After a review period of seven years and counting, President Obama formally rejected the controversial Keystone XL pipeline proposal. The President declared that the project was not in our national interests and that approval would undermine the US positions on addressing climate change.
In a previous article, we wrote about the political challenges facing the pipeline. Environmentalists had been after the President for years to finally take a stand and kill the project, but ultimately the hurdle that did the most damage to Keystone XL was not environmental or political, but economic.
The primary goal of Keystone XL, Phase IV of the pipeline project, was to provide a path for the oil extracted from the Alberta tar sands and the North Dakota oil fields to refineries and distribution centers throughout the US. When oil prices were above $100 per barrel and gas was near $4 per gallon, there was considerable economic incentive to extract the oil and bring it into domestic refineries to maintain energy independence. By the time the plug was pulled, oil had dropped to the $40 to $45 per barrel range, below the $65 per barrel range that makes the more expensive tar sands oil profitable to extract.
Currently, prices have dropped again, as the market is flooded with oil from oil-dependent nations such as Russia and Venezuela, as well as Saudi Arabia and the OPEC nations trying to drive the more expensive fracking operations out of business. A sanction-free Iran is cranking up supplies, further depressing the market. It simply is less economical to go after the tar sands oil at the moment.
Environmentalists see this development as a clear victory in the battle against climate change. Oil from the Alberta and North Dakota fields are "dirtier" in that it takes more energy to extract the oil compared to traditional drilling methods. However, this victory is arguably more symbolic than tangible.
While oil prices are expected to stay low through at least 2016, nobody seriously believes that oil prices will stay at around $30 over the long term. At a certain point, oil prices will rise enough to make the tar sands oil more profitable, and the same battles will rage over a refilled Keystone pipeline or a different oil transportation project. Despite the hopes of environmentalists, the Canadian and North Dakota oil will continue to be extracted.
The Wall Street Journal quoted a senior State Department official as saying that the Keystone XL pipeline decision will not affect oil production significantly, including the Canadian tar sands oil. The Canadian economy needs the revenue and will continue to set up the infrastructure to extract and ship the oil, whether it is to the US, China, or elsewhere. As it is, Canada is the largest supplier of foreign oil to the US market at 43% of total imports.
Further, one can make a strong argument that rejecting the pipeline actually harms the environment. Initial State Department analysis had concluded that Keystone XL would not significantly add to greenhouse gas emissions, and the nearly 830,000 barrel capacity of the pipeline must now be moved by truck or rail — obviously contributing more greenhouse gases than a pipeline.
TransCanada, the Keystone applicant, must now decide whether simply to write off the $2.4 billion it has spent so far and abandon the project, or wait and restart the application process with a potentially friendlier administration after the next Presidential election. For now and in the near future, Keystone XL is dead — but a shift in the political winds or the eventual rise in oil prices may bring it back from the grave in the future.