Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
Editor’s Note: Our energy industry insider – who for professional reasons must remain anonymous – yesterday explained how the Keystone XL Pipeline debate is largely a political football. Today, he advances his controversial expose of Keystone in the context of today’s cheap oil, and whether the project would do more harm than good. This shows how energy investors should position their portfolios to reap the best returns at the lowest risk.
To understand the logic behind the Keystone XL pipeline requires a trip back in time. When Keystone and its associated 830,000 barrels of oil per day were announced in 2008, U.S. crude production was at lows generally not seen since 1950 – right around 5 million barrels per day. Meanwhile, U.S. oil imports were rampant, near their all-time highs of 10 million barrels a day. Worse yet, over half of U.S. imports, again a near-record high of 5.6 million barrels per day, came from countries that don’t like us very much (i.e., OPEC).
In a nutshell, the U.S. oil and gas industry was in decline, without much hope for a real renaissance. We were meeting a whopping two-thirds of our appetite for oil with imports, and over half of those imports were coming from potentially unstable if not outright hostile nations. In that context, Keystone looked like a great idea.
Decisions based on these assumptions – such as the decision to green-light Keystone – seem in retrospect to be perfectly reasonable. Unfortunately for the project and the economy at large, the energy industry has since changed dramatically. These changes have altered the project’s consequences for everyone.
A Solution Looking for a Problem
New technology innovations that were starting to reinvigorate natural gas drilling in the United States turned out to be equally applicable when drilling for oil. The shale boom soon hit the oil patch, and we drilled – boy, did we drill! While the Keystone pipeline has sat in regulatory limbo, U.S. production has skyrocketed over the past five years or so – as of last count we are at more than 9.3 million barrels per day, nearly double U.S. production back in 2008. This is a level not seen since the oil heydays of the early ’70s.
This production boom has managed to squeeze out some of those imports. Total imports are now down to 7.1 million barrels per day, less than three-quarters of what they were in 2008.
This near doubling of U.S. production has also had a huge economic impact, pumping billions of dollars in capital investment, equipment demand, and jobs into an economy that was otherwise mired in an extremely sluggish recovery from the Great Recession. The exact degree to which the oil and gas industry has helped America claw its way out of recession is debatable. But the evidence is strong that its impacts have been powerful.
A recent study by the National Association of Counties looked county-by-county across the nation to measure the degree of recovery from the Great Recession. The study found that just 65 counties nationwide had fully recovered, and roughly 60% were in Texas and North Dakota, the home of some of the most prolific oil shale in the country. The industry has once again become a significant part of the economy, amounting to a near-$1.2 trillion-dollar-per-year industry representing over 9 million permanent jobs.
Unfortunately, these fat years for the oil and gas industry are now facing daunting headwinds in the form of a massive oil glut. The production surge I just laid out has been great for American energy independence, and also for a time has reinvigorated important sectors of our economy, in addition to positive ripple effects for retail and other tangential sectors in boom towns in North Dakota, Texas, and elsewhere. But America’s refinery and petrochemical base is simply unequipped to process this tidal wave of oil fast enough.
If you look at crude storage in the United States over the past several months, particularly in the pivotal Gulf Coast and Cushing, Oklahoma, crude storage regions, you might as well be looking at the much-touted hockey stick chart. These regions play home to the vast majority of our country’s storage capacity, and they also have the most impact on the U.S. crude price benchmark, WTI.
An Embarrassment of Riches
The Gulf Coast is America’s factory for gasoline, diesel, and most of the other things we make using oil. There is plenty of storage nearby for use as needed. Now think of Cushing as the reserve fuel supply. The town consists almost entirely of miles and miles of huge storage tanks, and recent pipeline expansions have connected the two points extremely well.
Cushing became jammed up to record levels a few years ago, but it was no big deal, because at the time Gulf Coast storage was comparatively low, so that regional glut was able to eventually work its way down to the Coast, being drawn down as needed.
