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May The Oil Price Crash Kill Keystone XL

In late November, the lame-duck Congress came inside one vote within the Senate of sending a invoice to the President mandating approval of the controversial Keystone XL pipeline. That undertaking would deliver oil produced in western Canada – primarily from tar sands but in addition from conventional drilling – all the way down to Nebraska after which on to refineries in Texas and Louisiana for processing into petroleum products for export to Asian markets. Republicans planning their takeover of the Senate and enhanced majority within the Home of Representatives rapidly vowed to renew their effort to drive Keystone construction as a precedence after the first of the 12 months, with visions of a doable cruid oil price ‘veto-proof’ two-thirds majority, together with Democrats pushed by their unionized supporters attracted to the job-creation benefit, nonetheless temporary, related to the Pipeline’s building.

Just some days later, the Group of Petroleum Exporting Countries (OPEC) determined not to reduce their oil production below the present target of 30 million barrels annually, even in the face of an already precipitous fall of that commodity’s worth from over $one hundred per barrel to a low $70 range since early summer time. This fall is due to an oil glut on world markets, partially as a result of tremendous growth in home American oil manufacturing from shale rock via the process often called ‘fracking.’ The day after OPEC chose not to chop, the worth of West Texas Intermediate crude oil (a proxy for what is actually oil produced within the U.S.) sustained a further, dramatic drop of 10%, right down to $sixty six per barrel.

Oil market professionals and observers had been speculating that Saudi Arabia and a couple of its Arabian neighbor states have been purposely playing a ‘long recreation’ by way of being willing to tolerate a lot lower per-barrel costs for their oil (and decrease present returns to their ‘petrodollar’ economies and social welfare benefits protecting their young, restless unemployed off the streets) with the safety of a whole bunch of billions of dollar reserves. The item of that sport, it was supposed, was to force the oil produced by marginally and precariously financed shale oil producers in the U.S. out of the market. That’s, shifting the burden of lowering the global ‘oil glut’ and in the end rising demand and a return to increased costs, from OPEC to America’s upstart producers. If a goodly number of U.S. producers occur to go bankrupt and stop shale oil production completely because they grow to be unable to service their debt because of lower market costs, so be it: all the better to revive and improve Arab market share once the dust settles.

All of which seems to beg the query: although we have now waited through over six cruid oil price years of environmental research and political haggling to settle the cruid oil price query of whether to construct the Keystone Pipeline to deliver extra oil to American refiners and extra jobs to the American restoration state of affairs, what is the hurry now with a lot oil product floating all over the world that costs have fallen almost 40% in less than six months, and look to fall even further into the approaching yr “On additional assessment,” as they are saying in soccer, maybe we have to replay the Congressional debate on Keystone to see if the apparently ‘obvious name’ to maneuver forward really ought to be reversed reasonably than ratified by the new Congress. Certainly, there seems to be a case to be made that the Saudi’s actual goal is not just to crush wildcat shale oil corporations in the U.S. but additionally, and more importantly, to place a spanner into the tar sands works up in Alberta, which produces the identical type of oil as most of OPEC’s Gulf States. Right here we get into the ‘sweet’ and ‘sour’ distinctions in the oil market, which has a sure charm on condition that the Arabs and the Canadians are really caught in market share warfare over the Chinese language market!

The fundamental difference between ‘sweet’ and ‘bitter’ oil (the former predominant within the U.S. fracking production and the latter in the Canadian tar sands and Arabia) is the amount of sulfurous impurities (primarily hydrogen sulfide) combined in with the oil. Hydrogen sulfide smells like rotten eggs in low quantities but may be life-threatening in increased quantities. Sour oil is mostly outlined as having more than .5% of such impurities and should be shorn of them in the refining process earlier than merchandise like gasoline, kerosene and diesel gas will be safely refined, increasing the manufacturing prices. So-known as sweet oil (which actually tastes that way, and smells nicer, too) has lower than .5% impurities and thus will be more routinely and cheaply refined into those core gas merchandise.

Both the Saudi sour oil and the Canadian tar sands bitter oil are thus in direct competitors for environment friendly manufacturing and marketing to Asian market, particularly China. It’s obvious that the Keystone Pipeline undertaking itself is intimately concerned within the Saudis’ ‘long sport’ calculations. If OPEC can drive down the market price for oil to a level where the technique of extracting tar sands oil in Canada, and then transport it to expensive refinement in the U.S. turns into uneconomic, then Keystone itself could change into doubtlessly uneconomic as well. Oil prices sustained beneath $eighty five per barrel may power deferral of latest tar sands extraction undertaking, however opinions differ on how low oil must go to chop ongoing manufacturing headed for Keystone. Some say as low as $65 would threaten such curtailment, while others point to long term contracts with Keystone customers that could tolerate costs even beneath $forty. Interestingly sufficient, some market observers are lately predicting just such a fall to the $forty stage — recalling that the Saudis beforehand engineered a crash to around $12 in 1999. The Financial Times reviews that Saudi Arabia holds three-quarters of a trillion dollars in reserves to maintain its economy and welfare state going, so it’s prepared for a ‘long game’ indeed. In the meantime, the Keystone XL may turn into a ‘pipeline (with nothing) to nowhere,’ a sensitive point for a Congress already well-known for approving a bridge to nowhere.

Alternatively, nonetheless, if costs were to stabilize at greater levels more toward a floor of $sixty five, the Keystone Pipeline – as a cheaper, less cumbersome and less costly distribution route for tar sand producers than rail or different pipelines to Canadian port refiners – might make the crucial distinction in whether tar sands production is sustained economically. This might eventuality provide a stronger environmental objection than heretofore acknowledged by the U.S. State division in its previous evaluations of the Pipeline’s seemingly environmental impression on greenhouse fuel emissions. This report presumed that at then-current oil pricing, the tar sands oil production would discover its strategy to market in any occasion with or without Keystone. If Keystone makes the critical distinction to whether tar sands manufacturing continues in a a lot decrease oil worth atmosphere, as its opponent contends, then it will surely fail President Obama’s introduced coverage to not approve its construction if doing so would contribute to vital additional greenhouse gas emissions from tar sands oil and its production processes.

Why, certainly, would U.S. shale producers want to use public coverage to subsidize Canadian oil producers in an extreme and sustained low oil value atmosphere Perhaps North Dakota and Texas entrepreneurs will change into ‘for Keystone XL earlier than they have been in opposition to it ‘ Time for a replay in Congress

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