Editor’s Notebook: The Lessons Of History

January 2015, Vol. 242, No. 1

You have to appreciate history, for it tells no lies and whether we like it or not, it tends to repeat itself.

Last month I recalled how the Saudis ramped up production 30 years ago with the backing of the Reagan administration in order to wreck the Soviet economy though it also did long-term damage to the U.S. oil industry. With crude prices in the $55 range (as of Dec. 18), motorists are delighted but nerves are on edge in Texas and other regions where the economies depend on oil and gas production.

Now the Saudis are at it again. They are loath to cut production, preferring to play a game of chicken with the U.S. producers who have flooded the market with shale-driven crude. The Saudis have patience born from past experiences and knowing they can survive on $40-$50 oil while most U.S. producers cannot, especially those involved in unconventional and costlier sources like shale.

U.S. producers helped create this dilemma with their “drill, baby, drill” strategy. Nobody stands in their way of selling $100 oil. As with any commodity, there is a supply and demand balance. With American oil flooding the market as many economies are sputtering, that balance is out of whack.

So, that naturally brings us to the Keystone XL Pipeline. I remember talking four years ago to a harried PR guy from TransCanada who was worn out from the physical and emotional toll the project had already taken on him and his staff. They, like many others from TransCanada, eventually left for calmer pastures.

With slumping prices, questions have arisen about the project’s worthiness. In what may have been an ominous signal, TransCanada announced in November the estimated cost of the cross-border pipeline had doubled to $9 billion. Although Canada’s economy is heavily tied to oil sands production, there is a question at what point this remains profitable.

A spokesman for TransCanada insists that producers still want the pipeline because they plan for the long term. I beg to differ. Other than the majors, which do plan long term, independent producers want to get their product to refining and marketing centers as cheaply and quickly as possible and many have already found that rail fills that need. It’s not a perfect solution but they don’t care because the logistical and safety issues are the railroad’s responsibilities. That preference for rail led Enterprise Products last month to cancel a crude oil line from the Bakken to the Gulf Coast.

None of this is stopping the Republicans from making passage of Keystone XL their top priority, as Senate Majority Leader Mitch McConnell has vowed. Let’s think about this: other than fulfilling an inflated campaign pledge, what does he really expect to accomplish? Until a local siting decision is reached by a Nebraska state court – which is expected shortly – President Obama won’t even consider approval.

What happens if the court rules in Keystone’s favor and Obama has to finally decide yes or no? Do the Republicans secretly hope he’ll say no, and by doing so provide TransCanada an excuse to back out of the project while also handing the GOP more political fodder against that “job-killing” administration? But how foolish will they look if 1) they override his veto and TransCanada backs out, or 2) he says yes and TransCanada then has to decide whether to move forward?

It seemed Obama was in a no-win situation with Keystone. Now it’s subtly changed and Obama can play his own game of chicken. He owes no political debt to anyone; if he says yes, it will be after he gets something in return while telling his backers that he waited till all the i’s were dotted and t’s crossed. In the back of his mind, he might be saying, OK, you want it, you got it. Now let’s see if you still want it.

Back to history. Sometimes long delays are beneficial. The Mckenzie pipeline would have cost billions to bring gas south from the Northwest Territories. After six years of debate which saw the estimated cost rise from $3 billion to $16 billion, it died. The Alaskan gas pipeline would have cost over $20 billion to bring gas into the Lower 48. It too languished for years but with the advent of shale would have proven an enormous waste of investment.

TransCanada was heavily involved in both projects and remains active in a vastly revised Alaskan scheme. Keystone is just a small part of its portfolio, so from a business sense it wouldn’t shock me to see TransCanada walk away.

Let’s just hope they don’t.

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