Who would have thought that an oil pipeline could cause so much controversy and uproar? But this is exactly what has happened with the Keystone Pipeline, an oil pipeline system that runs from Western Canada to points in Illinois, Texas and Oklahoma.
Three phases of the Keystone Pipeline system are already in operation, transporting crude oil extracted from tar sands in Alberta to oil refineries, tank farms and oil pipeline distribution centers in the U.S. It is the fourth phase that has become so controversial. This new pipeline would duplicate the pipeline in the first phase, but cut the distance between the Hardesty Terminal in Alberta and the network junction in Steele City, Nebraska , while also using a larger diameter pipe to transport this oil.
Most environmentalists and some members of Congress oppose Phase IV of the Keystone Pipeline project, claiming that it would increase carbon dioxide emissions that contribute to climate change. Last April, the Obama administration announced that the federal review of this phase of the project would be extended indefinitely.
Two New Developments
There have been two critical developments in recent months that could go a long way in determining the eventual fate of Phase IV of the Keystone Pipeline project. The first is the takeover of control of the U.S. Senate by the Republican Party, which generally supports the project.
One of the first things the Republican-controlled House of Representatives did upon reconvening in January was pass a bill approving Phase IV. The Senate will take up the issue next, with passage now considered likely. However, President Obama has vowed to veto the measure if it makes it to his desk, and it is uncertain whether there are enough votes in Congress to override the veto.
Political gamesmanship aside, the second development could have an even greater impact on the future of Keystone Phase IV: the plunging price of crude oil. Put simply, as oil prices have plummeted — and along with them, the price of gasoline at the pump — one of the major rationales for building the pipeline has become a little bit less persuasive.
This is the argument that the pipeline would help the U.S. become more energy independent, thus reducing oil and gasoline prices. With regular gasoline now selling for close to $2 per gallon in many parts of the county, this does not seem to be as high a priority as it was when gasoline cost close to $4 per gallon.
Aside from the energy independence pitch, though, is the simple economics of the project. It is estimated that the price of oil needs to be at least $65-$85 per barrel in order for Canadian oil sands production to be profitable.
One expert put it this way: “We’re in this interesting place where we have this push by Congress for the project at a time when the marketplace is telling us we don’t need this new oil. The reality is tar sands crude only makes sense in the world of expensive oil. That’s not the world we’re likely to be in in the near or immediate future.”
On the Other Hand…
However, another expert points out that while starting up new tar sands oil projects is cost-prohibitive with oil priced at $50 per barrel or lower, this is not necessarily the case for existing tar sands oil producers. They are currently producing about 2.1 million barrels of oil extracted from the Alberta tar sands every day.
In addition, conventional oil producers in British Columbia and Saskatchewan can also use the Keystone Pipeline, boosting its demand and usage. “There’s enough demand and supply fundamentals to make the economic case for the pipeline to be built ,” she said.
Also consider the fact that many pipeline customers have long-term contracts of up to 25 years, which negates the impact of volatile crude oil prices on pipeline construction. A spokesman for TransCanada Corporation, which owns the pipeline, noted that customer interest in the Keystone Pipeline project was strong when it was first proposed back in 2009 and oil was as low as $33 per barrel. He says customer interest in the pipeline remains strong even with today’s low oil prices and that there is a waiting list of customers that want to use the pipeline if and when Phase IV is approved.
Impact of Fracking
The hydraulic fracturing, or fracking, explosion is another factor that could impact the future of Phase IV of the Keystone Pipeline. For example, Rupert Murdoch recently tweeted: “Is Keystone Pipeline really good idea? Bringing lots of heavy, dirty oil across country, when fracked, cheaper, cleaner energy available.”
In early January, the Nebraska Supreme Court issued a ruling in a lawsuit that cleared the path for Phase IV of the Keystone Pipeline to proceed in that state. President Obama had cited this lawsuit as one of the factors influencing his delay in making a final decision about the project. After the ruling, new Senate Majority Leader Mitch McConnell said the President is “out of excuses” for delaying his decision any longer.
So it seems like the long political battle over the Keystone Pipeline may finally come to a head soon. The only thing that seems certain is that one side — either environmentalists or supporters of oil production — will be disappointed.