As you may know, the Keystone XL Pipeline project is back in the news, with new pressure being put on the Obama Administration to approve what is more properly referred to as the Keystone Gulf Coast Expansion Pipeline.  This commentary briefly summarizes what are said to be the costs and benefits of completing this pipeline project.  As, I am sure you know, the majority of the oil that would be shipped through that proposed pipeline to the U.S. Gulf of Mexico refineries would be sourced from the Canadian Oil Sands.  As I understand it, the principal issues raised by the pipelines detractors (effectively the ‘cost side’) are:

• the potential of oil spills from the pipeline that could contaminate ground water in Nebraska and other areas the pipeline will pass through if built;

• Most importantly, the generation of greenhouse gases from the processes used to extract oil from the Canadian Oil Sands, as contrasted with greenhouse gases produced from processes used to extract oil from conventional oil resources.  On average, the difference in greenhouse gas generation from the Canadian Oil Sands is cited in some estimates ‘best case’ to be between 2.3X – 2.8X, and ‘worst case’ to be 3.0X – 3.7X, higher per barrel of oil produced depending on whether the Oil Sands oil is extracted by surface-mining techniques or in-situ techniques.  In-situ extraction techniques extract the oil by heating the sands ‘in place’, thereby reducing the viscosity (or more simply put ‘freeing up’ the oil trapped by the sand) so that it can be pumped out like conventional crude oil; and,

• The extraction of oil from the Oil Sands is more destructive environmentally than is conventional extraction.

As I see things, the ‘benefit side’ of the Keystone XL Pipeline equation from an American point of view is as simple as this.  In all probability, America will need conventional oil going forward that it can’t itself produce – and barring American interference, if America doesn’t want or is unable to access Canadian Oil Sands output, that output will go to China or elsewhere via physically shorter pipeline transportation systems that will take future Oil Sands production to Canada’s west coast.   That said, as a practical matter I think the U.S. eventually will have to face up to, what I see as, its prospective need for the Oil Sands production – and if it doesn’t act now, or even if it does, it will or may end up sharing that production with Asia in any event.  If I am right in this, if the Keystone XL Pipeline is not built now, it (or some alternative direct or indirect pipeline from the Oil Sands to the U.S.) almost certainly will be built at a future date – and at that time will prove to be far more difficult to approve and be more expensive than the current Keystone XL Pipeline as now proposed.

Rightly or wrongly, I see what is going on in the U.S. (and the Obama Administration) as procrastination in the face of a comparatively small minority of vocal environmentalists.  Continuous ceding by governments, whether they be Federal, State, Provincial or Municipal, to the ‘vocal minority’ typically, in my view, in the end results in unwarranted delays, inefficiencies and excessive costs.

If you are not well versed in matters pertaining to the Canadian Oil Sands, you might want to visit Wikipedia’s write-up on what is thought to be about one-third of the world’s known oil resources.  I think the Wikipedia write-up is a good primer on the Canadian Oil Sands, and one can use it as a ‘takeoff point’ for further research.

I, for one, have very little doubt that the Canadian Oil Sands will – in one way or another – play a very important part in how the world unfolds economically over the next decades.  If you invest or trade in the financial markets I believe you should make it your business to learn as much as you can about the Oil Sands.  I suggest you ask your Investment Advisor(s) to provide you with whatever written information they have at their disposal now, and on an ongoing basis, so as to keep you up to date with Oil Sands development.

For an article dealing with the Keystone XL Pipeline that includes a map and charts, see ‘Costs and benefits of the Keystone XL pipeline’ – reading time 5 minutes – published yesterday on the Econbrowser Blog.

You might also want to read ‘The GOP could accidentally delay the Keystone XL Pipeline’ – reading time 3 minutes. This article suggests that if House of Congress Republicans attempt now expedite that pipeline, that could result in the pipeline being deferred longer than it might be if they simply let the Obama Administration deal with it.  I do not have an opinion on whether or not that makes sense.

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Ben Bernanke – Main Street American?

A December 16 article reports that U.S. Federal Reserve Chairman Ben Bernanke, now age 58, a man who I see as holding one of the most important positions in on the world macro-economic stage, refinanced his own home mortgage in September for a 30 year term in the amount of …..

Commentary reading time 3 minutes.  Referenced article(s) reading time 4 minutes.

Foreclosures – 60 Minutes – December 18!

And more on U.S. Housing – but from a different perspective.  On Sunday, December 18, CBS’s 60 Minutes carried a documentary on U.S. Housing Foreclosures.  Its emphasis was on the destruction of foreclosed houses in the Cleveland area by the municipality.  The documentary as I watched it, and listened to what was said, had a number of messages

Commentary reading time 2 minutes.  Video viewing time 14 minutes.

An American Centric Article!

Or so I think.  A recent article from Bloomberg suggests that S&P’s August, 2011 downgrade of its United States Credit Rating from AAA to AA+ was absurd in light of subsequent events, citing a number of U.S. statistics in support of this proposition.  I think the real question that the article does not answer, let alone pose, is:  What is …..

