Keystone Indecision Puts Everyone on Hold

 | Nov 09, 2013 | 1:30 PM EST  | Comments
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This week, President Obama apologized for the healthcare fiasco. While he's at it, he might consider offering an apology for delaying his decision for the Keystone XL Pipeline. In both cases, the economic impact on America's middle class is a burden.

TransCanada (TRP) is proposing to spend billions of dollars to expand its existing Keystone Pipeline. What many do not realize is the Keystone Pipeline already exists: Oil is already flowing from Alberta Canada to U.S. refineries. All TransCanada wants to do is to expand and extend existing capacity. It also wants to provide the U.S. economy with more of the same oil.

The Keystone Pipeline is a winner for the U.S. economy -- and it is also a winner for Canada. Using more Canadian oil would means less oil needs to be imported from unfriendly sources. It also provides Canada with an economic boost.

Delaying the Keystone decision, therefore, has the impact of imposing a new tax on the economy. The very people that pay unnecessarily high prices for energy are the same people facing increasing costs for medical insurance.

It appears the State Department and the Obama Administration have had all the information they need to make a decision. Yet for some reason, the administration has decided to drag out its decision ad nauseum.

Of course, most are aware Albertan oil is not the highest quality. The production of oil from Canadian tar sands can cause more carbon emissions than transitional sources.

However, there are two challenges to the carbon argument. First, we don't have a long list of better alternatives. Traditional sources are becoming depleted, and North America is forced to seek most of its new oil from shale, sands and deepwater sources.

The second challenge for environmentalists is carbon accounting -- when everything is totaled, carbon is not the primary issue. Regardless of whether TransCanada's pipeline is built, it appears the same amount of carbon will be produced.

The alternative to a pipeline is a rail line. If President Obama rejects TransCanada's request, its loss will be Warren Buffet's gain, as Berkshire Hathaway's (BRK.A) railroad can transport oil in railcars as a virtual oil pipeline. Through its Burlington Northern Santa Fe Railway, Berkshire operates a network of more than 30,000 miles of track in 28 states, two Canadian provinces and links to Mexico. The rail network serves the Midwest, Pacific Northwest, Western, Southwestern and Southeastern regions. Their primary routes link Canadian exports with major U.S. cities, ports and refineries. This includes oil exports.

Berkshire is not alone. Union Pacific (UNP), Kansas City Southern (KSU), Norfolk Southern (NSC) also benefit. All of these rail systems link into Burlington Northern Santa Fe and together these rails reach most U.S. cities and refineries. They also knit together the transportation systems of Canada, the U.S. and Mexico.

In light of this, it's clear that a "no" from President Obama does not necessarily resolve any carbon or environmental issue. Oil trains also produce carbon from their carbon-based train engines. No matter how Washington slices it, carbon should not be the deciding issue.

The Keystone XL Pipeline represents an unrequited opportunity for Canada, and it also benefits American and Canadian consumers. Oil prices tell the story.

Friday's prices had Brent crude at $105.04 per barrel, West Texas Intermediate (WTI) at $94.37 and Western Canada Select (WCS) at $53.55. The difference between WTI and WCS was $40.66.

This has been the usual spread for WTI and WCS -- and yes, it is huge. Part of the difference is the quality of Canadian oil. The other part is attributable to transportation constraints. From the huge price difference, it seems clear Alberta's product cannot get to market. As a result, WCS wellhead prices are heavily discounted.

The discount represents an opportunity and a threat. TransCanada's pipeline will reduce constraints. Canada's oil could fetch a higher price and U.S. refiners could attract lower prices. However, new pipeline capacity could also take margin away from the rails.

Everyone is on hold, including the railcar industry. If TransCanada's pipeline is denied, companies such as Westinghouse Air Brake Technologies (WAB), Greenbrier (GBX) and American Railcar Industries (ARII) could take off. However, few companies can make a move until a decision is made by President Obama.

It is understandable that the president may be overwhelmed by healthcare challenges. Nevertheless, cash-strapped consumers are also overwhelmed.  

In addition, Washington's delays are a cost to the nation. Canada is offering North America huge opportunities to move toward energy independence. Delaying a decision for longer makes little sense for the U.S. and its citizens. Even if President Obama makes what some might consider a bad decision, it is much better than making no decision at all.

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