Today, Cushing has once again glutted, surpassing even the record levels of 2013, except this time Gulf Coast stocks are also at all-time highs. This imbalance between supply and demand forced U.S. crude prices to implode, falling nearly 60% from their highs last June and marking the biggest crude sell-off since the Great Recession. While prices have stabilized for now, most experts expect U.S. storage capacity limits to be heavily tested in the coming months, and if Cushing is capped, the bottom is likely to fall out of oil prices yet again.
This massive oil price decline has worked wonders on the price of gasoline, and the common wisdom would suggest this is doing great things for the economy. So what’s the problem? While the jury is still out on what cheaper transportation fuels will mean for America in the longer term, there are two dynamics that are casting doubt on the trend as an additional spur for the economy going forward.
First, the huge oil price drop has made drilling in most of the country uneconomical, and is gutting the oil and gas industry. Recall that the advent of the shale boom for oil roughly coincided with the worst of the depths of the Great Recession, and that the U.S. has averaged moderate to low single-digit growth since emerging from the downturn. On the whole, the CME Group’s chief economist estimates that the shale boom has added between one half and one percentage point to GDP growth per year.
Playing those numbers against the backdrop of the moderate recovery suggests that on average from quarter to quarter, the industry may have accounted for anywhere from 10% to as much as the entirety of U.S. GDP growth. During the boom, the industry created hundreds of thousands of jobs (oil hub Houston alone added 100,000 new jobs every year since 2011 according to the University of Houston), and it is fair to say that this was an integral part of speeding America’s recovery.
This growth has now rapidly deteriorated and reversed — as of the end of Q1, independent oil major producer Continental Resources calculates sector-wide industry job losses at around 91,000 jobs cut since December. Given that we are still in the early days of the new price paradigm, additional damage to the industry is very likely. Moody’s estimates that net losses in the U.S. mining sector — which includes oil and gas — will come in at 37,000 more jobs lost over the next two quarters, although about half of that sum is expected to be recouped by early next year.
"Okay, that’s awful," you might say, "but doesn’t the broader benefit of cheap gasoline to the economy as a whole more than make up for that damage?" Not necessarily…
I find it interesting that you are unwilling to identify your guest contributor. Obviously he's a Democrat.
i am saddened to hear the people say both that the oil is damaging USA and at the same time is helping it.
i the keystone pipeline is a good idea and i think exporting our oil is a good idea
For a moment I thought the author inderstood the term "energy security". However in the summary he indicates complete ignorance in this critical area. To be clear energy security is buying oil from freindly secure sources or producing oil ourselves.
The key point is that bringing in 1,000,000 barrels oil from friendly Canada doesn't add more to the storage glut, it allows us to buy less oil from dangerous countries and the MiddleEast.
If the author and President Obama had their
Interests of this country … "Energy Security" … ahead of their liberal agendas this pipeline would be underway and we would be one step closer to energy security.
Our mystery writer does not mention that the U.S. cannot now export petroleum. Our next President will hopefully have more understanding of business and international trade than the current one.
"Cheap gas means people should be spending more on other things, boosting demand and leading to job creation, right?"
This only works if people have money to spare. Alas, we are at peak debt. People are struggling to get by so cheap gas allows them to spend on their rent, food, and necessities as well as to save a little for a rainy day.
Cheap gas is good for America as a whole however it is not the one item that will save the economy. Bad government and Fed policy have destroyed the economy and until a market is allowed to truly be free, it isn't going to get any better.
Your analyst is missing one key point. Warren Buffet is making a fortune moving the same oil that would flow through Keystone shipping it by rail. BNSF has become keystone. More oil will not flow with Keystone. It is already flowing it just took the slow train.
