This editorial is from the St. Louis Post-Dispatch:
The company that is building the controversial Keystone XL pipeline no doubt wishes Energy Secretary Rick Perry had been right the other day when he explained the law of supply and demand.
At a coal-fired power plant in West Virginia on July 6, Perry dismissed worries about the future of coal by saying, “Here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow.”
In fact, as any first-year economics student learns, supply follows demand. Perry could call TransCanada Corp. of Calgary, Alberta, for verification. The company has spent $3 billion to date on what’s planned to be an 875-mile, $8 billion pipeline from Alberta’s oil sands to Steele City, Nebraska. There it would link up with existing pipelines that would carry the thick, high-sulfur, tar-sands oil to refineries on the Gulf Coast.
Since its inception in 2008, the project has been dogged by environmental concerns that brought opposition from the Obama administration. President Donald Trump greenlighted it in March.
But now, the Wall Street Journal reports, the law of supply and demand has raised its ugly head. There’s an oversupply of oil. The benchmark price is about 38 percent of the $130-a-barrel price in 2008, when the Keystone project was proposed.
TransCanada is having trouble getting commitments from oil companies to use the pipeline. Firms would rather take their chances on spot-market oil, even if they have to pay more to transport it, than risk long-term commitments to the Canadian oil.
TransCanada has said it wants commitments for 90 percent of the pipeline’s capacity before it continues building. Keystone XL will be capable of moving 835,000 barrels a day, with an average transportation toll of $8 a barrel.
Compounding the problem: Western Canada Select oil is more expensive to recover and refine than the benchmark Brent Crude “light sweet” oil. It produces three to four times more greenhouse gases than Brent Crude, which was trading at $49 a barrel last week. Western Canada Select was at $35. A transportation toll of $8 for a $35 barrel of oil doesn’t make economic sense.
In February, the falling demand for Canadian oil led ExxonMobil to write off its entire 3.5 billion barrels of estimated reserves in Alberta oil. American shale oil, plus falling prices for solar and wind energy, have caused analysts to predict that oil prices won’t recover anytime soon.
If Secretary Perry wants to outline a “little economics lesson,” he could point to a company that bought 875 miles of pipe for oil nobody wants, still facing opposition from farmers in Nebraska and an accounting problem. The pipeline investment must be amortized over 50 years, by which time global warming will be impossible to ignore. Just like the law of supply and demand.