Commentary reading time 3 minutes.  Referenced article(s) reading time 3 minutes.

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Trust me, I don’t want to go where this commentary takes me.

An article on Tuesday titled ‘A New Arms Race Looms between Russia and US’ – reading time 4 minutes – reports on Russian and U.S. activities related to the recent concerns that have arisen over Iran’s alleged continuing nuclear development program.  I think that article is worth reading as a background to the other articles referenced in this commentary.

A further article, written by Robert Saiget and published late on Tuesday by Yahoo News, titled ‘China’s Hu urges navy to prepare for combat’ – reading time 4 minutes – reports that on Tuesday Chinese President Hu Jintao “urged the (Chinese) navy to prepare for military combat, amid growing regional tensions over maritime disputes and a U.S. campaign to assert itself as a Pacific power”.  This strikes me as more a ‘long-view statement’ than an ‘immediate-view’ statement.  That said, I suggest you read this article and as you do think of the old saying ‘where there is smoke there is fire’.  Also, I recommend you read this article as further background to the balance of this commentary.

An article yesterday written by Martin Katusa (of Casey Research) and re-published on the Financial Sense Blog is titled ‘Why the Middle East Is Keeping Oil Traders, Politicians Awake at Night’ – reading time 8 minutes.  I strongly suggest you read this article.  In summary it says that on November 8 the International Atomic Energy Agency claimed it has ‘credible evidence’ that Iran is still developing nuclear weapons.  That is one-month old news, and I am sure you are well aware of it.  That said, I consider this article a good summary of:

• Iran’s oil output and its customers;

• the importance of the Strait of Hormuz to Middle East oil supply to international markets (about 20% of daily world oil supplies pass through that Strait which lies along Iran’s southern coast); and,

• the impracticality (my words) of the European Union embargoing Iranian oil if Iran persists in developing its nuclear program, etc., etc.

The article describes the Strait of Hormuz as “the world’s most important chokepoint for oil supplies”.  As a minimum, reading this article will be a refresher course for you in what you already know.  Best case, you will learn things you didn’t know before reading the article, and frankly may not want to know after you read the article if you live in Europe or North America.  If you don’t want to take the time to read the article, Katusa concludes with respect to Iran:  “Do not underestimate Iran. Given reason, an attack on Israel is possible and a stranglehold on 15.5 million barrels of daily oil supply is probable. Either would escalate rapidly into scenarios we would all rather not contemplate.”  As I see things, such scenarios would almost certainly include a greatly escalated oil price, economic recession leading to likely depression in the developed countries, and escalated military activity led by the United States.

Katusa goes on in his article to discuss both Syria and Eygpt, concluding “The Middle East is about as far away from stable and predictable as you can get right now”.

I also suggest you read ‘Iran – Possible Implications of an Oil Embargo’ by Euan Mearns and published on The Oil Drum Blog – reading time 5 minutes.  This article will not take you as long as that to read, but it includes charts and maps that helped me better understand the numbers and the geography.  This article concluded with, what I think are, two worrisome statements:

• the first of these is “With the risk of armed conflict against Iran increasing with every week that passes”; and,

• the second is “The second more extreme scenario is that armed conflict spreads, compromising oil exports through the Straights of Hormuz. Oil exports from Saudi Arabia, Kuwait, The United Arab Emirates (UAE), Qatar, Iraq and Iran all pass through Hormuz. Data is not available for Iraq, but exports from Saudi, Kuwait, UAE and Qatar stood at around 12,805,000 bpd in 2010. The global net export market stood at around 35,173,000 and so these 4 countries alone account for around 36.4% of the global export market (excluding Iraq and Iran). Should these exports cease, albeit temporarily, the oil price will go through the roof, causing severe trauma to the global economy, including China”.

Again, I recommend this article to you.

Three comments:

• first, while I have not read anything written by anyone that the financial markets are currently pricing in a ‘war’ or ‘wars’ over oil, I suspect that will be a bandwagon many media gurus and pundits will jump on if what is going on in Iran and the Middle East escalates in the near term;

• second, a further war is the last thing the European Union and the United States needs at this point in time; and,

• third, from limited antidotal evidence I think that not all the ‘smart people’ in the financial services industries may be as attuned to the foregoing (and ongoing) events noted in this commentary as they might be.  I suggest you discuss these things with your financial advisor(s) and get their views on how these things may (or may not) impact the financial markets going forward.

My Overview Comments on all of this.

Whether it happens in the next months, the next year, the next decade, or in the longer term, it seems to me that military confrontation over resources – food, water, fisheries, forests, land use, oil & gas, base metals, and precious metals to name obvious ones, eventually will occur.  The only thing that I see preventing this is a cooperative and meaningful collaborative effort by all country governments to forge and enforce rules that have to do with restricting population growth, re-distributing what wealth exists so as to enable the world population to live in a much less ‘privileged’ way than some in the developed countries have enjoyed over the past many decades, and controlling generally how each world citizen lives their respective lives.

