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Trading Lessons

The Truth Behind the Keystone Pipeline

Commodities / Crude Oil May 05, 2015 - 02:35 PM GMT

By: Money_Morning

Commodities

Editor's Note: The Keystone Pipeline has created one of the biggest political debates of the last five years. And you're about to hear a lot more in the media as the we move closer to the State Department's final ruling on the project.

But what is the truth about Keystone? And where are the lies hidden? More importantly, where can we invest to exploit its ongoing political soap opera?


We've asked one senior energy analyst to write the following exposé on the pipeline. He asks not to be identified because this analysis is so controversial.

What you'll find in today's segment, and the two that follow, will shock you. If you want to finally know who really benefits from Keystone – and how this one single project could keep energy sector growth stagnant – then read on… 

The Keystone XL Pipeline saga should be laid to rest in the coming months when the U.S. State Department issues its final ruling on the project.

One would be hard-pressed to find a business issue that's more politically polarizing and contentious. Politicians on both sides of the aisle have used it to bludgeon their opponents, often with little evidence to support their claims.

The Planning Wrinkle That Complicates the Issue

The key issues are the long- and short-term economic effects of not only the pipeline, but the additional oil it will deliver. Over the next several days, I'll explain the true consequences of the project for jobs, energy prices, and the economy overall.

The proposed Keystone XL pipeline expansion would bring a hefty 830,000 barrels of oil per day from Canada's Oil Sands to the Gulf Coast by way of Steele City, Nebraska. The project was first proposed in 2008. Many similar pipelines have crisscrossed the American landscape since then.

But because its proposed route has the misfortune of crossing the border between the U.S. and Canada, unlike all of those other projects, Keystone must be approved by the federal government. Solely because of this planning wrinkle, Keystone has become a political football so abused that by this point its pigskin must be wearing thin.

Republicans have shouted that it must be approved for the sake of jobs, while Democrats have screamed that Keystone will essentially create no jobs, and destroy the environment to boot. They're all wrong, and I'm going to tell you why.

Real Issues Versus Political Red Herrings

Pipeline company TransCanada and its boosters on the Right claim that Keystone will create about 16,000 construction, manufacturing, and other jobs in America through direct spending. They say it will support a combined total 42,000 U.S. jobs counting the "ripple effects" it will have throughout the economy.

While these numbers come directly from the estimates in a report by the Obama Administration's State Department, you won't hear the Left mention them.

Instead, the project's hard Left opponents cite a different part of the same State Department report, which notes that on completion of the two-year construction project, Keystone XL will only need 35 permanent employees plus another 15 temporary contractors. That's a paltry sum, particularly in light of the increased environmental cost the Left asserts we will pay for burning oil from the dreaded "tar sands" of the Great White North.

I won't get too deeply into that environmental question in this piece. But say that tar sands oil is modestly "dirtier" from a greenhouse gas perspective than other crude oils. Adding the extra few hundred thousand barrels per day from Keystone to the roughly 92 million barrels of oil the world consumes each day would be a drop in the bucket. And the Left is well aware of this.

It's not that the Left really has a beef with this specific type of oil; it's that it takes issue with burning of oil at all. This just happens to be one small corner of the supply chain where the cross-border hiccup allows it to make a stand. Again, political football.

But back to economics. On their respective faces, both parties' arguments have some merit, but beneath the surface, they are not nearly as compelling as their respective proponents would have you believe.

About 42,000 U.S. jobs, you say? Great! But after two years, the construction jobs will be gone. Some of the components of the pipeline have already been manufactured, so whether the pipe actually gets laid, for those workers, is sort of moot.

And a large chunk of the jobs credited to Keystone are only "supported" by the project (rather than "created" by it – in other words, the jobs already exist). So basing the argument for the pipeline largely on that estimate of job creation is somewhat intellectually dishonest. That said, construction work is inherently project-based, and many workers in that sector are used to moving periodically from job to job and even location to location. So long as the jobs keep coming, it's all gravy, at least for the construction portion of the total, which is expected to come in at around 4,000 jobs.

Meanwhile, it feels absurd that the Democrats have latched onto that "35" number and are pretending that a project that is expected to contribute $3.4 billion to the U.S. economy during its construction will not result in added job creation, or at least security, in the Gulf Coast refinery complex. Not to mention, there should be some additional permanent job creation from some of those ripple effects in the broader economy along the way.

So up to this point, where does that put us? Somewhere between 42,000 and 35 jobs? Split the difference and call it 21,000? The truth appears to lie somewhere in the middle. So disregarding arguments about environmental impacts and looking purely at economics, it seems the answer should once again be "Great! Sign me up!" Unfortunately, not that this has been simple so far, but things are not that simple. Times have changed – and in the next installment, I'll explain how.

In Part Two of our insider's analysis of Keystone, the author addresses the positive – and negative – effects of cheap oil on the Keystone project, and the economy overall.

Source :http://moneymorning.com/2015/05/05/the-truth-behind-the-keystone-pipeline/

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