Hard lesson in economics
The company that is building the controversial Keystone XL pipeline no doubt wishes U.S. Energy Secretary Rick Perry had been right last week when he explained the law of supply and demand.
At a coal-fired power plant in West Virginia, Perry dismissed worries about the future of coal by saying: “Here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow.”
In fact, as any first-year economics student learns, supply follows demand. Perry could call TransCanada Corp. of Calgary for verification. The company has spent $3 billion US to date on what’s planned to be an 1,400-kilometre, $8-billion pipeline from Alberta’s oilsands to Steele City, Nebraska. There it would link with existing pipelines that would carry the thick oil to refineries on the Gulf Coast.
Since its inception in 2008, the project has been dogged by environmental concerns that brought opposition from the Obama administration. President Donald Trump greenlighted it in March.
But now, the Wall Street Journal reports the law of supply and demand has raised its ugly head. There’s an oversupply of oil. The benchmark price is about 38 per cent of the $130-a-barrel price in 2008, when the Keystone project was proposed.
TransCanada is having trouble getting commitments from oil companies to use the pipeline. Firms would rather take their chances on spot-market oil, even if they have to pay more to transport it, than risk long-term commitments to the Canadian oil.
In February, the falling demand for Canadian oil led ExxonMobil to write off its entire 3.5 billion barrels of estimated reserves in Alberta oil. American shale oil, plus falling prices for solar and wind energy, have caused analysts to predict that oil prices won’t recover anytime soon.
If Secretary Perry wants to outline a “little economics lesson,” he could point to a company that bought 1,400 kilometres of pipe for oil nobody wants, still facing opposition from farmers in Nebraska and an accounting problem. The pipeline investment must be amortized over 50 years, by which time global warming will be impossible to ignore. Just like the law of supply and demand.
St. Louis Post-Dispatch