Keystone XL Will Fail Obama's Climate Test If Plunge in Oil Prices Persists

Will crude oil prices go low enough and for long enough to become the final nails in the coffin of the Keystone XL pipeline?  The answer just might be yes, but not for the reasons that might be assumed.

Soaring production in the United States, slack international demand and increased fuel efficiency have produced a glut in the past few weeks that has left the benchmark WTI grade bouncing around $80 a barrel.  Futures markets are pointing even lower and some analysts, most recently Goldman Sachs, are predicting a price of $75 or even less in the months ahead.

Already, Canadian tar sands producers appear likely to put off at least some of the new projects they had on the drawing board.

This slackening of Canadian production would seem to lessen the urgency of opening up the Alberta-to-Texas Keystone XL tar sands line, which has been delayed for years.

But it is also true that in a world of cheaper oil, the industry would need the Keystone XL more than ever.  Without it (or some other pipeline to export markets) the Canadians' only shipping alternative to move its landlocked product would be costlier rail transport.

Just ten months ago, the State Department, brushing off the possibility of cheaper oil, found that the Keystone XL would have little impact on Canada's tar sands oil production—and by implication, little effect on greenhouse gas emissions.  As long as oil prices stayed high enough, the reasoning went, the industry could afford to ship its output by rail to the Gulf Coast markets that the Keystone XL is intended to serve.

But the market analysis in that final environmental impact statement acknowledged that if oil prices went below $75 for a long time, the Keystone XL would indeed become a crucial factor for expanding the tar sands enterprise.  And in that case, however unlikely, the report said the pipeline would enable a significant increase in emissions of greenhouse gases.

In other words, low oil prices mean the Keystone XL fails the Obama administration's carefully hedged litmus test, set by the president himself when he said in June 2013 the pipeline's impact on climate change would be the deciding factor in whether to approve the project.

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