Keystone Pipeline Permit Denial is Sound Energy Policy

By Adam Riedel, CCCL Associate Director

With much fanfare and angst, on January 18 the Obama administration denied a permit for the hotly contested Keystone pipeline which would carry oil from the tar sands of Alberta to refineries in the Gulf Coast of the U.S. The decision over the pipeline has become a political football over the past several months with highly publicized protests against the pipeline contrasted with dire warnings of economic Armageddon and inflamed rhetoric by pipeline supporters. With this backdrop, the decision to deny the permit for the pipeline has been derided by many, including the editorial boards of several respected publications, as the result of shrewd political calculus rather than a wise policy decision. However, the arguments advanced by those opposing this decision lack a basis in energy market economics and energy policy. A true evaluation of the merits and drawbacks of the construction of the Keystone pipeline reveals the denial of the pipeline permit to be sound energy policy. I begin by deconstructing the most prominent arguments advanced by pipeline supporters.

1. The pipeline will enhance our energy security by making the U.S. less dependent on unstable regions (i.e. the Middle East) for its oil.
This argument is based on a gross misconception of the operations of oil markets. Oil is the quintessential global commodity. Oil prices are set on world markets and oil is easily transported around the globe (although, such transport can be costly as discussed below). Thus, oil prices and availability are determined by factors affecting global supply and demand, not localized forces or the relative geographic proximity to supplies. A disruption in oil exports from the Middle East, whether these exports are going to the U.S., China or Europe, will affect the price of oil in the U.S. regardless of what percentage of oil imports into the U.S. come from this region. Barring extreme government intervention into energy markets such as price caps, subsidies or nationalization of domestic oil supplies (actions nearly all proponents of the pipeline vehemently oppose on ideological grounds), U.S. oil and gasoline markets cannot be shielded from the price shocks brought about by a disruption in oil supplies anywhere in the world. Accordingly, the thought that by increasing oil imports from politically stable Canada will do something to protect the price and security of U.S. energy supplies is entirely without merit.

2. The oil is going to be exported to other markets if not to the U.S., so denying the pipeline would be of no environmental benefit.
While it is possible that the oil will be exported to other markets, specifically China, without the Keystone pipeline, this is far from certain. There is a reason why TransCanada, the company proposing the pipeline, has fought so hard for the Keystone pipeline and has vowed to reapply for approval of the pipeline with a slightly altered route: distance and resistance. With regards to distance, shipping the crude to China requires getting the oil sands-derived crude to a port and then shipping this crude via oil tanker to China, no small journey. The tanker trip adds an additional cost to the transportation of the oil thereby reducing the profitability of the oil. At certain prices, such an additional cost may render the export of the oil uneconomical. Regarding resistance, the approval of a pipeline route in Canada faces equal, if not greater, resistance than in the U.S. A proposed alternate pipeline route through British Columbia to ports on the West Coast of Canada would cross the land of the First Nations who are fiercely opposed to such a route. The hurdles for a westward pipeline are so high that an eastern route to ports on the east coast of Canada and the U.S. is considered the most viable alternative to the Keystone pipeline. Crossing four provinces and thousands of miles requires a variety of permits and would certainly encounter public resistance at multiple junctures. The process would likely take years to complete. Accordingly, the increased export of oil sands regardless of what happens with the Keystone pipeline is not a foregone conclusion.

3. The denial of the pipeline permit will do little to stem global climate change.
At a very high level, this argument is accurate. A gallon of gasoline derived from oil sands produces approximately 5 to 15 percent greater GHG emissions than a gallon of gasoline derived from conventional oil. This increase in emissions only equates to a small fraction of total U.S. annual GHG emissions and the avoidance of these emissions certainly will not save the planet from the perils of climate change. However, this argument can be advanced for nearly every GHG emitting project and activity. Comparing projects and actions on an individualized basis against total global or national emissions nearly always results in an unimpressive contribution to overall GHG emissions. However, when viewed not as a portion of global or national emissions, the increase in emissions becomes seen for what it is: a 5 – 15 percent increase in emissions from an already heavily emitting source. Given the need to decrease emissions of GHG rapidly in the next decade, barring a tremendously compelling reason, making this difficult task that much more daunting makes little sense.

4. The pipeline will create hundreds of thousands of jobs.
As many economists have pointed out, these figures provided by the oil industry are highly inflated and suspect, based on gimmicks to that artificially inflate the numbers. For example, many of these studies count “person-years” of employment rather than absolute jobs. This means that a job created that last 2 years is counted twice, greatly inflating the number of “jobs” created. Similarly, many of the jobs that these studies claim will be created are based on dubious assumptions regarding significant decreases in the price of oil brought about by the greater availability of oil sands crude. As noted above, the price of oil is determined in the global marketplace. With world oil demand approaching 90 million barrels per day, the addition of a few hundred thousand barrels of oil sands crude will have little, if any, impact on the global price of oil, casting doubt on claims of job creation stemming from decreases in the cost of oil. While the pipeline would undoubtedly create jobs, many of these would be temporary and the absolute number would be far below the inflated oil industry estimates. In any event, the impact on U.S. unemployment would be negligible.

As discussed above, the arguments in favor of the pipeline’s construction are less than compelling. Yet the absence of a reason to approve it does not necessarily dictate denial of the pipeline. So, why does the denial of the pipeline permit make good energy policy? The policy argument in favor of denying the pipeline permit is that a denial does not contribute to the indefinite perpetuation of a fossil fuels-based energy system. A multi-billion dollar project such as the Keystone pipeline only makes economic sense based on projections of continued utility for decades to come. Thus, it creates a strong vested interest in the continuation of an energy system based on the combustion of fossil fuels and sends an unofficial message that fossil fuels are expected to play a major role in our energy system for decades to come. In this case, it ensures the viability of a particularly carbon intensive form of oil and would likely encourage additional development of oil sands projects. While we will not wean ourselves off of fossil fuels overnight, if new low-carbon energy sources are to become a major part of the U.S. and global energy system, policy signals need to be sent to markets and participants in the energy system that the current fossil fuel-based energy system is slowly winding down, not ramping up. The denial of the Keystone pipeline is just such a signal.

Undoubtedly, the politics surrounding the Keystone decision have accorded far more importance to a relatively minor decision than is warranted. Approval of the pipeline permit would not in itself doom efforts to combat climate change, nor will the denial of the permit assure a transition to a low-carbon economy. However, when fairly judged on its merits and against the larger energy policy goal of transitioning the U.S. and world energy system to a low-carbon system, the denial of the pipeline permit was good energy policy regardless of the politics.

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