About a week ago, President Obama announced that he would not approve the Keystone XL oil pipeline, which would have connected Canadian supplies of crude oil to refineries and port facilities along the Texas Gulf Coast. The debate over the pipeline had dragged out over about seven years, with countless dollars and hours expended on both sides of the issue in an attempt to sway the decision. In the end, President Obama decided that the pipeline would not serve the national interest and denied the permit request. I respectfully disagree with this outcome, as denying the pipeline simultaneously (1) forgoes the economic and other benefits of the pipeline and (2) fails to measurably change environmental realities.
More than five years ago, we were asked to conduct a comprehensive economic impact analysis of the proposed Keystone XL Pipeline. We looked at the impact of construction and development on business activity in affected areas as well as the market benefits of enhanced energy security. We, as always, focused solely on the economic issues and not the surrounding political debate.
The original Keystone pipeline project involved a $5.2 billion investment to connect reliable oil supply regions in Canada with key US refining and distribution centers. In July 2008, TransCanada announced Keystone XL, an approximately $7 billion pipeline project complementing the original Keystone Pipeline and nearly doubling the size and capacity of the Keystone Pipeline System with an expansion to the US Gulf Coast. With Keystone XL, the Keystone Pipeline System would have the capacity to deliver approximately 1.1 million barrels of Canadian crude oil to US markets each day.
This initiative could have had significant implications for the US economy. We measured the total impact of the construction and development of the proposed Keystone XL Pipeline including multiplier effects and estimated that the gains in business activity over the life of the project would include $20.931 billion in total spending, $9.605 billion in output, and 118,935 person-years of employment. These benefits are significant in the states along the route, though spillover gains to other areas, particularly with regard to manufacturing, are quite notable. It should be mentioned that some of these benefits have occurred, as the lower portion has been completed.
In addition to the sizable economic stimulus generated by the construction and development of the pipeline, the more stable supply of oil could lead to other positive outcomes. In particular, the pipeline would enhance US “energy security” by increasing our available supply of oil in reliable quantities from more stable and predictable sources than the volatile regions which now dominate the global market.
Availability of substantial Canadian supplies delivered in an efficient manner would also involve a lower risk premium, and cost savings would be generated which would stimulate business activity. The Keystone XL Project would have facilitated a long-term increase in marginal supply, which would have had a modest price effect permeating the entire economy. These benefits, of course, would have been over and above the sizable gains from the construction stimulus.
The irony is that while environmental concerns were among the primary reasons for denying the pipeline, there is little reason to believe the environment will be helped by the decision to deny. Pipelines are heavily regulated and monitored for leaks and other issues and are among the safest methods of moving oil. Without the pipeline, there is a greater need to transport crude via less safe methods such as rail cars.
State Department reviews found that the construction of the pipeline would have minimal impact on the amount of crude from Canadian sands that is burned. The oil will find its way to market through existing pipelines and rails, with additional imports of heavy crude from areas such as Venezuela to fill refinery needs. In other words, similar oil will still be processed along the Texas Gulf Coast, it will just be more likely to come from politically unstable areas and be transported across the ocean.
For the Canadian oil industry, the Keystone denial is bad news. Virtually all of the oil and natural gas produced in Canada is exported to the United Sates, and existing pipelines are nearing capacity. Rather than opening up a way to get Canadian oil into world markets, denying the Keystone permit will reduce incentives to develop oil supplies in Canada. An opportunity to enhance US energy security has thus fallen by the wayside. The oil will ultimately be produced, with the effect of the denial only being that the jobs associated with refining it will now go to distant places.
All in all, environmentalists are proclaiming a “win,” but there is little evidence that the decision will make a difference in consumption of heavy oil and, in fact, risks associated with transporting such oil will almost certainly rise. At the same time, an opportunity to stimulate the economy across a spectrum of industries (construction and steel manufacturing to restaurants) has been denied. Perhaps even more important, we have missed an opportunity to complement our recent shale expansion and become more insulated from the market manipulations and agendas of nations around the world who are often unfriendly to the United States. I would call that a definite “loss.”
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.