Wednesday, November 16, 2011

Is Punting On Keystone XL Pipeline Deal Propelling Oil Over $100 Per Barrel

The price of oil was trending upward prior to the November 11 announcement that a decision on the Keystone XL Pipeline would be delayed until after the 2012 election. Given the tight supply, increasing demand, and turmoil in the Mideast, the price of oil may very well have broken through the $100 per barrel barrier regardless of the Keystone XL decision. However, this decision symbolizes America's lack of will to reduce our dependence on imported oil.

The U.S. need to import 9 million barrels of oil per day to satisfy our energy requirements puts the economy at risk. Expensive oil impacts the U.S. economy in myriad ways. It is even arguable that the positive economic numbers in the 3rd quarter were largely due to the drop in the price of oil. A case can also be made that many of the rosy economic projections that have been published lately are badly flawed due to not giving sufficient weight to the negative impact of increasing oil prices.

Thus, although the Keystone XL decision may not be a factor in oil rising above $100 a barrel, it is endemic of the type of policy decisions on energy that puts the U.S. economy at risk. As new supplies of oil become increasingly expensive to access and worldwide demand goes up, there is likely to be long term upward momentum for continued increases in the price of oil. The huge and dependable ongoing demand for imported oil from the U.S. is one of the pillars providing support for the high prices.

The ultimate irony of the decision to delay a decision on the Keystone XL Pipeline is that not building out this project has environmental drawbacks, as outlined in a Grist article. In a worst case scenario, it could actually end up leading some utilities to replace expensive oil with cheap, dirty coal.

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