Keystone Confusion: A Crude Mix of Policy and Politics

Sam Ori is the Director of Policy at the Electrification Coalition, an organization advocating the electrification of the transportation sector as a means to achieving energy independence. He previously served as the Director of Policy at Securing America’s Future Energy (SAFE), an organization that promotes achieving national and economic security by decreasing the United States’ dependence on oil as an energy source. He is a principal author of the Electrification Roadmap and the Fleet Electrification Roadmap. He is a 2003 MPP graduate of the Harris School. The views reflected here are his own and do not reflect those of the Electrification Coalition or CPR.

On January 18, President Obama acquiesced and gave orthodox environmentalists and Congressional Republicans exactly what they each wanted. Consistent with the recommendation of the State Department, the President rejected an application from TransCanada Corporation to build a 1,700-mile oil pipeline extension that would link oil sands fields in Alberta, Canada, with U.S. refineries on the Texas Gulf Coast. It was a sad day for energy policy, but not for the reasons you might think.

For the uninitiated, the Keystone Pipeline system currently runs from Hardesty, Alberta, to refineries and storage depots in Illinois and Oklahoma. The system has a nameplate capacity of 590,000 barrels of oil per day. To serve rapidly rising production of Canadian oil sands, TransCanada has proposed to expand the network’s capacity to 1.3 million barrels per day (mbd) via a new leg from Hardesty to Steele City, Nebraska, and an extension from Cushing, Oklahoma, to Port Arthur, Texas.  (By way of context, total U.S. oil demand was 19 million barrels per day in 2011.) TransCanada estimates that the $7 billion dollar project—known as Keystone XL—would directly employ 20,000 Americans in construction and manufacturing and stimulate more than 100,000 jobs in local communities along the pipeline.

To an unprecedented degree, the environmental movement succeeded in turning a single infrastructure project into a litmus test for President Obama’s position on climate change.  They argued vocally that approval of the pipeline was a vote in favor of oil sands development—which they say emits more climate-warming carbon dioxide and does more harm to the environment than conventional oil.

Republicans had long argued that approval of Keystone XL was a slam dunk for improving energy security, stimulating employment, and supporting economic growth. But after more than a year of debate, the Administration signaled in November 2011 that it would postpone any decision on the pipeline until 2013—a not-so-subtle political act designed to avoid the issue until after the 2012 election. Weeks later, seizing a political opportunity, Republicans successfully passed a provision requiring a Presidential decision on the pipeline within 60 days.

Given that kind of time-frame, and the fact that the final route of the pipeline was still basically in flux due to objections by Nebraska’s (Republican) governor, it was fairly obvious that the President would have no choice but to reject TransCanada’s application and invite them to reapply. In doing so, he provided more fodder for right-of-center critics who claim that the Administration is waging an all-out regulatory war on business in general and the energy industry in particular. It was a well-executed political tactic that successfully forced the President’s hand and provided Republicans with a potent talking point for the upcoming campaign season.

Unfortunately, the Keystone XL fiasco was symptomatic of the distressing state of U.S. energy policy. It is a piecemeal discourse dominated by political games, special interest manipulation, rigid dogma, and a willing avoidance of reality, and its continuance threatens both national and economic security.

Here, for the record, are the basic facts around Keystone.

Keystone XL will not improve American energy security. The fundamental energy security problem confronting the United States today is our utter reliance on petroleum, particularly in the transportation sector. Oil meets nearly 40 percent of U.S. primary energy demand, more than any other fuel. Our transportation sector accounts for 70 percent of U.S. oil demand and alone consumes more oil than the entire economy of any other nation in the world. Oil-derived fuels (gasoline and diesel) provide 94 percent of the energy that powers our cars and trucks. There are no substitutes available at scale, and consumption is highly inelastic.

What this ultimately means is that our economy is wholly exposed to the price of petroleum-based fuels. Oil prices are based on the global supply-demand balance, which is experiencing incredible turbulence as tens of millions of newly-middle class consumers take to the roads in China and India, and events like the Arab Spring and Iranian nuclear standoff create a cloud of uncertainty around a gigantic portion of global oil supplies. These and other events have created a cycle of high and volatile oil prices that has been incredibly damaging for the United States. In 2011, the average American household spent more than $4,000 on gasoline—equal to 8.2 percent of the median family’s income. The increase in spending over 2010 levels equaled $104.4 billion and nearly completely offset the benefits of the 2011 payroll tax cut, which gave Americans an additional $108 billion in take-home pay.

This problem will not be addressed in the slightest by Keystone XL. Our relationship with Canada is strong, and there should be no doubt that supplies from our neighbor would be dependable, but when oil prices spiked to $147/bbl in 2008, oil from Canada cost the same as oil from Saudi Arabia.

Approving or denying the permit for Keystone XL should not have been cast as environmental policy. At year-end 2010, Canada’s oil sands reserves were estimated at more than 150 billion barrels, ranking them third in the world behind Saudi Arabia (264.5 billion) and Venezuela (211.2 billion). That places the raw value of Canada’s oil sands at $12.5 trillion using an inflation-adjusted 5 year average of global oil prices. The fact is that whether or not this specific pipeline gets built, Canada is going to develop its oil sands resources and deliver those supplies to the global market where they will be burned in engines and emit CO2. Indeed, even in the best-case scenario, the global market is going to need every drop of oil it can get going forward, and Canada is the rare example of a stable, reliable, democratic oil exporter.

It may or may not be true that developing oil sands is more emissions-intense than developing other forms of crude. Numerous studies have reached different conclusions. Perhaps more importantly, 80 percent of petroleum’s life-cycle emissions occur during combustion, suggesting that policy would be best focused on end-use technologies.

Regardless, it should not be acceptable to treat individual infrastructure projects as one-off opportunities to set environmental policy. Such an approach creates an uncertain investment climate and in this case has indefinitely deprived the U.S. economy of tens-of-thousands of jobs at a time when the unemployment rate is still above 8 percent. If reducing CO2 emissions is a priority, then the nation needs a clear mechanism for doing so, such as placing a price on carbon. A simple carbon tax would allow the market to efficiently decide whether projects like Keystone XL were viable or not—in addition to supporting the development of low-emissions fuels and more efficient transportation technologies.

The United States is in desperate need of a comprehensive energy policy—one that focuses on improving energy security by reducing our dependence on oil and simultaneously improves environmental quality by putting a price on carbon. Properly crafted, these can be mutually reinforcing policies that improve national and economic security. As a policy analyst, I see opportunity. But as a realist, I know that policy is politics.

Feature photo:  cc/rcbodden