Why Approving Keystone XL Was A No-Brainer

Some readers won’t get past the headline before rendering the opinion that I obviously don’t care about climate change. That is false. My views on climate change are entirely compatible with the points I am about to make.

In fact, my points are also compatible with the views of the Biden Administration. Just this week at a press briefing, in response to questions about restricting Russian oil imports, Press Secretary Jen Psaki said “We don’t have a strategic interest in reducing the global supply of energy and that would raise prices at the gas pump for the American people around the world because it would reduce the supply available.”

Read that last bit again, and think about what canceling Keystone XL actually does. It reduces the supply available. So let’s talk about the strategic interest in ensuring that we get the oil we need from friendly sources — while simultaneously working to reduce the need for that oil.

People often admit to me that the Keystone XL itself wasn’t that important. Stopping it was more about what Keystone XL represented. This is a good point. I am going to argue the opposite. The arguments I am going to make here aren’t specific to Keystone XL, but are rather about what it represented — a strategic insurance policy with negligible downside.

First, I don’t believe Keystone XL would make a material difference when it comes to global carbon emissions. I have actually quantified this (source). Using the Supplementary Environmental Impact Statement (SEIS) for the Keystone XL Pipeline from the US State Department, I calculated that in the worst case, a completed Keystone XL could increase annual global carbon emissions by 0.07% by 2030.

In an alternate scenario where the oil finds its way to market via alternate pipelines, the carbon emission difference was 0.007%. We can’t even measure carbon emissions to that level of accuracy, so this is effectively zero.

As I wrote in the previous article, I always thought the win-win scenario was to build the pipeline, and then work hard to reduce demand for oil and ensure that the pipeline is never needed. But if it is needed, it’s there.

Why Canceling Keystone XL was the Wrong Decision

Let’s consider four scenarios:

  1. Build the pipeline and we don’t need it
  2. Build the pipeline and we need it
  3. Don’t build the pipeline and we need it
  4. Don’t build the pipeline and we don’t need it

The first scenario is that TC Energy (formerly TransCanada) builds the pipeline, but aggressive actions to combat climate change render it unnecessary. This means a private company took a risk, spent billions of dollars, hired a lot of Americans and used a lot of American resources, and the bet ultimately didn’t pay off. In this case TC Energy was the loser, but there was a significant economic benefit to the U.S.

The second is that the pipeline is built, and we find that when it is completed that the U.S. is still a net importer of crude oil. In this case, the oil that Keystone would have provided is just going to displace some other oil from somewhere else. We will be getting more oil from a friendly ally (and more domestically as well) and less from the global markets. Based on Jen Psaki’s comments this week, the Biden Administration should like either of these two scenarios.

The third scenario is that the pipeline isn’t built, but we find that demand for oil imports still exists when it would have been completed. Then we have a situation like we have today, where we are importing oil from countries that in many cases have foreign policies that are hostile to the U.S. There was this naïve belief that if Keystone XL was blocked, then the oil wouldn’t be produced. If the demand is there, the oil still going to be produced. It’s just going to come from places like Russia, and some of it will be transported via more carbon intensive (and more dangerous) methods like truck and rail.

The final scenario is that the pipeline isn’t built, but oil demand has declined and it isn’t actually needed. The main winner there is TC Energy, who saved billions not building the pipeline. The main losers are the U.S. workers and industries that would have supported building the pipeline.

In none of these scenarios does building Keystone XL dramatically increase U.S. oil consumption, nor does blocking it dramatically decrease U.S. oil consumption. Building could have helped alleviate dependence on overseas oil if that dependence still existed upon completion. Not building it could increase dependence on foreign oil.

It Was Also a Political Mistake

That leads me to the final reason this was a big mistake. The average person isn’t going to do a deep dive into the reasons that gasoline prices have spiked. They are going to see that spike, and look for an easy scapegoat. Even though canceling Keystone XL has no bearing on the current gasoline price spike, for many people it seems like basic common sense that it must have had an impact.

When I am discussing gasoline prices with people, inevitably someone will blame the cancellation of Keystone XL. That’s totally inaccurate, but the appearance is there superficially. I will say that in a few years, the failure to have Keystone XL in place could be a contributor to higher gasoline prices. If the demand is there, and it is more expensive to ship oil from Russia, for example, then gasoline prices are going to be higher.

Many environmentalists will acknowledge that, and say this is just fine with them. Higher gasoline prices should lead to more conservation. That’s true, but it also leads to losing elections, and the loss of the ability to pursue your agenda.

Ultimately, canceling Keystone XL was about sending a message. But when you weigh the actual impact versus the political impact that many got from the message, it was just the wrong decision to cancel it.

Finally, this entire analysis doesn’t even consider the $15 billion TC Energy is seeking in damages from the U.S. government for the cancellation of the project under the terms of the North American Free Trade Agreement. If they are awarded damages, then the decision changed what would have been a positive for the economy into a significant net negative.

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