The Keystone XL Pipeline Was Never Key for Stocks

A lesson in how to put seemingly big headlines in context.

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Politics often stokes big emotions, captures significant public attention and preoccupies investors—frequently, in our experience, to their portfolios’ detriment. It is just very hard to tune down biases amid a bevy of headlines that would have you believe the story du jour must be huge for markets. But there are several problems with this. For one, all the attention paid to big, divisive issues allows markets to efficiently pre-price them, mitigating any impact. But others times, political issues—even ones that may seem very market-or-economy related—get blown out of proportion relative to markets. One such long-running issue was back in headlines last week: The death of the Keystone XL pipeline.

Last Wednesday, Canadian oil storage and transport firm TC Energy announced the Keystone XL pipeline—a project that has served as an American political football almost long enough to celebrate its bar or bat mitzvah—won’t happen. The pipeline, which would have moved ~800,000 barrels of Canadian crude oil per day from Alberta to Nebraska, where it linked with another pipeline, is dead.

Well, we should say, still dead. This really isn’t coming as a shock to anyone. After all, the project debuted in September 2008. It seemed destined to move forward early on, as the pipeline’s construction would create many (then hugely desirable) jobs. Because this pipeline crossed the US-Canadian border, the law soon required approval from then-President Barack Obama’s State Department. Then-Secretary of State Hillary Clinton even said the department was inclined to approve it in October 2010, a position the department’s rulings confirmed several times thereafter. But then it became an environmental issue and got firmly lodged in American partisan politics for the next decade.

After the seemingly positive reception from Obama administration officials, the president demurred on making a decision in November 2011, claiming to need a further review. This effectively delayed any decision until after 2012’s election.[i] The GOP-controlled Congress tried forcing his hand by passing legislation requiring a yea-or-nay decision within 60 days, which led Obama to reject the pipeline, although he invited the Canadian firm to resubmit later. When they did, the approval sat and sat, enduring state legislative and court challenges, as well as protests galore. In 2015, the GOP Congress again tried to force Obama to decide. He rejected it again. So the pipeline was mostly dead.

The tables may have seemed turned when Donald Trump won 2016’s election and issued an executive order in January 2017 approving Keystone XL, giving proponents hope. But court challenges still put sand in the gears all the way up to this year, when President Joe Biden rejected it again. Now the company is saying it won’t attempt to revive the zombie pipeline, seemingly ending the saga.

Throughout the course of this extended back-and-forth, people argued heatedly over the pipeline’s potential economic effect. It took center-stage in many debates—including three presidential elections—over jobs and slow growth. After all, even up to this year many claimed building it would create 11,000 or so jobs.[ii] On the oil market front, lots of folks touted its huge capacity to move something like 20% of Canadian production daily and represented an investment on the order of $9 billion.[iii] So it may seem logical to think this would have some market impact.

But scaling is crucial. The pipeline’s capacity may seem big, especially when scaled against Canadian output. But it amounted to just under 0.9% of total world oil output—which isn’t huge.[iv] It also doesn’t mean Canadian producers won’t bring this oil to market via other means, like truck or train, assuming oil prices justify it. This was actually one of the Clinton State Department’s findings in the middle of the 2010s: That the pipeline was a safer means of moving the oil than the likely alternatives. Jobs? While we don’t dismiss the fact construction would create jobs, if 11,000 were created, that would be a rounding error overall. When this project was unveiled in September 2008, total US nonfarm payrolls amounted to 136.7 million people.[v] The civilian labor force, a measure of all people age 16 or older, was 154.6 million.[vi] Now those figures are higher, 144.9 million and 160.9 million, respectively.[vii] $9 billion in investment, assuming it hit all in one year, would have increased 2008 business investment by just 0.45%.[viii] In 2020 it would have been 0.24%.[ix]

It should be no surprise, then, that markets barely budged on any of this news. But you wouldn’t know it from the political furor Keystone XL touched off over the last decade. To us, this highlights the need for investors to separate fact from rhetoric and politicized debate.

HT: Fisher Investments Research Analyst Ori Powers.

[i] “U.S. Delays Decision on Pipeline Until After Election,” John M. Broder and Dan Frosch, The New York Times, November 10, 2011.

[ii] “Fact-Checking Claims That Biden Is ‘Destroying 11,000 Jobs’ by Revoking Keystone Pipeline,” Daniel Funke, PolitiFact, January 26, 2021.

[iii] “Explainer: What Is Happening With the Keystone XL Oil Pipeline?” Rod Nickel, Reuters, November 18, 2020.

[iv] Source: US Energy Information Administration, Short-Term Energy Outlook, as of 6/10/2021. Figure cited is the estimated 830,000 barrel-per-day capacity divided by total world oil production in barrels per day.

[v] Source: Federal Reserve Bank of St. Louis, as of 6/10/2020. Total nonfarm payroll count in September 2008.

[vi] Ibid.

[vii] Ibid. Total nonfarm payrolls and labor force.

[viii] Source: US Bureau of Economic Analysis, as of 6/10/2020. Figure is the percentage of 2008 annual nonresidential fixed investment in nominal terms.

[ix] Ibid.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.