President Obama is a smart guy. I reckon he is exponentially smarter than me.
When I saw last week that he was delaying a decision on the Keystone XL Pipeline I was more than a little disappointed. The party line for explaining the delay on the decision was:
“Because this permit decision could affect the health and safety of the American people as well as the environment, and because a number of concerns have been raised through a public process, we should take the time to ensure that all questions are properly addressed and all the potential impacts are properly understood.”
Right. More study is needed so that we can understand the impact that an oil pipeline might have. Because an oil pipeline is something entirely new to the United States.
Actually you might be surprised to find out that the United States has 55,000 miles of crude oil trunk lines and another 35,000 miles of crude oil gathering lines.
Maybe I’m stepping out on a limb, but I’m pretty sure that the Obama administration has a good idea of the risks involved in adding another oil pipeline.
This lack of a decision (in my opinion) is the Obama administration putting their own reelection interests ahead the best interests of a country by avoiding making an unpopular call. Many of the most ardent Obama supporters are environmentalists who are obviously opposed to anything related to oil. At this point in the election cycle it is much easier for team Obama to defer on making an decision that might alienate them.
When Obama was elected I was certainly optimistic that maybe for once a country would have a leader more interested in making a difference than anything else. This decision has sapped the last bit of optimism out of me.
What are two huge problems facing the United States today? One is a high level of unemployment. Another is a lack of energy security. By not sucking it up and approving this pipeline the Obama administration delays (or kills) 20,000 high paying jobs that would have been created for Americans and risks alienating a vital future source of energy for the United States.
I appreciate the environmental concerns over fossil fuel burning as much as anyone. But the reality is that we are going to need those fossil fuels badly for the next few decades. And for a country like the United States that has to import a huge portion of its energy supply from unfriendly regimes, access to a source of energy from a country like Canada is critical.
In my book, this punt on the Keystone Pipeline is a very selfish decision. Mr. Obama and his team know very well what the right thing to do was.
The Importance of This Pipeline May Become Clear Very Soon
I’ve been bullish on oil for a number of years. But even I am very surprised that with weak American and European economies we face a global oil price well north of $100. Can you imagine what the oil price might currently be if we hadn’t had a giant recession induced by a huge credit collapse?
I read recently an article that detailed the current thinking of the Goldman Sachs analyst Arjun Murti who presciently forecast the oil spike in 2008. Long story short, the market is getting tight and Murti thinks very similar to late 2007.
Murti’s opinion is based on observations of the actual oil inventory situation globally:
"The latest inventory data from Europe, the U.S. and Japan suggests total inventories are now 31 million barrels below their five-year seasonal average, and in absolute terms crude inventories are back at their 2006 levels," Murti said, adding stocks would be even lower if it were not for the International Energy Agency's emergency fuel release over the summer.
"This reflects a global market in deficit despite Saudi producing the highest amount of crude since the 1980s and shows stark similarities to the 2007 bull market that led to demand rationing prices."
Environmental concerns over fossil fuel production are no laughing matter. But if we get an oil spike in 2012 that goes to $150 or $175 there is going to be a lot of public support for approving the Keystone Pipeline. This self preservation move by Obama could end up backfiring if the entire country is paying $4.50 per gallon heading up to election in 2012.
What should be more concerning is that this delay is likely to push Canada to start making commitments to ship a portion of its oil production to the oil thirsty Chinese. Canadians would much rather sell their oil to their friends south of the border. But if the United States doesn’t want it, we will sell it to someone else.
Dirty oil is not an ideal solution for an energy source. But not having oil is even worse.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.