On the Canadian Oil (or Tar) Sands

posted by Andrew Holland on August 23, 2011 at 11:36 am

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KeystoneI’ve been trying to figure out one which side I come down on regarding the Keystone XL pipeline. For those unfamiliar with it, the Keystone XL pipeline is a proposed expansion of a pipeline operated by TransCanada to bring oil from the Northern Alberta refined from the oil sands (or tar sands) into the United States and down to the main American refineries in Texas and Louisiana.

Be prepared – this is a long post, because this is a complicated and difficult issue. I am writing about this now because there has been a series of protests against the oil sands by Greenpeace and Bill McKibben’s 350.org group. I see that a number of protesters have been arrested this week at the White House.

This is a difficult topic to write about because, as I have been writing, most recently in my paper “America’s Energy Choices” and the Op-Ed published along with it, we have to consider three aspects when making choices about energy: (1) energy security, (2) economic stability, and (3) environmental sustainability. The problem with the Canadian oil sands is that these three concerns come into conflict, thus proving that determining America’s energy future will require us to make difficult choices.

Let’s look more closely at these three concerns. On energy security, it seems self-evident that more oil from Canada is better than more oil from Saudi Arabia, Venezuela, or Libya. With regards to economic stability, it is not clear to me whether the oil sands, which are high cost to produce ($50-$75 per barrel, as opposed to around $10-$20 for light, sweet crude from the Persian Gulf) - are the best option to be the base of America’s oil supply. Finally, on environmental sustainability, production from the oil sands is definitely not good for climate change: oil sands production releases more emissions than conventional oil – anywhere from 6% more (according to a CERA report) to 20% more (according to IEA).

So, at first glance its a trade-off. More energy security in exchange for high-cost oil (not necessarily bad in terms of economic stability, as that still provides jobs and maybe economic certainty) along with potentially dangerous climate change. We need an open debate that acknowledges that there are trade-offs here; too often campaigners ignore that there are opposing sides. Let’s take a look around the web for evidence.

A month ago, Kelsey Moran on ASP’s blog had a post in which she came down against the pipeline because it would take us away from a long-term strategy to move toward low-carbon energy.

The best, most well-rounded piece I’ve read on this debate is from Bryan Walsh in Time’s Ecocentric blog “Standing Against Oil Sands—and Standing for the Climate”. He goes through the arguments, and praises the campaigners who are standing up for what they believe, but ultimately he seems to think that they are misguided in their target. Better to go after coal than oil.

Michael Levi’s two-year old report for the Council on Foreign Relations, “The Canadian Oil Sands Energy Security vs. Climate Change”, examines how energy security and climate concerns – so often aligned – are in competition. This report is important in that he acknowledges when we’re talking about trade-offs. In the end he comes down in favor of oil sands production.

On Sunday, the New York Times’s editorial page came down in opposition to the expansion of the pipeline, citing concerns both about climate change and leakage along the pipeline itself. It is unfortunate that the editorial does not cite any of the possible benefits - especially to energy security – that the pipeline would bring.

I see that the Chamber of Commerce’s blog, they are strongly in favor of the pipeline. They have also started a “Partnership to Fuel America” that is advocating for the pipeline. Again, it is very unfortunate that nowhere on either of these sites do they say anything about climate or environmental concerns.

Also, we should remember that the Canadian companies building this pipeline are doing it because it is in their economic interest. We have to make sure that it is in America’s interest too, before we permit it. According to a report from TransCanada, who is building the pipeline, the American refineries currently at the receiving end of the existing Keystone pipeline pay less for the oil than world market rates.  They know that Canadian exporters have no other option. That is why gas in the Midwest (refined from cheaper tar sands oil) has been cheaper in recent years than gas on the coasts (refined from US or imported oil). The proposed Keystone XL pipeline could actually increase costs to American refiners by bringing the oil to the Gulf Coast, where it would compete with imports from around the world. This would refute arguments that more oil from Canada could reduce gas prices.

Finally, there’s a claim that if the U.S. doesn’t use the oil, it will simply be sold somewhere else. For most  oil around the world, this is true; oil is a fungible commodity. For instance, the U.S. has never bought much Libyan oil, but because other countries did, the loss of that production in the spring had caused the world market price to rise. However, the Canadian oil sands are different because of the lack of any infrastructure going to Canadian ports.  The Chamber cited China as potential buyer for Canadian oil, as well as an investor in Canadian producers.  However, they simply cannot because all of Canada’s pipelines bring oil to market in the U.S., not to any ports. A proposed pipeline to Canada’s Pacific coast has been blocked by indigenous groups and environmentalists.

In fact, the opposite is true: if the pipeline is built, it will allow Canadian oil to be exported via the U.S. Gulf Coast. The Keystone XL pipeline will finally connect Canadian oil production to global markets, making it a fungible commodity. Diversifying the Canadian economy away from dependence on the U.S. is a strategic goal for Canada, as cited by this Globe and Mail story. Once Canadian oil can reach the Gulf Coast, then it can be exported to wherever the demand is highest: and right now, that’s China.

After this long argument, I think the balance of evidence shows that permitting the Keystone XL pipeline will not be good for American energy security, economic stability, or environmental sustainability. While building it will provide jobs in the short term, the long run cost environmental sustainability and economic stability, with little benefit to American energy security mean that it should not be permitted.

On balance, I actually think that the status quo on Canadian imports is sustainable. They are are already our #1 source of oil imports (over 2 million barrels per day) through existing pipelines. For right now, if we choose not to permit the pipeline, they will not be able to expand production. In the future, if we suffer from a strategic need to expand, it will be available. Right now, the growth of domestic production means that we do not need their expanded production. So long as the Canadians can only export oil to the U.S., we have them in a box: we get their oil for lower prices, and we can keep it in reserve. We should not undercut our position by allowing them to build a big new pipeline to the Gulf Coast that would  allow them to export their oil to Asia. This is one of the few area of energy where the status quo is more sustainable than proposed changes.

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