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. Today’s 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.

This article appeared on the National Journal’s Energy Insiders weblog at http://disqus.com/wokeefe/

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