I live in NE Tx. where the pipeline is being built(built). The property owners had to either sell their land or give it over to eminent domain. it broke their hearts and souls. it will , if opened and used will contaminate all the land surrounding this pipeline. just look at history on the pipelines.. just because you can't see the pipe doesn't mean you aren't standing right on top of one. or worse, living near one…..I am in the OIL and Gas production business and I have so been AGAINST this pipeline from the get go. It also backs right up against the Nestle water bottling plant in Wood county. Kinda close to our excellent ground water , my friends.. I am no fan of Nestle, either.. they don't need our water, but that is another story altogether. My son in law lost his job. Our independent oil company is staggering to the ground.. how dare anyone think of bringing in ANY FOREIGN OIL>>>> and according to the article we have only reduced our imports by a measly 10 million… that in itself is a crime,,,, so many out of work., taking lower paying jobs. losing homes, cars.. out of control… The pipeline is a disaster on the horizon and why people cannot understand how blaringly brightly out of control this would be to allow this thing to be open needs to seriously take a look at climate control, loss of drinking water, land and water pollution world wide.. it is bigger than it looks all the way around… Pray that thing never opens… Karen J.R. Texas
i'm a big believer of the 100 year old quote…. " TAKE THE MONEY AND RUN "
TWO YEARS FROM NOW AND AFTER THE PRESIDENTIAL ELECTION I, BELIEVE WE WILL SEE A BIG SHAKE UP IN THE ECONOMY , AND THE KEYSTONE PROJECT WILL BENEFIT EVERYONE….
Have you noticed the trend of crude ( up !) apparently that doesn't matter to you?
Come on now. Everyone knows that the Keystone is for transporting Canadian oil to gulf for export, not domestic use. While oil produced within the US is restricted regarding export, the Canadian crude would not be, and neither would refined products either US or foreign derived. If refined at the gulf, it is just more US commerce, even if exported. You cannot comport the transport of foreign oil across the country with domestic production or consumption. Oil has long been an international business, going to the highest bidder and where there is demand. The export of Canadian crude or refined products in just a small part of it, and never meant to solely or even partially benefit the US. We need a good relationship with Canada who now provides the substantial portion of our domestic consumption from sources other than Canadian tar sands. Building the pipeline would provide good jobs for it's duration and how can that be a bad thing?
Wow. Talk about short sighted. Would you rather import those 7 million barrels of oil per day from OPEC or Canada?
If the US still imports 7 million bpd, why is there a glut of domestic oil? Why can't domestic oil replace the amount imported? Is it lack of processing capacity?
Regards
Some interesting little hard facts are missing from this first round discussion. First, foremost and always… any commentator needs to keep in mind that there is a MAJOR and FUNDAMENTAL DIFFERENCE between a "regular oil/gas well" and a "shale well". That difference is DEPLETION. Regular oil wells deplete at 1% to 3% per year… usually 1% or 2%. Shale wells deplete at 50% to 60% per year with some of them as high as 70%. That means that the regular old wells would keep yielding useable oil for 30 to 60 years. Most shale wells are largely expended in 3 to 4 years. And shale wells COST A LOT MORE to drill and prep for production… $4 Million to $8 Million vs $800,000 for a "regular" oil well. So "regular" wells are cheaper to drill and extract oil from than shale wells and they last a WHOLE LOT LONGER than a shale well.
By their very nature a regular porous limestone oil well has MAJOR differences in content and oil flow possibilities from a well drilled into a shale formation. They are NOT THE SAME… and they never will be. The porous limestone formations allow for continuous and lengthy flow to happen… easily and naturally… based on physical reality. Shale formations might have oil in them but that doesn't mean that they will give up that oil very easily because they DON'T give up their oil very easily. That's why fracking is used… to jam small stones and rocks into the spaces between the shale stone and allow some flow to happen… at least for a little while. But in the end, that's the ultimate issue. It only works for a little while. And then another well has to be drilled nearby to continue the flow/extraction process.
