The renewed push for approval of the Keystone pipeline suggests its backers believe it is "now or never," and they're probably right. The economics of Canada's tar sands operations are already unfavorable, and they are becoming worse. The tar sands operations and supporting projects like Keystone will look even less attractive two years from now, because the economic environment will have changed. This suggests that a delaying strategy could kill the pipeline project and others like it, as well as slowing or shutting down tar sands operations.
[Update: Several people have provided information in the comments indicating that another proposed pipeline could achieve substantially the same boost for tar sands operations. The analysis presented below really should be viewed as a reason for people in the U.S. and Canada to maintain opposition to ANY pipeline that would serve the tar sands, not just Keystone.]
One of the most important factors governing whether the Canadian tar sands operations will proceed and expand is the price of oil. The operations are only marginally viable economically (pdf), and any additional costs or further declines in revenue could put them on hold or maybe shut them down.
If the Keystone pipeline were in place, it would make the tar sands operations more viable. Transportation capacity for the petroleum materials would increase, and transportation costs would decrease. The pipeline probably would have a medium-sized but important effect on the overall economics of the tar sands operations and the companies that have invested in them.
In the absence of the Keystone pipeline, the tar sands operations could get a smaller boost from other proposed pipelines such as the one that TransCanada has named Energy East. However, the magnitude of that boost would be limited partly by the capacity of refineries on Canada's east coast, where Energy East would go. Current refinery capacity in that region of Canada is considerably less than what exists on the Louisiana and Texas coasts where Keystone would route the material. Canadians also do not appear to have much desire to build more refineries in that area, and refineries take years to construct anyway.
With oil at its current price, Keystone or a similar project would be a lifeline for tar sands operations. In fact, if the price of oil were to decline a little, then a pipeline could give the tar sands operations that extra economic buffer they would need to keep going.
But what if oil prices declined by more than a little? With cheap global oil prices, the tar sands operations would be put on hold until price recovered. Having a pipeline already in place would make it economically possible for the operations to re-start sooner than they otherwise could. In fact, having a pipeline in place could make the difference between restarting the operations or leaving them idle. (I think backers of the tar sands project may believe this to be the case.)
Fortunately, opponents of the pipelines and the tar sands operations have two big factors that could work in their favor if they use them right – time and price. I know it runs contrary to popular opinion, but oil prices are likely to decline in fits and starts for about two more years, perhaps even below $65 per barrel for awhile. The ultimate price low probably will occur in mid-2016 or a bit later. This is indicated by technical analysis of oil futures markets as well as the expectation that global industrial activity will decline over approximately the same period. In fact, oil prices and copper prices can be very useful in forecasting economic growth, and both oil and copper charts portend a global slow-down.
(If you would like to read my firm's analysis showing how low oil prices will go, and when, send me a message asking for the link. We are pretty confident in the projection, but I'm not trying to plug the company here. Also, there probably will be a substantial bounce in oil prices fairly soon, but in a few months oil will get back on the downward trend.)
Barring a major geopolitical event, the price of oil is likely to be lower a year from now than it is today. In that environment, an argument in favor of Keystone will have less traction than it does today. Two years from now, price will be even lower, and the case for a pipeline will be even harder to sell. Those two years represent a window for us to build alternative energy projects that would make the tar sands even less viable on the energy market. Those two years also represent an opportunity for us to move public sentiment away from the pipeline and the tar sands.
Of course, oil prices eventually will recover and will climb considerably higher than they are now. If a pipeline is already in place when price rises to a certain critical level, then the tar sands operation will get that extra boost to start up again. On the other hand, if there is no pipeline, then the economics of re-starting the operations will be more challenging for petroleum companies.
The main point that I think people should take from this is that opponents of the pipeline and the tar sands may be successful if they can maintain a delaying action for a year or two. I invite comments from others here who may have more expertise in the specific economics of the tar sands project than I do.