Keystone XL: Liberal Histrionics Answered with Conservative Histrionics

December 19, 2011 • Commentary
This article appeared in Forbes​.com on December 19, 2011.

Cynics have long contended that politics is largely driven by high‐​decibel arguments about symbolic issues that have 100 times less real import than the politicians would have us believe. Those cynics, if they’re paying attention, are surely enjoying the sturm und drang surrounding the proposed Keystone XL pipeline that would deliver oil from the Canadian tar sand fields in northern Alberta to U.S. refineries along the Gulf Coast. Both opponents and proponents of the project are offering palpable nonsense to gin up their respective bases in hopes of horsewhipping their electoral opponents in 2012.

First, consider the environmentalist opposition, which offers two main objections. The more global objection is that producing oil from the tar sands in question would produce large quantities of greenhouse gases — far more than would be produced by oil from more conventional fields. Well, that’s true. But blocking the Keystone pipeline won’t stop those feared greenhouse gases from reaching the atmosphere. With break even tar sand production costs estimated at $70 per barrel — and global oil prices averaging around $100 per barrel — the fields are going to be developed. The only question is where and how the oil will be delivered to market; to U.S. refineries on the Gulf Coast via pipeline or via pipeline to Vancouver and then on to tankers bound for refineries in Asia? Canadian investors have already proposed building a pipeline, called Northern Gateway, to transport crude from Alberta’s oil sands to Canada’s Pacific coast and Kinder Morgan plans to expand its Trans Mountain pipeline to do the same.

The second environmentalist objection is that the pipeline would travel across land where important groundwater aquifers — most notably, the Ogallala aquifer below the Sand Hills in Nebraska — are extremely close to the surface. Were the pipeline to rupture there, environmentalists warn, crucial drinking and agricultural water relied upon by millions would be dangerously compromised.

Well, nonsense. Professor emeritus James Goeke, a research hydrologist at the University of Nebraska with no obvious dog in this fight, points out that the Ogallala slopes from west to east and that the deep waters within the host rocks move persistently downhill — that is, eastward. Happily, approximately 80 percent of the Ogallala Aquifer lies to the west of the proposed pipeline — that is, “uphill” of the pipeline’s proposed route. Spilled oil simply cannot move upward against gravity. Moreover, the water is 50 feet or more below the surface along much of the pipeline’s route; any oil spilled would have a difficult time infiltrating that far beneath the surface. Where the water is closer to the surface, the pipeline will be encased in a waterproof covering and cement jacket. Finally, the highly varied layers with the rock formation that houses the Ogallala would itself serve to localize the impact of any contamination. Writing in The New York Times last October, Goeke concluded that “All of this comforts me with the knowledge that a leak from the XL pipeline would pose minimal risk to the aquifer as a whole.”

Proponents, however, offer arguments for the pipeline that are little better than are the objections. First, we hear incessantly about “tens of thousands” of new jobs (perhaps as many as 119,000 jobs according to an economic consulting firm hired by TransCanada, the firm that hopes to build the pipeline) for an economy in great need of new employment opportunities. Yet TransCanada itself acknowledges that only 2,500 to 4,650 workers would be required to build the pipeline. The remainder of the alleged jobs come from: adding jobs already created (or, in many cases, already come and gone) from Keytsone’s previous pipeline expansion investments to the jobs that would follow from letting the rest of the project go forward; dubious “multiplier effects” (the use of which is routinely attacked by free market analysts, at least in other contexts); and an ill‐​founded assumption that domestic rather than foreign firms will provide most of the raw materials and engineering work necessary for pipeline construction.

The only independent economic impact study comes from researchers at Cornell. Their review of the methodology used to produce these high end job creation estimates is, for the most part, devastating. Their review of the methodology used to produce these high end job creation estimates is devastating. Their conclusion? It’s unlikely that more than 4,650 temporary new jobs would be created and only 50 of those jobs would remain after the pipeline was completed. Big deal.

Regardless, pro‐​development conservatives should be leery of making these job creation arguments. The point of economic activity isn’t job creation; it’s to allow gains from trade to occur among firms, workers, and consumers. Using “jobs” as a metric to support or oppose federal action is dangerous political business for those inclined to limit the size and scope of government.

Next, proponents pound away on the energy security drum; wouldn’t oil from Alberta be more reliable than oil from fill‐​in‐​the‐​blank? Well, it doesn’t matter if it is more reliable. Unless we found ourselves in a world in which a foreign navy prevented all transit into U.S. ports, we will always be able to buy oil as long as we’re willing to pay the market price. Those who produce the oil can’t control what happens to the oil, and what happens to the world’s crude is that it goes to the highest bidder… just like in any other market. Moreover, eschewing oil from “insecure” suppliers does not insulate us from the price effects of that insecurity. An oil supply disruption anywhere in the world will increase oil prices everywhere in the world.

Finally, we’re told that the pipeline would somehow lead to a reduction of gasoline prices. Well, how exactly would that happen? Pipeline or no pipeline, that crude oil will be delivered to the market somewhere, and it is global supply and demand that dictate oil — and thus, ultimately, gasoline — prices. If the pipeline were built, all that would occur is that U.S. refineries would buy Canadian oil rather than oil from somewhere else. Would the crude oil delivered via the Keystone pipeline go for less than the market price? No. The lower transportation cost associated with delivering oil via pipeline from Canada relative to tankers from wherever would be translated into profit for the oil producers in Alberta, not into price savings for oil consumers in the United States.

The one way in which the pipeline would reduce gasoline prices is by helping to free up the bottle neck associated with getting crude oil out of storage tanks in Cushing, Oklahoma to refineries on the Gulf Coast. Pipeline capacity out of Cushing is constrained, but if Keystone were built, it would increase supply and thus lower refined product prices slightly from Gulf Coast refineries.

The argument for allowing the construction of the Keystone pipeline to go forward is simple but, perhaps, not politically all that sexy; the federal government should not needlessly frustrate markets and the gains from trade that go to market participants; firms, consumers, and labor. While conservatives might be forgiven for answering environmentalist histrionics with economic histrionics, they should not be forgiven for forwarding economic fairy‐​tales about how oil markets work or making such a minor issue a central plank of their policy agenda.

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