The Keystone XL Pipeline is dead, at least for now. On Jan. 18, President Obama announced that he would reject the construction of the pipeline largely because the deadline imposed by Congress didn't leave enough time for a thorough review. If you haven't heard of the Keystone XL Pipeline, here's what you need to know.
TUTORIAL: Commodities: Crude Oil
Tar Sands Oil
When we think of oil drilling, we think of the pictures of an oil well gushing oil out the top like a like a large sprinkler, but most of the world's oil, 2 trillion barrels, is in the form of oil sands, or tar sands. Tar sands are a combination of oil, sand, clay, water and a material called bitumen, a heavy, black and thick oil. After a refining process, tar sands oil becomes the liquid form that we all know.
The United States doesn't get a lot of oil from tar sands, but Canada is different. Forty percent of Canadian oil comes from tar sands and, currently, 20% of the United States' oil imports come from Canada.
The United States currently imports 21% of its oil from the Middle East, but importing oil from countries where relationships are strained is a national security concern. The United States would like to import more oil from Canada, but the infrastructure doesn't exist. (For more on this sector, read the Oil And Gas Industry Primer.)
Presently, Canada exports 800,000 barrels of tar sands oil to the United States, but both sides would like to see that number rise. TransCanada (NYSE:TRP), a company that builds energy infrastructure, wants to build the Keystone XL pipeline. At more than 2,000 miles in length, the pipeline would transport oil from Alberta, Canada to refineries on the Gulf coast. The addition of the pipeline could double the amount of oil the United States imports from Canada.
Along with reducing our independence on oil sourced from the Middle East, the TransCanada XL Pipeline would create a lot of jobs. TransCanada estimates that they would employ 13,000 Americans to construct the pipeline, along with 7,000 manufacturing jobs throughout the United States and 118,000 spin-off jobs, as local businesses along the pipeline route would see increased demand. (Looking for a new job this year? Read 3 Tips To Boost Your Chances Of Finding Work In 2012.)
Critics of the pipeline have two main problems with the project. First, The National Wildlife Foundation published a report that claimed that the pipeline will run through or near water tables, wildlife refuges, aquifers, fisheries and crop land. Any breach in the pipeline could cause a catastrophic spill that would ruin the local habitat and endanger citizens if the water table is compromised.
Second, the NWF claims that TransCanada doesn't have a good track record of safety. In one report, they list 12 TransCanada spills in 12 months, including a 21,000 gallon oil spill, and it's not only TransCanada. From 1990 to 2005 there were more than 4,700 oil spills according to the same report. (For a similar reading on the subject, check out Does Bad PR Make For A Good Investing Opportunity?)
The Bottom Line
In a Jan. 18 CNBC interview, well-known oil executive T. Boone Pickens said, "we're complete fools" for rejecting the pipeline. He worries that Canada will grow tired of waiting, build a pipeline to the west and send the oil to China, instead of the United States.
Environmentalists are happy, but for those like Pickens who are strongly lobbying for the United States to cut its independence on Middle Eastern oil, this was a defeat. Once the 2012 Presidential election is over, the political environment may change, allowing the pipeline to be approved. Even Democrats who rejected it were once in favor of the plan, but objected to being pushed to make a decision.
The fight isn't over yet.