Unclogging America's Oil Pipeline System
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By Vedran Vuk
Dear Reader,
With job creation on the political agenda again, I wanted to discuss the skills deficit. Over the past few years, I've read numerous articles blaming high unemployment on a lack of skills. These articles often provide anecdotal evidence of employers with piles of resumes, but few qualified applicants.
On the one hand, the skills deficit is a real problem. On the other hand, it really doesn't explain the prevailing near 10% unemployment. Skills didn't magically evaporate in the 2008 crash. If a lack of skill is to blame, then how does one explain 4.4% unemployment only a few years ago? Surely workers weren't that much more skilled in 2005. Unless the workforce had a sudden skills deficit, this theory doesn't hold up.
However, there is a way to make the theory fit: Workers do have skills - just not the right ones. For example, if someone has been working construction for the past decade, they have skills, but not those necessary for office work, retail, or the service industry. As a result, it makes perfect sense for employers to receive so many resumes from "inexperienced" workers.
In some ways, this a good sign. If one's industry is really in the dumps, it's best to start applying elsewhere. After any recession, capital and labor must be reallocated. This is part of the economic healing process.
So, does this explain the skills deficit? Partially; but it doesn't explain the high unemployment rate. Consider this: How did all of those construction workers learn their trade? At some point, they didn't have any skills, but regardless applied for a construction job. An expanding employer saw a person with potential and gave him a chance. From there, they became skilled and productive workers.
In my opinion, this is where a bigger question comes into play. The question shouldn't be, "Why don't workers have more skills?" Instead we should ask, "Why won't employers hire bright and hard-working people with lots of potential?" After looking through 100 resumes, an employer might not find any skilled people perfect for the job, but I find it hard to believe that not a single person from a stack of resumes has potential.
The workers are not completely to blame here. Part of the problem is that employers are too afraid to take risks. With the economy still in horrible shape and an uncertain future ahead, employers want to play it safe and won't risk hiring an inexperienced worker. They want either someone ready to hit the ground running or nothing at all. The same issue takes place with capital. Businesses don't want to take huge risks by expanding and purchasing expensive capital. They want the sure thing and are playing it safe.
Could America use more skills? Sure, more skills are never a bad thing, but what the economy really needs is a stable environment in which businesses aren't afraid of another bubble bursting around the corner. With reasonable certainty and stability, businesses will start taking chances on the smart college grad without experience or the hard-working construction worker in a different role. No one is ever perfect for any job. To build skills, someone else has to be willing to give a worker the chance to do so. Until the economic environment improves, few companies will offer those chances. Instead, they'll only pick the safe plays and experienced workers.
For the rest of the issue, the Casey Research energy team will discuss the Keystone XL pipeline's expansion plans and the political situation surrounding those plans.
Unclogging the System
By the Casey Research Energy Team
Two proposed pipelines that together have the potential to unclog the overburdened pipes from the oil sands - and in doing so provide America with a friendly, stable, and growing source of oil - took significant steps forward last week.
The State Department gave a crucial green light to the proposed Keystone XL pipeline, which would carry heavy oil from Canada's oil sands across the Great Plains to terminals in Oklahoma and the Gulf Coast. And Calgary-based Enbridge announced that it has lined up enough shippers to fill its proposed Northern Gateway pipeline, which would move bitumen from Canada's oil sands to the west coast for transport to Asian markets.
Together, Keystone XL and Northern Gateway would alleviate the mounting issue of how to get crude oil from the oil sands out to market. Oil sands production is very much on the rise: Canada produced 1.5 million barrels of crude a day from the oil sands in 2010 and plans to expand that total to 2.2 million barrels a day in 2015 and 3.7 million barrels a day by 2025.
The crude oil extracted from the sands is thick and heavy. Refining this bitumen (as it is known) requires heavy oil facilities, of which there are none in Canada. At present bitumen is sent to heavy oil refineries in America's Midwest, but the pipelines that run from the oil sands to Oklahoma will reach maximum capacity in as little as four years. At that point oil sands producers will be stuck with increasing volumes of bitumen and no way to get it to market... that is, unless another pipeline or two gets built.
The Northern Gateway pipeline would bypass refining altogether, sending crude bitumen to the west coast to be loaded onto tankers and taken across the Pacific to Asian markets. The company looking to build the line - Enbridge - says companies have fully subscribed to long-term service on both the main line (a 525,000-barrel-per-day pipe running from Alberta to the west coast town of Kitimat) as well as on the subsidiary (a smaller line that would bring imported condensates inland). In its announcement, Enbridge did not identify which companies signed on to use the C$5.5-billion facility, but Chinese refining giant Sinopec says it is on board with the project.
Enbridge called the shipper agreements a "major step forward" for the project. The company says the option of selling crude oil to Asia, instead of only selling to the United States, will enable Canadian producers to command a better price for their product.
Then there's Keystone XL. The Keystone pipeline, which started operations in mid-2010, crosses the border from Manitoba into North Dakota, then traverses South Dakota, Nebraska, Kansas, and Missouri to terminate in Illinois. In February of this year another terminus was added in Cushing, Oklahoma. But even with two end points, the line can still carry only 591,000 barrels of oil a day.
Owner TransCanada wants to expand the pipeline in two steps. Phase I would see a new, 2,700-kilometer line run from Alberta through Montana, South Dakota, and Nebraska, meeting up with the current line in Steele City. The second phase would connect the entire system to the Gulf Coast by adding a line from Cushing, Oklahoma, to Houston.
