| The Players and the Pieces |
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Time for controversy!
Well, sort of. Today we’re going to talk about the proposed Keystone XL pipeline. It’s weird. I’ve watched this thing transform from one of those overwhelmingly supported, “hey, that sounds pretty smart” ideas to a highly politicized talking point.
But first, special thanks to whoever forwarded our 10 Predictions for 2012 to President Obama! I know that rhetoric is rhetoric, but it was neat to hear him explicitly mention natural gas in his State of the Union address. I don’t recall the last time I heard anybody address the entire country about how natural gas needs to be a significant part of our long-term energy plan. I hope he’s serious about urging Congress to get moving on this.
Anyway, I think this year is a huge one for the natural gas story. I just heard a terrific interview with JPMorgan’s senior economist Jim Glassman who dropped a stat that natural gas, on a thermal equivalent basis, works out to about $18/barrel in crude oil terms. Those are the kinds of data points that get people listening. And this is the kind of disconnect in the market that gets companies thinking seriously about how to convert some of these power plants to gas turbines and short-haul trucks to cleaner burning natural gas engines.
The natural gas story doesn’t directly tie into Keystone XL. But in a broad sense, it hints at the kind of thing that might be possible when you have a broad infrastructure in place where it’s easy to pump this stuff around. I also get a kick out of the political games that are played over issues like this, but that’s just a function of my having zero personal investment in either party.
There is a significant economic component to this story, so it’s something that investors need to watch. I’ll get to that in a bit.
But first, to set our scene…
FADE IN:
The REPUBLICAN PARTY, egg dripping down its face after playing bad poker over payroll taxes and somehow snookered into getting labeled the party that supports tax increases, slinks down in its chair, brow furrowed and lips puckered. THEY are determined to get revenge in the next match.
INT. OVAL OFFICE
President OBAMA and Democratic members of CONGRESS are laughing hysterically. HARRY REID is playing HAIL TO THE CHIEF on a grand piano. It’s all very weird. But jubilant.
EXT. CAPITOL HILL – NIGHT
CUT TO INT. HOUSE CHAMBER
CLOSEUP JOHN BOEHNER
(growling)
Guys, we need a plan.
REPUBLICANS are working in a frenzied state. The clock ticks on into the night. CONGRESSMEN loosen their ties and open their collars, wiping sweat from their brow. In the back of the room MICHELE BACHMANN is eating pizza. Nobody asks what she’s doing there or why. The Pizza was paid for by MichelePAC, which has no direct affiliation with Michelle Bachmann. Honest!
CUT TO
JUNIOR STAFFER
I’ve got it! I’ve got it!
JOHN BOEHNER
Go ahead, son.
JUNIOR STAFFER clears his throat. All eyes are lasered in on the staffer with a boyishly devious grin. Even Michelle Bachmann is paying attention.
JUNIOR STAFFER
This Keystone XL pipeline is a home run for our backers and constituents. And for the American people. Mr. Speaker, sir, do I have permission to speak openly.
JOHN BOEHNER
(eyes darting left and right)
Go ahead, son.
JUNIOR STAFFER
This pipeline will create real jobs — perhaps as many as 20,000. Engineers to design the structure, laborers to lay the pipe, steelworkers to manufacture the materials. And that’s to say nothing about all the peripheral jobs this project will create — staff at barbershops, convenience stores, and payday loan outlets. We’ll need to open more bars and Buffalo Wild Wings, too. Then we’ll need people to maintain the pipeline. And it will also reduce our dependency on the Middle East for oil. With the Keystone XL, we’ll be able to get a lot more of the oil we need from North American sources. That’s good, right?
CLOSEUP JOHN BOEHNER raising his eyebrows.
CUT TO RICK BERG, Congressman from North Dakota.
RICK BERG
(really, really excited)
Hey guys! NORTH DAKOTA hooks up to Keystone too! My state is making more oil right now than Ecuador! And Ecuador is an OPEC member! Maybe NORTH DAKOTA should join OPEC!!!
JOHN BOEHNER
No foolin?
NORTH DAKOTA
(boomingly)
Damn straight, John.
JUNIOR STAFFER
Anyway, let’s hurry this project up. Let’s put a 60-day deadline on it and sneak it into this payroll tax extension bill. If OBAMA approves the project, we win and get fat donations from our backers. If OBAMA rejects the project, then we get out our pitchforks and accuse him of being a JOB DESTROYER!
JOHN BOEHNER
Nobody likes a JOB DESTROYER.
NEWT GINGRICH
(louder)
Yeah! Nobody likes a JOB DESTROYER!
Cheers erupt through the HOUSE CHAMBER. Nobody wonders what NEWT GINGRICH is doing there. Wasn’t he supposed to be in South Carolina? Everybody is too excited to notice.
NORTH DAKOTA
(boomingly)
Wait, there are states where people have no jobs?