It follows then that shale formations will only yield up their oil via more expensive formation fracturing and repeated drilling… lots of repeated drilling… drilling, drilling and more drilling. It also follows that shale oil is the most expensive type of oil to try to extract. It just is. Fracking costs money… LOTS of it. High depletion rates mean that more and more wells have to be drilled to extract the same volume of oil. There is a reason why the oil companies left the shale formations alone and searched out the limestone oil deposits first. The regular wells were cheaper and lasted longer. But now that most of the regular porous limestone formation oil deposits have been located and exploited, the expensive and short-lived shale formations are all that's left.
Financially, the drilling contractors used investor money in the initial stages of shale exploitation. But word of the rapid depletion soon got around and investors moved on with their money since the returns on the drilling investment were not the same as the regular porous limestone deposits. The drillers moved over to the bond market and financed their drilling habits with bonds… the cheapest available money. And when the bottom fell out, the drillers couldn't afford to service the interest on those bonds. And the house of cards has started to crumble. The problem is that without a significant price recovery for oil, even bond money (the cheapest finance source) can not be paid for. So all that expensive drilling and well prepping comes to a halt. And those bonds funding that fracking-based extraction method constituted about 20% of the nation's bond market… not an insignificant percentage (as percentages go).
The Keystone pipeline is not a saving grace for the current energy situation in its oil glutted condition but it probably will be one of the saving graces at some point out into the future when the drilling-fracking-depletion merry go round here in the US comes grinding to a cost-prohibitive halt. Past a certain cost point, it doesn't pay to keep drilling into shale formations with high depletion and low return on investment. At THAT point, the US is going to WISH that it already had the Keystone in place and running smoothly. But the Keystone will not instantly build itself, fill itself and maintain itself. It takes PEOPLE and YEARS of CONSTRUCTION to do that. You see, at the end of it all, it's a "vision thing"… anticipating a future condition that might not exist yet but ultimately will one day… based on the nature of shale depletion reality. But for now we watch the politicians jumping around like marionettes on the end of strings while they posture, pose and make speeches… basically doing nothing significant or useful. The Keystone is not getting built. The high tech energy alternatives are not getting funded or even researched. Economic depression is looming in our proximate future and the political marionettes don't seem to see any of it coming our direction… much less the need for a workable energy policy for the nations future. When the blind lead the blind, it really is an "interesting" world, isn't it?
Your points are very well-taken. I would like to add that at least two of the Oxford Club's analysts, Kent Moors and David Fessler, say that oil consumption is on an unstoppable increase because of rapid growth in the rest of the world, especially Asia and China. Canadian oil brought by the Keystone Pipeline, especially since that pipeline won't deliver any oil for years because that long will be take to build the pipeline. That will probably be too late, but better late than never. Also, if we don't build the pipeline, we won't get that oil, China will because Canada will build a pipeline to the western Canadian coast to export the oil to China. The pipeline will let us take that oil and keep it from China for use to use or refine and export. The flaw in the guest commentator's reasoning is that he doesn't take into account that that things change with time: the current oil glut won't last because oil demand is increasing and will continue to do so.
Comment on Keystone article . Why can't the excess stored US oil be refined and reduce imports ? Are the heavy oil refiners using imported oil ? If so would it be better for North American oil independence to use Canadian heavy oil shipped via the Keystone pipeline?
Also ,the Keystone will provide transportation from the Bakken fields (North Dakota,etal) to the refiners. The Keystone would reduce the more expensive and more dangerous shipments of crude by rail .Isn't this a signifigant benefit ?
This analysis ignores the most obvious solution to all the problems he mentions: build more storage capacity! We are going to need all we can get if indeed the US can achieve energy independence. A number of massive projects like this will also mitigate the unemployment impact. So, what are the obstacles: 1) a US government which has given up on oil and coal in favor of some untested (and unknown) alternatives — the same obstacle faced by Keystone; and 2) the scarcity of capital for oil projects when the market is uncertain. The answers to both problems start with the same solution: a change in government — from obstruction to tax incentives. This is a question not only of national security but also possibly of protecting the dollar. (Oil is more valuable then gold!) Out with the lunkheads, in with the oilmen!
