May 06, 2020

Howard A. Learner

Oil Prices Matter When It Comes to Pipelines

Eeny, meeny, miny, mo. Which of the controversial large oil pipelines are going to go? Some might be on a path to nowhere, financially.

Oil prices have fallen so much that Exxon reported its first quarterly loss since 1988 and announced that it will shut down 75% of its oil rigs in the Permian Basin (Texas). Likewise, oil drillers are shutting down in the Bakken shale region (North Dakota) – the active rig count has fallen from 62 rigs a year ago to 22 rigs today. Suncor is shutting down some of its oil sands production in northern Alberta because of very low market prices for bitumen. COVID-19 and the related economic downturn have clobbered demand.

Why is this happening, and why does it matter if you don’t own oil stocks or live in a state – such as Alaska, North Dakota, Oklahoma, Texas, Wyoming – where the economy depends heavily on oil production?

Oil prices are falling because:

First, most of us are staying-at-home and driving much less. We’re taking fewer trains and almost no airplane trips. Consequently, oil use has dropped steeply. Less demand results in lower prices. That’s Economics 101.

Second, remember OPEC? It’s not exactly a laissez-faire competitive market here. Saudi Arabia and Russia, among others, can maneuver and manipulate prices by increasing or decreasing their oil production. They do that both for economic reasons – to retain their oligopolies by driving out competitors including Bakken shale, Canadian oil sands, and South America and Asian oil producers – and for geopolitical reasons. For example, when Saudi Arabia, the world’s lowest-cost oil producer, increases its supply, that drives down prices and puts pressure on higher-priced competitors to reduce production.

Why this matters for the environment:

Let’s face it – when the gas price at the pump in Arena, Wisconsin is $1.39 per gallon, that price signal encourages people to drive more, which pollutes more. Low gasoline prices aren’t good for electric vehicle sales or for public transit.
On the other hand, low oil prices really aren’t good if your business is building oil pipelines to bring northern Alberta oil sands or western North Dakota shale oil to distant markets. That’s exactly what the controversial Dakota Access, Enbridge Line 3, Enbridge Line 5 and Keystone XL pipelines, among others, are designed to do.

Let’s learn the lessons from Enbridge’s spill of 1 million gallons of crude oil into the Kalamazoo River near Marshall, Michigan when a 6-foot rupture opened in its Line 6B pipeline. Oil flowed for 17 hours and pushed close to 40 miles downriver before Enbridge shut down the pipeline. That oil spill affected 4,435 acres of land and required massive cleanup work, which kept the river closed for about two years.

ELPC and our allies, including Groundwork, Michigan Climate Action Network, National Wildlife Federation, several Tribes and many others, are concerned about disastrous consequences for safe clean water, and the Great Lakes ecology and economy if there is an oil spill from the old Enbridge Line 5 oil pipeline in the Straits of Mackinac.

Some quick oil price economics:

The market price of West Texas Intermediate (WTI) crude oil is the North American industry marker. Right now, the volatile WTI oil price is $23.39 USD/bbl. (Nymex) for June 2020 contracts. Here’s what that means in the oil fields.
It’s hard to make most Bakken shale oil drilling economical at less than a WTI price of $50.00 – $55.00/bbl., which is more than twice as high as today’s price. Canadian oil sands in northern Alberta generally need a WTI price of $80.00 – $100.00 USD/bbl. Businesses aren’t going to invest in new oil drilling rigs in western North Dakota and start the roughly four-year production cycle unless and until oil prices move much higher. It’s hard for that to happen in the current economic downturn.

So, what does that mean, for example, for the proposed Enbridge Line 5 new oil pipeline tunnel running through the Straits of Mackinac where Lake Michigan and Lake Huron connect?

The impact of low oil prices calls into question whether it makes economic sense for Enbridge to invest in the expensive proposed new tunnel for its Line 5 oil pipeline running through the Straits of Mackinac. Pipelines make money by charging oil producers to transport their oil from wells and other facilities to refineries and to coastal areas for export. Because there’s much less oil supply from northern Alberta and western North Dakota (Bakken) being produced, there’s less demand for the proposed expanded new oil pipeline capacity (Dakota Access, Enbridge Line 3, Enbridge Line 5 tunnel, Keystone XL and others).
This is sort of like the kids’ game of musical chairs. There are fewer seats at the table than people. These pipelines are competing against each other to carry less available oil supply.

It’s hard to see how Enbridge gets paid enough to profitably build a new tunnel for its oil pipeline anytime soon unless some of these other pipelines don’t operate. There’s likely too little oil supply to satisfy all of the pipelines’ needs. Will the financiers for these pipeline companies continue to support the expensive capital investments? That’s risky. Stay tuned.