EXT. UNITED STATES CAPITOL BUILDING – Early morning.
The sun rises.
FADE OUT
—
This isn’t about solving problems that matter for most people. It’s not about a bunch of really intelligent guys sitting down over beers and trying to figure out which energy policies generate the most benefit for the nation as a whole with the fewest costs. It’s a game.
To borrow a phrase from HBO’s latest hit and one of the most engrossing book series I’ve read, this is the Game of Thrones, the only game that matters. This game is about getting your man into office and keeping him there so he can enact policies that benefit certain interests that have a lot of money. So long as you’re smart about it, helping people who have a lot of money make even more money is a pretty good way to get paid yourself. And isn’t that what we all want, anyways?
Not just a player, but a grand-freakin'-master.
To quote my favorite character in the series, Lord Petyr Baelish, the Master of Coin, “In King’s Landing, there are two sorts of people. The players and the pieces.”
It’s not always obvious who’s who, either. Obama is clearly a player. Same with Hilary Clinton. Karl Rove was of the great players of the last 20 years. George W. Bush was one of his greatest pieces. John Boehner, failing time after time with the impossible task of wrangling a diverse party base under a unified strategy, is a piece of both the right and far right, which may as well be its own third party. And you guys all remember Chris Dodd, right? Co-architect of the half-assed attempt at financial regulatory reform and one of the primary forces behind the SOPA legislation? He’s a total piece – first of the banking industry and now of the MPAA.
Most of the people on Wall Street are players. And an awful lot of the people in Washington D.C. are pieces. More often than not, it comes down to money.
Unfortunately, we, the people, are all pawns. We are pushed around the board by interests and powers that most of us cannot or don’t bother to comprehend. We are told stories and we paint ourselves red or blue. This helps us feel better. It brings us comfort to be surrounded by pawns of the same color and who sing the same songs. It’s fun to yell at the other guy. But in the end, none of this matters. We are all carved from the same marble.
Just the facts
The reason why this game is important to understand is that it sometimes gets in the way of doing things that help us pawns out. In the case of the Keystone XL pipeline, the benefits it provides to our country are meaningful. There are certainly costs, but when you make a 2-column pro/con list, it gets really hard to oppose this thing unless you’re a fringe environmentalist who places principle above all else.
Keystone XL is a 36″ diameter pipe that will run roughly 1,700 miles from the tar sands of northern Canada, through the shale oil fields of North Dakota, and all the way down to the Gulf of Mexico where the big refiners are. It doesn’t magically make more oil appear, nor does it involve drilling in an environmentally-sensitive area. All it does is make it a whole lot easier and cheaper for crude oil to get where it needs to be so that we can turn it into useful stuff like gasoline and other distillates. Once it’s rolling, it’ll move around 800,000 barrels per day.
Currently, we import around 4.8 million barrels of crude oil per day from OPEC. You can see that 800,000 barrels/day isn’t a one-shot kill, but it’s a significant step in the right direction.
There’s a good chance you don’t find the geopolitics of oil as exciting as I do. That’s cool. I’m a weirdo. But if you do care, here’s the thing: OPEC doesn’t really matter so much to the U.S. anymore, and it’ll matter even less if this pipeline gets built.
No longer will the U.S. be a piece occasionally played by rickety governments and unstable oil powers.
Keystone XL isn’t going to keep Canada from developing its oil fields. Canada is sitting on a (black) gold mine and they know how important that asset is to their future as a nation. The Players all understand this even if the Pieces don’t. If this pipeline gets shot down, the only difference is that Canada will ship more crude oil west to Vancouver where it will get on a tanker and sail to China to be refined.
As I mentioned, the primary objection to this pipeline is environmental in nature. But when you accept the fact that Canada isn’t going to slow down the development of its oil sands, there’s an argument to be made that the environmental impact would be even more negative if all this oil has to get on a boat and then be refined by the Chinese. I can’t say for sure, but my guess is that that China’s refineries don’t exactly need to adhere to the same environmental standards as those along the U.S. Gulf Coast.
Yet after all this, 47% of Americans are opposed to the proposed pipeline. If you’ve ever needed an example of Americans deriving their personal values from their political party rather than developing those ideas through independent thought, here it is.
Just the concerns
There’s no question that this is going to benefit Big Oil. It benefits TransCanada, the company that wants to build it. It benefits the refiners who will be getting easier, cheaper oil. This is a project that these guys are all pushing hard for and paying a lot of money to lobby for.
Part of me feels a bit of philosophic objection to that whole idea — I don’t like super-powerful special interests either. I daydream about how great it’d be if my car was powered by a Mr. Fusion and emitted only drinkable spring water as waste. But the fact of the matter is that I have to put gasoline in my car and there are only so many places I can spend money. Personally, I’d rather that gas be cheaper rather than expensive. And if that means projects that help Big Oil, then, oh well. I wish that I and 250 million other Americans had the luxury of being able to afford to take a moral stand here.
