How Falling Oil Prices Will Impact Economy--And The

Keystone Pipeline Debate

Falling oil prices may be a bonus for consumers. But its not such a blessing for those
extracting oil and natural gas or constructing the pipelines to move those commodities.
For producers, cheaper prices mean either less profits or even losses, which leads to a
slower national economic expansion.
In other words, right now oil supplies are outstripping demand and causing commodity
prices to fall. At the point in time they would dip below the point to where producers
could profit, they most likely stop digging and stop hiring, or even start firing. Thats
economics! But, in keeping with the scholastic parallels here, the economic and political
curves wont immediately intersect.
To that end, the U.S. Senate is expected to soon pass a bill allowing for the construction
of the northern section of the Keystone XL Pipeline to be owned and operated by
TransCanada Corp. While Canadian tar sands are already making their way to the United
States by either rail or by extensions to existing pipelines, Keystone will provide a more
direct route to U.S. refineries in the Gulf region, delivering an additional 900,000 barrels
a day. Forget the environmental questions. Does that deal make economic sense when oil
prices are around $50 a barrel?
Consider that the United States has surpassed Saudi Arabia as the worlds biggest
producer of oil: In 2008, this country created 5 million barrels a day. Now it accounts for
10 percent of the globes development, or about 8.4 million barrels a day. This year, U.S.
production is expected to hit 9.3 million barrels a day, unless drillers slow up.
The United States is still importing more than 10 million barrels of oil per day from 80
different countries, with OPEC remaining the biggest supplier. However, overall imports
are at a 17-year low while the nations production rate is at a 24 year high because of
hydraulic fracturing. In fact, production in 2013 exceeded net imports, which is the first
time since 1995 while net oil imports were the lowest that they have been since 1991.
Three competing thoughts: First, would not the Keystone Pipeline mean less reliance on
imports from hostile regions? Second, if the United States is the worlds biggest producer
of oil, who exactly benefits from the Keystone Pipeline? And third, why should this
country export its domestically-produced oil if it must still import those resources from
others?
Critics of lifting the current oil export ban say the oil is needed here to feed this
countrys energy appetite. Many are also concerned about rising gasoline prices if the
resources are exported as well as greater greenhouse gas emissions. ConocoPhillips COP

-0.02%, Hess HES -0.36% Corp. and Marathon Petroleum MPC -2.79% Corp. want to
see the ban lifted so that they can increase their market share in Asia and Europe.
In an interview with this writer, oil tycoon T. Boone Pickens said that in a free market
society, producers ought to be able to sell their product wherever they like. Nevertheless,
he advises that the United States would be better off if it first tried to service its own
needs before it attempts to sell overseas. The best way to help European and Asian
nations, he says, is to export
American hydraulic fracturing technologies that allow for the retrieval of
unconventional oil and gas.
The world is awash in oil because Chinas economic development has slowed, as has
that of the European continent. Meantime, production in the United States has advanced
because of hydraulic fracturing while OPEC has maintained its production levels even as
prices are dropping.
The price of oil is now about $50 per barrel, or so, with the one year forecast at $55 per
barrel. According to the U.S. Energy Information Administration, anything below $60 a
barrel forces the hand of the oil sector: Either pull up stakes or keep at it and hope to be
last one standing. Either way, something has to give, which means peoples jobs, project
expansions or shareholders dividends.
At $60 per barrel, the current price of oil is likely approaching or already below the
expected per-barrel costs of some of the most expensive U.S. tight oil projects, the
agency says.
The corollary to the global oil glut is the ramifications it might have on unconventional
natural gas, or shale gas that is also extracted using hydraulic fracturing. In recent times,
oil prices have been tied to global indices while natural gas has been regionalized. That
helped explain how oil prices could be greater than $100 a barrel while natural gas prices,
in this country, kept falling.
Now, of course, oil prices are nosediving while natural gas is remaining low, meaning
that the two are moving in tandem with one another. Nevertheless, its more complicated
than that given that oftentimes the two commodities are extracted together and because
natural gas contains other marketable gases, notably butane, ethane, methane and propane
that are called natural gas liquids.
Pragmatics would then suggest that, at this point on the curve, decreasing production of
oil would stabilize those prices. It would also reduce the levels of associated natural gas,
which might help prop up those prices.
Natural gas liquids are well priced and that leads to more profitability for natural gas
producers, says Valerie Wood, president of Energy Solutions in Madison, Wisconsin.

However, if crude oil prices fall, then natural gas liquids prices could fall too, if
producers keep drilling and if the oil and natural gas are discovered at the same time.
The break even price for shale gas is all over the place but it varies based on the price of
the liquids, she adds. If producers cut back their exploration efforts, it could raise the
price of the ethane and methane gases that are used as feedstocks for the chemical and
manufacturing processes.
In point of fact, the intricacies of oil markets extend far beyond the cost of driving a
vehicle and well into the boardrooms of major oil and gas companies that are making
major spending decisions. The volatility means that jobs across the economic spectrum
are at stake, which makes one question whether this is the time to press forward with
increased oil supplies from Canadas Keystone Pipeline.
As a conclusion, I would like to point out the fact that the Keystone XL project started a
few years ago, when the oil prices were a lot bigger than about 50$ a barrel. Now, giving
the fact that the price of the oil reached this bottom low, the question that the U.S.
Government should ask themselves is the following: Is the construction of the Keystone
XL still necessary at a time when the price of gasoline averages $2 at the pump?. It does
not make a lot of sense to continue building this pipeline, knowing the fact that the oil
obtained from the Canadian tar sands is a very expensive to produce oil, and that the
price of it is bigger than the price for which it could be sold for at the end of the
production stream. The U.S. oil shale production has added about 3 million barrels a day
to the marketplace, which made the U.S. more independent in front of the necessity to
rely on Saudi Arabia. The main problem is, however, that all of those things are
happening in an environment where the economy is not growing enough (even China
announced that they expect a slow of growth, reaching the value of 7,1%), therefore, the
global demand of energy is not really high.