Oil prices are near 9-month highs in part because of concerns over Iran. Tehran cut oil deliveries to British and French markets and has threatened to choke off key oil shipping lanes in the Strait of Hormuz.
"Given the intensity of multiple crises in the Middle East and the certainty that threats to oil supplies are not limited to the current crisis with Iran, it is incomprehensible that the president has rejected approval of the Keystone XL pipeline," Lugar said in a statement.
"Few national security decisions of the past several decades are more clearly at odds with core U.S. interests than the president's pipeline delay."
U.S. President Barack Obama rejected a permit from pipeline company TransCanada to build the entire pipeline from tar sands deposits Canada to refineries along the southern U.S. coast. The White House this week said it welcomed a decision by TransCanada, however, to build a portion of the pipeline in the United States.
Critics of the project say oil from tar sands is more toxic to the environment than conventional crude oil. Nebraskans persuades TransCanada to consider an alternative route out of concern for a regional aquifer.
The company said it would reapply for a permit once it settles on an alternative route.