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Oil's Well That's Not Ending Well...for Keystone


What if they're allowed to build it, but nobody wants to come?

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I'm talking the Keystone Pipeline. Republicans now say their takeover of the Senate all but assures finally getting the pipeline built. I wouldn't be too sure about that. Not because the President might not budge, but because the math behind building that pipeline might no longer work.

A couple of weeks back, some of you might recall I wrote about the precipitous drop in gas prices, and wondered aloud about Washington's curious silence on the subject. Half-jokingly, I observed the same politicians who were convinced there had to have been a cabal among energy companies to fix prices as they were climbing, were oddly silent now that prices were declining.

Surely, I asked, if energy companies are fixing prices on the upside, they must be doing the same on the downside? Alas, no calls for hearings now, just as there are no calls to drag the oil chief executives to Washington, so politicians can make pinatas of them now. No, none of that.

I wondered what some of these politicians thought about all these Texas oil drillers, who are being all but priced out of business. Many are losing their jobs, as the math behind drilling loses its financial appeal. I wrote then, and stress now, these dynamics of declining energy prices cut both ways -- good for us when we drive up to the pump but bad for them because they don't make nearly as much money off the pump. In fact, these days smaller drillers, so-called "wildcat" drillers, lose money, and they're losing it fast.

Now back to Keystone. Even if a Republican Congress gets a Democratic President to budge on building it, is it already too late? Is the rapid descent in oil prices already making the cost of drilling for that oil worth the fuss?

Darrell Delamaide brilliantly spells it all out in today's MarketWatch, explaining that "oil prices are falling below the price at which the high cost of extraction of this heavy crude oil can be profitable."

A report out this week from no less than OPEC bears Delamaide out. The energy cartel forecast oil prices will likely continue declining, "down closer to 75 dollars a barrel and international benchmark Brent Crude, to near 80 dollars a barrel, a drop of more than 30 dollars from its 52-week high.”

Keep in mind drillers need oil closer to $85 a barrel -- at a minimum -- to make the cheapest drilling methods worth it. That means, even allowing for the most cut-rate drilling costs, the cost of oil is already too low to make drilling worth it. The math comes down to this: it just ain't worth the drilling buck.

And I'm being generous here. As Delamaide points out, new mines behind Canadian oil-shands projects require oil closer to $105 a barrel "to make a reasonable return."

In other words, oil prices being what they are now, Keystone isn't nearly so attractive an investment now. The irony is that had we built the darn thing years ago, when prices were much higher, we'd be reaping the rewards, regardless of oil's present cost. But we didn't do that then, so here we are now.

Stuck between demand that's dropping and now the folks who build the stuff to get it out of the ground all but quitting. That's what happens when you drag your feet. If this continues, you drag this country's goal for energy independence...into the ground.

What do you think?

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