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January 9, 2015

Keystone unlocks potential

After the sweeping 2010 Republican victories in the House and the failure of a major climate bill in the Senate, environmentalists recognized the difficulties associated with passing legislation and reallocated their attention toward the Keystone XL Pipeline, whose construction is stalled until it is approved by the State Department. The proposed pipeline would stretch from Hardisty in Alberta (western Canada) to Nebraska. From there, it would use existing pipelines to reach refineries in Illinois and Texas. The importance of the Keystone Pipeline is that it is a massive, state-of-the-art project, capable of transporting more than 800,000 barrels of oil a day and significantly reducing transportation costs — both in terms of dollars and energy (gasoline). Although the environmental lobby was the first to draw attention to the pipeline, what was meant initially to be a quiet project has turned into the focal point of debates about jobs, safety, eminent domain, oil independence, and climate change. If nothing else, Keystone XL has been net beneficial for the nation as a result of the educational benefits the debate about it has brought about. However, the Keystone project could also be beneficial for the U.S. for many other reasons.

The heart of the issue of whether or not the U.S. government should authorize the construction of the Keystone Pipeline is the trade-off between jobs and carbon dioxide emissions. Estimated by the State Department to create 42,000 total jobs including indirect jobs as a result of the pipeline over its two-year construction and contribute $3.4 billion to the economy, the project is expected to have significant impact—maybe not on a national level (0.02 percent boost to GDP), but certainly for the local communities directly involved in the project. The “problem” is that these jobs are those specifically necessary to build the pipeline. The number of permanent jobs after its construction? Thirty- five. This isn’t to argue that the pipeline isn’t economically beneficial, but only to point out that its long-term benefits will be localized to the industrial participants of the oil industry. The net environmental impact is also, in the grand scheme of things, drops in a barrel. Estimated to add between 1.3 and 27.4 million tons of carbon dioxide to the atmosphere (or in human terms between 250,000 and 5.5 million cars on the road), the pipeline will not significantly add to the 36 billion tons the human race already produces. Moreover, even if you hold the defendable position that we are at a tipping point when it comes to global warming and every marginal emission could still make the situation catastrophically worse, the reality of the situation is that the 2.1 million daily barrels of oil produced by Canada’s tar sands will probably make their way to their final destination anyway by rail or alternative pipeline—leading the State Department to conclude that the pipeline would not have a significant impact on emissions.

The wrench in the analysis is that the pipeline will only leave oil production unaffected if prices are high enough. If the cost of oil is less than its market value, regardless of means of transportation, then granted global warming concerns are irrelevant, but if prices are in that sweet spot between $65 and $75 a barrel, where it’s profitable to ship it via Keystone but too expensive to use rail or one of the less direct and less efficient pipeline routes, emission levels will indeed be significantly increased as a result of Keystone XL’s construction. With prices having recently fluctuated between $50 and $100 a barrel, oil sand projects are those most affected because they represent the most expensive sources of oil. According to Vice President for Research at CERI Dinara Millington, “anything not under construction [is] at risk of being delayed or canceled altogether.” Despite the massive drop in oil prices, futures markets are still pointing to a longer-term price of $85 to $90 a barrel, so the Keystone Pipeline is still expected to be profitable and would be built if given the opportunity, especially since the short-term drop in prices is not actually affecting the profits of Alberta’s tar sands. TransCanada, the company in charge of the potential project, has long-term contracts in place from customers with prices already set—as an industry-common hedging practice—which represent fixed demand and fixed prices during these times of oil-economy uncertainty. The economic conditions are such that oil from Alberta’s tar sands will probably be either extracted, or not—the scenario where it will only be economical to deliver to market if Keystone XL reduces shipping costs is worth considering if climate change is your main concern, but it is relatively unlikely.

The economy and the environment aside, the pipeline is also deeply controversial because its construction requires the usage of eminent domain by a foreign corporation. Eminent domain is the practice of, out of economic or national security necessity, the forced sale or use of private land at fair market prices. Eminent domain has been delegated to U.S.–based corporations for many years for the purpose of building railroads, pipelines, and electric transmission because otherwise such works would never be built. Invariably, they stretch for hundreds of miles and pass through property that is owned by people who attach sentimental value to it and are unwilling to sell to a corporation at any price, period.

Without eminent domain there would be no such thing as a straight railroad—it would be as squiggly as the boundary of a newly redrawn district. In practice, eminent domain-empowered corporations use that privilege sparingly, opting to reach voluntary agreements to purchase the land rights, to in an overwhelming number of cases. In the case of the Keystone Pipeline, TransCanada reached voluntary agreements to secure 100 percent of the easements required for the pipeline in Montana and South Dakota and 76 percent in the case of Nebraska—overall, it exercised domain with only 2 percent of landowners. Of course, this number is arguably immaterial. The very threat of eminent domain might be a powerfully coercive bargaining chip. Interestingly, the House of Representatives actually passed a bill banning the use of eminent domain for private interests: The government can still exercise it for national parks, military bases, etc., but can’t give it out to corporations whose only objective is profit. However, they restricted the law so that it only applied to new projects (Keystone has already been “in the system” for a long time). Of course, writing legislation which can interrupt projects already in the system is highly destabilizing and would be a terrible precedent, but many nevertheless see this as a loophole used by Republicans to specifically exempt the Keystone Pipeline. On a broader level, the debate over eminent domain essentially boils down to whether the benefits of railroads, pipelines, etc. outweigh the rights of landowners to keep their property despite being offered fair market value for it because the market does not price in the sentimental value of having generations of history tied to the family farm. It’s a tough question without an immediate answer, and one which every society must resolve for itself.

The final issue to consider is the “independence card.” All things being equal, we would prefer to import our oil from people who greet us with “feel free to break anything you like, we honestly don’t mind” (Canada) rather than “death to America” (Saudi Arabia). In the late 90’s Canada, Saudi Arabia, and Venezuela were the largest exporters of oil to the United States  with a near-identical share. Now, we import more from Canada than we do either of the other two nations combined. Combined with the massive rise of the fracking industry, the drop in oil prices has served to severely weaken OPEC’s potential influence over the U.S. economy. Green-lighting Keystone XL would serve to only continue that trend. While it should be noted, out of fairness, that the critics of the pipeline point out that once the oil is shipped from Canada to American refineries, it is often then shipped elsewhere for sale in the global market, what matters from a national security perspective is not where oil ends up but where it comes from, because where it ends up is what can be manipulated by OPEC. The last time OPEC cut off our oil supply, there was no way to relieve the shortages that crippled the economy. Now, if OPEC were to make a similar move, prices in the United States would indeed rise, but the oil it exports would be redirected by the market toward internal consumption to satiate ongoing demand without cutting off.

The Keystone Pipeline has received more than its fair share of attention because, from a perspective of political action, it is the last issue that is still truly on the table, and as such it’s arguably the only thing on the agenda worth caring about. On balance, it’s probably a good idea. The pipeline will make some money, weakly improve our energy independence, and adhere to much higher safety standards than current  transportation alternatives, all while having little to no impact on the actual quantity of oil consumed—unless prices stabilize in the $65–75 range, in which case all bets are off. Aside from the practical impacts of the pipeline, which as I’ve explained are quite debatable, is the very important reality that they are so debatable. Rarely do so many topics—economy, eminent domain, climate change, energy independence—get raised while discussing a single issue.

David Grossman is a second-year in the College majoring in computer science.

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