While there are definitely some philosophic and semi-environmental concerns about the project, the benefits to the economy and our infrastructure are unquestionably positive. This project will create jobs. It’s not a panacea, but it’s a big project and emblematic of the type of focused infrastructure spending that economists, Republicans, and Democrats all seem to be in support of — at least when they’re not playing games with each other. And this isn’t even a government project, either! Your tax dollars aren’t paying for this thing. TransCanada is paying for it.
It’s not just about creating jobs, though this has certainly been one of the main aspects of the project to be politicized. It’s about keeping the cost of gasoline low. Like it or not, gas prices are a major expense for most households. When they rise, it acts as a tax on the middle and lower class. Energy prices are a major input to the health of the U.S. economy. Every single post-WWII recession was preceeded by a spike in crude oil prices.
Here are some fast facts about how the price of crude oil affects consumption:
- Every $10 increase in the price of oil translates to a roughly 25 cent increase in gasoline prices.
- Every one cent increase in gasoline prices represents about $1 billion of consumption.
- So every $10 increase in the price of oil nicks GDP growth by roughly 0.2%.
With the U.S. staring down a long-term growth frontier of about 2% per annum, I cannot understate how important low, stable oil prices are to the economy.
While oil prices are calculated on a global scale based on global supply and demand, there is still something to be said for where one buys it from. Take a moment and step outside of all your political & economic bias, and ask yourself a simple question.
Would you rather buy more of your oil from Canada & Mexico — who are already #1 and #3 on our list of importers — or more from Saudi Arabia, Venezuela, Nigeria, Columbia, and Iraq, who round out the other 7 of our major suppliers?
Let’s make a deal
Before I wrap this up, I should mention that a deal is going to get done one way or another. Don’t worry about that. The need for such a pipeline is too great. Behind the scenes, it’s pretty clear that Obama really isn’t opposed to this project. With a wink, he invited TransCanada to simply re-apply, hopefully buying him time until after the election and to conduct proper review.
Look, these are just all moves in the game he has to play. It’s disappointing that they have to play such a politicized game when we pawns would all be much better off engaging in collaborative problem solving. But it is what it is. I didn’t design the game. I just watch it.
I’m curious to see what happens when top-level Democrat players eventually come out in support of the project, when they conduct their own analysis and come out and say, “You know what, this pipeline ain’t so bad.” Will 47% of the country still be opposed to it?
Democrats, when Obama changes his position about something, what will you do?
And Republicans, will you embrace Obama for doing so?
The investment angle
As I mentioned, there’s an investment component to this.
Over the last decade, the energy sector has been a top performer. I think this trend is very long-term in nature and could continue for the next decade or so, at least until we embark on the next secular growth boom. When that happens, it’ll be time to lighten up all your energy stocks and load up on sectors like financials or consumer-discretionary that are leveraged to the health of the economy and contingent upon expanding levels of credit.
I’m not sure there’s an alternative energy trade here, though I can see how someone might be fooled into thinking that the failure of this pipeline would be good for solar or wind stocks. I don’t see this pipeline mattering to that one way or the other. And as I’ve always said, over the long run, there is no world where alternative energy investments succeed and traditional energy investments do not succeed. Conversely, there are plenty of endgame scenarios where alternative energy investments fail and traditional energy investments thrive.
Also, when Keystone XL is finally approved, expect the spread between NYMEX Crude and Brent Crude to narrow. Another side effect of this pipeline is that it will free up the oversupply of oil in Cushing, OK, and make it easier for oil to get down to the Gulf.
All of you regular readers know that Brent Crude is the oil price to watch, not NYMEX. NYMEX Crude is artificially low. In any case, if this pipeline does ultimately get approved, there may be a trade that investors can put on that would benefit from a narrowing of that spread. Theoretically, the two oil prices should be almost exactly the same, and indeed for most of their history, they have been. A more efficient oil transportation infrastructure will help those prices converge to where they really should be.
The REAL story
Ultimately, this is a cultural story. And as always, the real story is the story behind the headlines and the raw fundamentals. This is not a story about creating/destroying jobs, helping out Big Oil, or saving the environment. This is not even a story about “I feel this way and those other guys feel that way and screw those jerks!”
The story is that if something is going to come along that is legitimately and obviously beneficial to the economy and to our infrastructure, and we’re still going to resort to playing games, badmouthing, and finger-pointing, then we have much deeper problems as a nation.
This is the story that should disturb you, and it’s a story you won’t find in any of the headlines. I know you didn’t need yet another example of how unfathomably dysfunctional our political culture is right now, but here it is.
I wish I knew how it ended. My knowledge and experience are so small compared to what they need to be in order to really make sense of it all.
Perhaps it ends like…
CUT TO Every lobbyist in the world
Raucous laughter.
FADE OUT.
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