia, one of the world’s leading producers, relies on the sale of oil for most of its foreign exchange. With its economy in shambles as a result of Putin’s ambitious agenda to recreate an empire and sanctions, Russia cannot afford to reduce its production.

For the near term, there is likely to be more downward pressure on oil prices than upward pressure. So, the question is how low will they go. EIA in its latest short term outlook projects that the price of domestic crude will drop another $3 a barrel over the course of the next 12 months. Today’s low prices and tomorrow’s lower prices benefit consumers and businesses that are more energy intensive. These lower oil prices will help struggling economies like Germany, Japan, and South Korea grow more and that is a global benefit.

After next week’s election, President Obama may give the go ahead for Keystone since his slow walking has been politically motivated. That decision and the expected decision of the Nebraska Supreme Court will provide the definitive answer to the question about Keystone’s math.

A farmer may not grow as much corn next season because speculation is driving down prices, but that doesn't mean that he will walk away from the crop, that fertilizer companies will stop producing fertilizer or that manufacturers will stop building tractors. Apply the same logic to Keystone XL vs. lower oil prices and you quickly dismiss any argument against pipeline construction.

EIA.gov consistently releases reports that show the U.S. economy will continue to need crude oil for the foreseeable future. EIA.gov data also shows that the price of a barrel of oil fluctuates over time. In 2008, crude oil sold for $96.94 a barrel, four years later the price rose to $108.56. What we do know is the price of a barrel of oil will rise and fall and the U.S. economy will continue to buy crude oil.

Which brings us back to Keystone XL. Pipelines, such as the Trans-Alaska Pipeline or the Colonial Pipeline which runs from Houston, TX to Linden, NJ, are vital to powering the U.S. economy. Just as an airline or rental car company is vital for a business traveler, pipelines are critically important for an economy.

The U.S. economy does not have sufficient pipeline infrastructure, which is exactly why Keystone XL was proposed. Pipelines are the safest and most efficient way to transport crude oil. The improvements the Keystone XL Pipeline will bring to the U.S. economy should only be the beginning of construction of new energy infrastructure.

Do Falling Oil Prices Change the Math on Keystone?

At some point, lower oil prices, through their effects on oil sands development in Canada, could render the Keystone pipeline uneconomic. This would be true not only of Canadian oil sands but other oil development projects whose capital and operating costs are relatively high. It also would be true
of other infrastructure intended to transport and distribute crude oil or products. That’s the nature of a
commodity supply curve – lower prices brought about through technological change, in this case techniques to unlock shale oil, move us down the curve.

What’s happened is this. New sources of oil supply have impacted the world market, effectively
shifting the world supply curve for oil outwards, to the right. At the old world price there is too much oil relative to demand, so the world price falls. Supply is curtailed while demand is encouraged. In oil markets these changes take time, but they are underway nevertheless.

What does this have to do with Keystone? The pipeline, like rail and other modes of transport for oil sands product, are part of the oil industry infrastructure needed to move the oil to processing plants and to markets. If oil sands are outcompeted, then Keystone may not be needed either.

On its face, however, this seems unlikely. Oil sands have been in development in Canada for years, so that what matters now for most of their owners are operating costs, not capital investment. Lower
world prices may discourage some investment, but ongoing oil sands production is likely to continue for many years even at present prices.

What does this have to do with the political decision whether to OK Keystone? Not much. If the
Administration continues to delay such a decision, Canadian oil shale producers will continue to ship via rail as well as existing pipelines. They may decide to invest in more pipelines to move the oil East, if not West. Overall, they’ll be looking for less efficient ways to move their oil than were Keystone approved. That will add costs, but unless oil prices were to drop a good deal further, they’ll continue to mine and transport this oil.

Perhaps the Administration might consider an experiment. Approve the Keystone pipeline project and see what happens. If Canadian oil sands suppliers back off, the pipeline won’t be built and those who’ve been advocating it will be embarrassed. Environmentalists will be delighted and the Administration will end up having its cake and eating it too.

If on the other hand a decision to allow the line results in its coming into being, it’ll be a testament to how economic it is even with reduced oil prices, and therefore how wasteful it is not to have it. The U.S. economy can use a good jolt right about now. Why not OK the line and see if it provides one?