It is often said that ‘nothing is impossible’.  Of course that isn’t true – for example, a human being cannot live without breathing – and I could cite hundreds of other examples of things that are simply impossible.  One of those impossible things is to employ a finite amount of resources that occupy a finite space to nurture and maintain an infinite number of living organisms (of which human beings are but one type).

While I can’t say that the type of cooperation/collaboration I have described among country governments is impossible in a theoretical sense, I think it is impossible in a practical sense.  If you disagree with me, this is one time I simply say ‘let’s agree to disagree and move on’.  I believe that in the end the root cause of war is economics and prospective economics, and that this has been a fact of life throughout history.  This is one time I say history almost certainly at some point in time will prove to be a reliable predictor of the future.

You might fairly ask me “What Prompted You To Write The Last Three Paragraphs?”.  It was an article I read yesterday, and thought about throughout the day.  That article, titled ‘The Impoverished Asian Century’ – reading time 6 minutes, was written by Chandran Nair and published on the Project Syndicate Blog. Chandran Nair is the founder of the Global Institute For Tomorrow and co-founder and chair of Avantage Ventures, a social investment advisory firm based in Hong Kong. He is the author of Consumptionomics: Asia’s Role in Reshaping Capitalism and Saving the Planet.

I strongly suggest you read Mr. Nair’s article carefully, spend some reflective time ‘thinking for yourself’, and then spend some time considering whether you agree with my views as expressed in this commentary.

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Listen to this commentary

Bad enough, in my view, that the U.S. announced yesterday that it would release 30 million barrels of oil from its Strategic Petroleum Reserves (‘SPRs).  Collectively 27 other nations have agreed to release a further 30 million barrels from theirs.  Read ‘Surprise Oil Release by IEA Rattles Markets, Investors‘ – reading time 3 minutes.

The International Energy Agency (IEA) on behalf of the 28 program participants released this decision yesterday.  It seems to me either to be a ‘ridiculous band aid’ that can only draw crude oil prices down on a very short-term basis, or is a move that portends something far more problematic than U.S.$100 crude oil prices.  Frankly, I don’t understand it.  60 million barrels of oil is neither ‘here nor there’ in the context of the aggregate 4 billion barrels of SPRs reported in the article.  Likewise, 30 million barrels of oil is not a lot in the context of U.S. daily domestic consumption.  The IEA is quoted in the article as saying “Greater tightness in the oil market threatens to undermine the fragile global economic recovery”.  This strikes me as being a sensible view of things.  However, since when did any sensible person go into a firefight with a squirt gun when all other participants were shooting real bullets?

Looking at this from a U.S. perspective, it strikes me as plain loony that President Obama and his band of merry men and women could believe they could gain any meaningful political currency from such a move – a move that may indeed move gasoline prices in America a few cents lower at the pump for a short period of time.  The Presidential election is 16 months away, and with all the economic events I think likely to unfold between now and then I see no chance this one event will be remembered Main Street Americans when they vote in November, 2012.  So why do this at all, but to try to kick the ever-increasingly battered’ can a step or two further down the road?

U.S. preliminary jobless numbers were higher again yesterday, and last week’s jobless rate numbers were adjusted upward.  Consider this in combination with my commentary today on Mr. Bernanke’s current views of America and the world.  Intuitively, I am seeing things unraveling at an increasing pace.  I suggest you read this article, get up to 10,000 feet, and think about whether you agree with me.

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An article titled ‘OPEC Concludes Meeting, Arrives at a Stalemate‘ – reading time 2 minutes – reports that the OPEC meeting yesterday failed to reach agreement for the first time in 20 years.  At the meeting Saudi Arabia apparently proposed increasing quotas by 1.5 million barrels a day – presumably in large part to offset the current almost 90% reduction in Libyan oil output (reported in the same article).  That proposal was supported by Kuwait, Qatar, and the United Arab Emirates.  It was opposed by Libya, Angola, Ecuador, Algeria, Iran and Venezuala.

Reach your own conclusion, but it appears to me that what transpired largely was a ‘pro-America’ vote for, and an ‘anti-America’ vote against.  What this says about yet to be determined retail gasoline prices in America over the now ongoing ‘summer driving season’ remains to be seen.  That said, I would expect U.S. retail gasoline prices to be more likely to increase than decrease between now and September – with resultant increasing downward pressure on U.S. durable goods prices as U.S. consumers direct an increased % of their ‘spendable dollars‘ to keeping their vehicles ‘on the road’.  Moreover, if oil prices rise in the near term, that almost certainly will promote an increase in U.S. monthly net trade deficits over the next few months – see ‘How Screwed Up Is This’ following.

Possibly Related Posts:

• Keystone XL Pipeline?
• And So It Goes – New Arms Race?
• Strategic Petroleum Reserves
• Country Risk – A Very Big Deal!
• Oil Price Significance, Dollar v. Gold, Cash Flow v. Earnings, Poverty in America