Map courtesy of TransCanada.com
Both phases are equally important. Phase I more than doubles the volume of crude that TransCanada can move from the oil sands to the Midwest: With two pipelines the Keystone system would be able to move 1.3 million barrels of oil daily, compared to 591,000 barrels a day in one pipeline now. Phase II connects the Midwest to the Gulf Coast, preventing oil sands bitumen from overwhelming the heavy oil facilities in Oklahoma by creating access to the heavy oil facilities of the Gulf Coast.
Connecting Cushing to the Gulf Coast would likely also help to bring American oil prices in line with international prices. American crude oil is benchmarked by the price at Cushing, which is known as West Texas Intermediate (WTI) crude. The most-watched oil price internationally is Brent North Sea crude, which is traded in London. The key difference between the two is that Brent oil is seaborne, while WTI crude is landlocked. As such, the impending crude oil glut from the oil sands has been pushing WTI prices down, while Brent prices have been climbing because of instability in the Middle East and North Africa.
However, stabilizing the price difference between WTI and Brent is a side benefit of the Keystone XL expansion. The main benefit for America is oil-supply stability. The fact is, Canada represents a lone bright spot in America's oil-supply picture. The world's biggest oil consumer relies on unfriendly, unstable, or declining producers such as Nigeria, Venezuela, and Saudi Arabia for almost half of its supplies. So, while buying oil from the Canadian oil sands may be environmentally controversial, the oil sands actually represent America's only significant friendly, stable, and growing source of oil.
TransCanada is also promoting the economic benefits of the US$7-billion project. More than 900 US companies supply equipment to oil sands operators, selling everything from heavy equipment to customized software. Those supply contracts will dwindle without new pipelines to move oil sands oil to market. The pipeline would also generate 20,000 unionized construction jobs and hundreds of millions of dollars in tax and other revenues for the six states through which it would pass.
Five of the six governors support the pipeline expansion. The sixth, Nebraska Republican Dave Heineman, only opposes the pipeline's routing through the Ogallala aquifer. The project enjoys strong bipartisan support on Capitol Hill, where the House of Representatives last month voted 279 to 147 in favor of a resolution calling on the administration to make a decision by November 1.
The recent decision by the State Department is important: It decided that the benefits of importing oil from a friendly neighbor outweigh the potential costs of the pipeline, including environmental costs. Final approval, however, has to come from the president, who has to decide if the project is in the nation's economic, political, and environmental interest. Obama's decision will not come before the end of the year, after public hearings and consultations with other federal agencies. But with the State Department concluding that "there would be no significant impacts to most resources along the pipeline's corridor," it seems likely the president will give it the go-ahead.
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Many environmentalists are dismayed at the prospect of building a major new pipeline to bring "dirty" oil sands crude into the US. Granted, when companies first started extracting oil from the oil sands, the process was energy and water intensive. Things have improved significantly over the last 20 years, however, with carbon emissions from oil sands production and refining down roughly 40% compared to 1990. Oil sands crudes emit more carbon dioxide (during the full cycle, from production to tailpipe exhaust) than many Saudi Arabian, Mexican, and Venezuelan crudes; but the emissions are comparable or even lower than those from heavy crudes produced in California, Nigeria, and the Middle East, all of which are pumped at American gas stations.
As for Northern Gateway, the other proposed pipeline from the oil sands west to the Pacific coast, it is still at an earlier stage of the permitting process (though its process is simpler because the proposed route does not cross an international border). The proposal is currently under review by the National Energy Board, with hearings set to begin next year. Those hearings will likely be boisterous, as environmentalists and First Nations groups are strongly opposed. They say an oil spill at or near the pipeline terminus and loading port of Kitimat would be disastrous for the delicate northern coastal ecosystem, and therefore argue that the benefits are not worth the potential cost.
[To profit maximally from energy developments like this requires keeping up with all the news. A subscription to Casey Energy Report is invaluable to energy investors. Try it risk-free for ninety days.]
Additional Links and Reads
Unemployed Face Tough Competition: Underemployed (AP)
This article points out that the 14 million unemployed are also competing with the 8.8 million part-time workers seeking additional hours. If these two groups were combined, the unemployment rate would be up to 16.2%. That's pretty high, but I don't think that this is exactly an apples-to-apples comparison. Part-time workers usually aren't sending out as many resumes as full-time workers. They're busy working part of the time, or they often feel less urgency than the unemployed. Nonetheless, this is an important factor to consider.
The article also notes some important headwinds for the unemployment rate. For example, workforce dropouts may return as conditions improve. Another issue is that part-time workers will likely see their hours rise prior to the hiring of new employees.
Secrets From a Pawn Star (Yahoo Finance)
Here's a great video with Rick Harrison of the show Pawn Stars. The show features the Gold & Silver Pawn Shop in Las Vegas run by Rick Harrison, his son, and his father. In each episode, clients come into the shop to pawn or sell strange and historical items. The show is available on Hulu.
In this interview, Rick is interviewed about his views on the economy through the eyes of a Vegas pawn shop owner. He notes two things of interest: He won't accept construction tools any more, and he can't keep gold and silver bullion on his shelves. As soon as the pawn shop gets any bullion, it's sold almost instantaneously.
Marc Faber Sees No Bubble in Gold Price Runup (Bloomberg)
Marc Faber reinforces the view that gold is not in a bubble. With gold surpassing the $1,900 mark, the talk of a bubble is back again. However, I'm not sure if the bubble rumors make any sense at all now. When margins were raised, gold took a sizeable tumble. That probably took a lot of the short-term speculators out of the market. The gold bubble crowd implies that the speculators who were just knocked out of gold are piling on for yet more gold. That doesn't make much sense to me. Personally, I'm more optimistic today than the last time gold reached this area.
That's it for today. Thank you reading and subscribing to Casey Daily Dispatch.
Vedran Vuk
Casey Daily Dispatch Editor
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