This article is BS and misses the point completely. First, we are still importing millions of barrels a day on the East and West Coast from our enemies! Why? Because we don't have the pipelines running East-West to supply enough American oil for the Refiners to maintain capacity. Why should we be importing oil from OPEC countries instead of Canada? We should not be paying our enemies! The NIMB's need to be shut down so that the pipeline companies can build our critically needed infrastructure to supply American and Canadian Oil to our refiners. With all the oil we have sloshing around in Cushing and the Gulf Coast, we are woefully short millions of barrels of oil per day short
to be energy independent.
Second: We are denying a Friend and neighbor a safe way to get their oil to market. So we have more rail cars running North-South and the increased derailments so they can get some of the oil to Market. Why do this to ourselves?
Third: Because of our unfriendly behavior to a key neighbor, they are being forced to build an East-West pipeline so that they can ship their oil to our best friend- China! Again, why would we want to import oil from OPEC instead of Canada and force Canada into long term contracts to sell oil/gas to China? What will we do if Canada doesn't ship any more oil to the USA?
Fourth: This article also doesn't mention that a lot of our refineries can not refine our light American oil. They have been modified to refine heavy high sulfur oil from Venezuela and other non American sources as well as Canada. The finished product is shipped right back out of the USA. We haven't built a new refinery since the 70's. Why are we using up our valuable refinery resources to help anyone besides Canada and ourselves?
You, Americans, are a little behind the "times" and we, Canadians have been busy inking contracts with other countries, particularly in Asia. After Stephen Harper was snubbed by Obama in Washington, when Obama walked out of the room as our PM arrived (we are speaking of non-verbal communication here), we have decided to export our gas and oil abroad. It is already "too little, too late."
Little Mardi Monkey
dumb question ?
how come Canada does not build a refinery for its oil.
dumb question ?
how come USA does not build a refinery near border and save building pipeline.
Kent ???
PS. Our Australian politician's are dumber than your lot so do not ask for our help.
Not sure if America is out of a recession which would explain temporary glut conditions!
America's huge and probably unpayable debt will require it's economy to surge like no other economy has since civilization began! This has to happen for America to be the top dog in the International Sphere – Canadians are rooting for this to happen to our American Neighbours a Neighbour that has been a true friend to us!
Part of the solution although not totally the solution has to be an integrated supply chain to supply the energy for this quantum growth and Keystone is one component but only one that
needs to be built for America to be exceptional.
But if America has given up on their proper place in the world than Canadians obviously will make plans elsewhere.
As a Canadian I have been promoting our attempt at Integrated Supply Chains to shift not only West & East but North – I believe that Russia who Canadians share a Northern Border with is an eventuality and together we can experiment with integrated infrastructures that are sustainable in cold Arctic environments and would give us a supply route through Russia.
Yes this would take some negotiating but probably less than required on the Keystone Pipeline. The USA has lost its interest in Geopolitical Considerations and it's time for Canadians to honour our True Neighbours new independent interests!
If the USA's has lost its desire to grow like never before than their dollar will not recover and Canadians should require payment for our present trade in Gold rather than dollars to be compensated fairly!
I've read several of these postings and find it interesting that I agree with those who ask 'why does this reporter harp on the (glut) of oil in the storage areas". Why can't we reduce imports from those who hate us and make room for as much oil as we can produce. I believe he said there is still about 8,000,000 barrels a day coming in. Do you think it has more to do with the politicians getting their pockets filled than with the economy??? The case has certainly been proved over the last 6+ years that this regime couldn't care less about middle class "American Citizens" I still don't grasp the environmental damage. The Alaskan pipeline didn't do any damage so why do these "WHACK JOBS" seem to think that this pipeline will destroy the environment?? It's a hell of a lot easier to run than the Alaskan pipeline was.