Keystone Comes A Cropper

One of the first “wins” for the Trump administration – heck, maybe it’s only win – was the approval of the Keystone pipeline. After the State Department issued the permit, Mr. Trump had this to say:

“It’s a great day for jobs and energy independence,” Trump said, calling the pipeline “incredible” and “the greatest technology known to man or woman.”

I think under hyperbole in the dictionary there is just a picture of Donald Trump but never mind that. I’ve been a skeptic of the economic case for the pipeline for a long time. I still think the Obama administration should have issued the permit but I always thought that it made little sense unless oil prices stayed high permanently. It is possible that if the permit had been issued way back when that Trans-Canada could have made enough off the pipeline while oil prices were high to make it worth the investment. But building the pipeline could have had its own impact on oil prices so maybe it would have just pushed prices lower sooner. Here’s what I wrote back in 2012 after the Obama administration rejected the deal:

Austrian economics tells us that rates held below the free market rate will distort the investment decision process, create malinvestment and destroy capital.  The current boom in shale oil and tar sands as well as the disputed Keystone pipeline would seem to fit the bill perfectly. $100 oil prices, a product primarily of expansive monetary policy and a weak dollar, have produced a false boom in what should be non-economic oil production. For now, oil can be profitably extracted from shale and tar sands and that has produced a boom in western Canada and North Dakota, among other areas. The oil producers are rushing in and investing billions in production that is only profitable at current prices. If and when we get better fiscal policy that hopefully leads to better monetary policy, the dollar will rise, oil prices will fall and the capital invested in these areas will be wasted. Just as it was the last time this happened in the late 70s, early 80s. If Keystone is built and oil falls to less than about $50, it will end up being a large empty pipe. He might have made it for the wrong reasons, but President Obama’s rejection of Keystone may end up being the best investment decision he’s made since taking office.

Okay, all of that wasn’t right; we didn’t get better fiscal policy or monetary policy but the dollar did rise, oil prices did fall and guess what? Keystone isn’t a big empty pipe – yet – but only because it still hasn’t been built. Trans-Canada is having trouble finding customers for the boondoggle on the border. From the WSJ:

Keystone XL is facing a new challenge: The oil producers and refiners the pipeline was originally meant to serve aren’t interested in it anymore.

Delayed for nearly a decade by protests and regulatory roadblocks, Keystone XL got the green light from President Donald Trump in March. But the pipeline’s operator, TransCanadaCorp.TRP -0.65% , is struggling to line up customers to ship crude from Canada to the U.S. Gulf Coast, say people familiar with the matter.

It isn’t just about oil prices. Other pipeline operators expanded existing pipelines and that potentially took away some customers. But make no mistake, in the midst of a crude oil glut, finding takers for tar sands oil isn’t easy.

Refiners want the flexibility of being able to buy oil from wherever it is cheapest. In a world awash in low-price oil, Canadian crude doesn’t look as attractive as it once did. Many refiners thus far are unwilling to commit to long-term deals for Canadian crude, say people familiar with the matter.

With the dollar falling again maybe oil prices will rise enough for Trans-Canada to find profitable customers for the pipeline. But if they do we shouldn’t cheer. Making our economic growth dependent on a cheap dollar and high oil prices is a step backward not forward. Our economy needs investments that raise productivity so everyone benefits from the growth. Think of the 1990s, a decade of innovation and high productivity growth. And then think about the first decade of this century with its weak dollar, housing bubble and $140 oil. Which one do you want to return to?

Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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Lorimer Wilson 6 years ago Contributor's comment

Calhoun mentions that after the State Department issued the permit, Mr. Trump had this to say:

>“It’s a great day for jobs and energy independence,” Trump said, calling the pipeline “incredible” and “the greatest technology known to man or woman.”

That being said, here's a link to a very informative infographic entitled "Trump Revives Canada-to-Texas (Keystone XL) Pipeline: Why?" ( that presents a crash course in:

>the need for,

>the problems with,

>and the benefits of

building the Keystone XL pipeline from Alberta, Canada through the American mid-west to the refineries in Texas.

Joseph Calhoun 6 years ago Contributor's comment

I question the very first assumption in that infographic. Unless oil prices remain high there is no economic reason to mine tar sands in Alberta. It is expensive, dirty oil. Is it economic at $45? I have my doubts. And if it isn't, there is no reason for the pipeline. Having said that, if Trans-Canada wants to build it with their own funds, let'em. If it fails their shareholders will pay the price.

Dan Jackson 6 years ago Member's comment

I agree.