Opponents of the Keystone XL pipeline, which would ferry crude oil from Canada and North Dakota to the Gulf Coast, conveniently point to current lower oil prices as justification for President Obama's continued rejection of the project's permits. While it's true that oil prices have tumbled in recent weeks, there is much more to this saga that goes well beyond the price of a barrel of oil. For starters, there's the global oil market to consider. As well, policymakers must be vigilant about the nation's energy security interests and the needs of American consumers.
Let's begin with the global oil market. Prices are dropping because the OPEC has decided to continue pumping crude out of the ground despite oversupply in the marketplace. One reason for the oversupply is U.S. oil shale production, which has added 3 million barrels of oil a day and reduced the need for OPEC imports to the U.S. Not surprisingly, Saudi Arabia is not happy about this situation and is responding as it did in the 1980s when domestic production was on the rise: by blatantly trying to eliminate U.S. competition (see here).
Which moves us to the energy security issue. For 40 years, we have sought to limit our dependency on imported oil. Yet, every time we experience positive momentum at home, OPEC wages a price war and we see a collapse in our domestic production. In 1985, on the eve of the last induced price collapse, the U.S. was importing 300,000 barrels per day (bpd). A mere five years later, we were importing almost 2 million barrels daily. At the same time, domestic production dropped 20 percent and continued to fall for another decade.
When industry leaders and market analysts discuss "price signals," traditionally they do so in the context of starting — not slowing — production. Yet, recent announcements about rig count drops, layoffs at oil service companies and cuts in exploration budgets all point to a slowing of production. As well, when they discuss which nation is the swing oil producer, the answer usually given is Saudi Arabia. In reality, however, it is the U.S. When a shortage occurs, American production responds. When oversupply is sustained, we bear the brunt of restoring global production balance, which can mean everything from job loss and reduced economic growth to putting our energy security needs on the back burner.
To rub salt in the wound, let's discuss the impact to consumers by continued delays in construction of the Keystone XL pipeline and policy obfuscations. Absent a pipeline, crude oil is currently being transferred by rail — a far more expensive long-term proposition that creates a cost premium for our oil, which in turn is being passed along to consumers. It's not just consumers who are getting hit in the pocketbook. There are reverberations throughout the economy. For example, the agriculture industry is paying higher costs for rail services as they compete for scarce railcars and also incurring higher fuel costs to plant and harvest food.
Oil opponents are not limiting their vitriol to just Keystone. News reports note their opposition to a handful of other projects for which delays are undoubtedly creating a drag on the American economy. Let's not be under any allusion that their fury will lessen with time or their tactics will be any less ruthless. But, the fact is, they are operating under the misguided belief that if they can simply manipulate supply, they have achieved a victory against fossil fuels. With demand relatively inelastic, efforts to sabotage domestic production will not reduce fossil fuel dependency. Rather, they will serve to increase our foreign oil dependency.
The bottom line: Keystone XL pipeline opponents are degrading U.S. competitiveness, increasing the likelihood of future oil price shocks through reliance on politically unstable oil producing countries, and undermining 40 years of strategic work to achieve energy security.
The Keystone XL pipeline should have been approved years ago. It's time for Congress to act and send a bill to the president for his signature.
Maddox is a former senior official at the U.S. Department of Energy. He is a fellow at the American Action Forum and a consultant with the Livingston Group.