What's going on?

President Trump formally approved the Keystone XL pipeline, a long delayed project that would bring oil drilled in Canada to US refineries. But there are still plenty of hurdles to the project getting started… (tweet this)

What does this mean?

It was almost a decade ago that TransCanada, the company behind the pipeline, first proposed the idea. After a five-year review, the Obama administration blocked the pipeline in 2015 amid concern from environmentalists. While Trump has now reversed that decision, the pipeline still needs approvals from some individual US states like Nebraska (where there is significant local opposition). Meanwhile, the business case for building the pipeline has weakened substantially as the price of oil has dropped.

Why should I care?

For the markets: Low-cost American oil producers make the pipeline less attractive.

The price of oil has more than halved over the past two and a half years largely because of the huge increase in lower-cost drilling in the US. As oil extraction technology has improved, US companies are able to drill at a much lower cost. There are some technical issues that still exist, for example, many US refineries are built to handle heavier crude oil (like that produced in Canada) rather than the lighter oil that comes from US shale. But nevertheless, the huge drop in price has threatened the economics of oil drilling in Canada, where it costs much more to extract the oil � which is another reason that the pipeline might ultimately not be built.

The bigger picture: Projects delayed are often projects killed.

This pipeline was first proposed eight years ago, when the business case for building it was much more compelling (i.e. the oil price was higher). The lengthy process of obtaining approval for such large-scale projects is a problem for companies that build these sorts of things. If they have no realistic hope of obtaining approval within a reasonable period of time, the risks increase substantially and their incentive to try to build big projects is much diminished.