Three years ago, I first became interested in energy politics and policy when I wrote a column arguing that the opposition to the Keystone Pipeline was of questionable symbolic and practical value.
I was wrong.
As often happens when a college sophomore takes some 200-level economic classes, my argument rested on an incomplete understanding of global oil markets. “As oil supplies diminish, prices will eventually soar even higher,” my first Keystone column argued. So does the State Department’s final environmental impact statement, which argues that the pipeline will not produce increased carbon emissions because the oil sands will be developed either way, driven by high demand and rising oil prices. Their report relies on an assumed oil price of $130 per barrel in 2030, a number wildly higher than that called for by many financial experts. At $130/bbl, oil from tar sands would absolutely find its way to market – by rail, by truck, or concealed in the bodies of oil mules.
But the realities of the oil market have changed since the issue first started making headlines in the summer 2011. While we may live in a world of peak oil, that peak has shifted from supply to demand. There are more alternatives than ever to tar sands oil from Albert. Solar and wind are ever rising, cars go further on fewer gallons of oil – or run on batteries, and even within the market for fossil fuels, the revolution in shale oil has provided a marginally cleaner, marginally cheaper supply just south of the Canadian border. Increasing regulation, higher efficiency, and more alternatives have all led experts to predict that oil prices will not rise, but rather fall between now and 2030. Last summer, Deutsche Bank (not exactly a hippie publication) wrote that
The oil market is discounting that we are in a peak oil environment, and that demand efficiency and a stronger US dollar will offset geopolitical risk and inflation, leading to steady downward pressure on nominal prices … we have seen the all-time peak oil price…
Some have even predicted that oil will fall into the $70 range, a price at which even the State Department concedes that
Oil sands production is expected to be most sensitive to
increased transport costs in a range of prices around
$65 to $75 per barrel. Assuming prices fell in this
range, higher transportation costs could have a
substantial impact on oil sands production levels—
possibly in excess of the capacity of the proposed
Outside investors are more concerned about the effects of falling prices on the output and profitability of the tar sands projects. HSBC and Wood Mackenzie research has shown that many new projects of this type are profitable at prices above $85-105 per barrel, assuming they have an easy pathway to the market. Last summer, a group of investors including Boston Common Asset Management (BCAM) and Norwegian investment giant Storebrand wrote a letter to Statoil urging them to withdraw from several tar sands projects because
Even on a standalone basis, the economics of many oils sands projects are questionable given project execution risks,
transportation bottlenecks, and uncertainty about future oil prices. We also see additional threats in the negative externalities of oil sands projects: future carbon regulation, water scarcity, local environmental damage, and impairment to traditional livelihoods.
Proponents of the pipeline (or those who say it doesn’t matter either way) often argue that the pipeline merely will replace the inevitable rail and road transport of the product. But these alternatives are more expensive, lowering the effective price that oil suppliers can get by as much as $8 per barrel. By any understanding of the laws of supply and demand, when a commodity (or a good, or a service) will command a lower market value, its supply shrinks. This basic theory also assumes that the supply of tanker cars and trucks are entirely elastic – that the moment the oil is discovered, fleets spring into existence with its transport as their sole raison d’être. This, too, is overly simplistic: the State department’s own report finds that it would take until 2030 for alternative methods of transport to replace the capacity of the pipeline if President Obama does not approve its construction.
This is not to understate the many other issues with the pipeline. Chief among these is the right of landowners to determine what happens on their own property. The pipeline is wildly unpopular among Nebraska landowners, who worry that a spill could contaminate the Ogalla aquifer, the source of their livelihood and much of America’s agricultural dominance. When diluted bitumen spills into a water supply, the chemicals used to liquefy it separate out and it reverts to its original form, making it almost impossible to clean up. In terms of its impact on climate change, the State Department does not consider the refinement of petroleum coke, a byproduct of tar sands refinement that is both cheaper and dirtier than the cheapest and dirtiest coal, and is now being shipped to China in record amounts where it goes from the furnace of power plants straight into the atmosphere.
This past Saturday, hundreds of students from around the country including my former coeditor (and future boss), Middlebury’s own Hannah Bristol, zip-tied themselves to the fence around the White House in yet another protest demanding that the President refuse to allow the construction of the Keystone XL pipeline.
Those protests have held off a massive infrastructure for several years. It is time to kill it entirely. The evidence clearly suggests that regulatory uncertainty over the fate of the pipeline created by the forcefulness of the opposition to its construction has slowed the development of the Alberta tar sands. A refusal to allow the pipeline will mean that more of the asphalt-like substance that has to be heavily diluted with caustic chemicals to even resemble oil would stay locked away in the ground forever; that the forest and marsh the currently covers that fossil remnant of previous life might be preserved to serve as a habitat for animals and a sink for atmospheric carbon dioxide. The State Department’s report ignores this reality by resting its analysis on oil price benchmarks higher than anyone else paying attention to the oil market. But they concede that at lower prices – e.g. those predicted by other experts – stopping the Keystone XL pipeline will slow the development of Albertan Tar Sands and slow the rate of climate change. The time has come to put this issue to rest and move on to the next battle in the long war against the threat of man made global warming.