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What’s Keystone XL got to do with it?

Severin Borenstein, professor of business | February 5, 2013

Let’s face it. The opposition to the Keystone XL pipeline isn’t about dirty oil. It’s about oil. James Hansen and the other leading opponents focus on the greenhouse gases is that will be released when all of the oil in the Canadian tar sands (Canada’s relabeling as “oil sands” just hasn’t stuck with me) is extracted, refined, and consumed in vehicles and other uses.

Sure, on a lifecycle basis getting your oil from the tar sands creates 14%-20% more greenhouse gases than from the average source.  But the bottom line is that saving 14%-20% of GHGs on what will never account for more than 5% of world oil supply isn’t going to change world GHG emissions by even 0.5% in any year. (Remember that crude is less than half of GHG emissions.)

The more consistent argument one hears is “we have to reduce our use of oil and other fossil fuels, and there’s no better place to take a stand than against a new oil source that is even more GHG-intensive than other sources.”  Though I have a bit of sympathy for this argument, in the full world energy context “block fossil fuel technology and supply” doesn’t seem likely to be a winning strategy for combating climate change.

The fact is that oil prices are very high – 2011 and 2012 had the highest average real crude prices since the 1800s — and high oil prices create very strong financial incentives for finding oil and bringing it to market. The same happened with high natural gas prices a decade ago, which brought new technologies and now vastly lower prices.

Blocking any one fossil fuel technology or supply source — whether it is tar sands oil, hydraulic fracturing, or deep water drilling — will reduce supply and raise fossil fuel prices.  That will make alternative energy sources at least marginally more cost competitive. But it will also increase the incentive to find new fossil fuel sources and new ways to access the energy in the fossil fuel sources that we already know about.  Alternative energy technologies are progressing, but so are the technologies for extracting and using fossil fuels, and the market incentive for improving those conventional technologies is at least as great.

Ultimately, we are going to need to massively reduce greenhouse gas emissions, not just make incremental progress by playing whac-a-mole on new fossil energy technology and sources. And greatly reducing our consumption of crude oil, not just by a few percent, is going to put severe downward pressure on the world price of crude.  That means that alternatives to oil that can disrupt our current path to climate change will have to beat not the $100/bbl price we see today, but something closer to the $20/bbl price we would see if world oil consumption declined by 20%, 30%, or more.

And that’s where it seems there is an opportunity for a grand bargain of sorts. The Keystone XL and other new oil sources create billions of dollars in economic value. Blocking them will have at best a very small impact on emissions.  But allowing them could be tied to much greater funding for alternative energy research and development.  Such work may have a shot at creating low-carbon alternatives that can compete against the bargain basement fossil fuels that will very likely result if alternative fuels start to contribute substantial supply.

And, of course, putting a real price on GHG emissions would help a lot.  R&D without a carbon price is a climate policy with one hand tied behind its back.

Cross-posted from Energy Economics Exchange (tag line: Research that Informs Business and Social Policy), a blog of the Energy Institute at Haas.

Comments to “What’s Keystone XL got to do with it?

  1. If we refuse to import the tar-sands oil from Canada, we will merely be redirecting it to China and other countries. Of course, we will be able to congratulate ourselves on an important symbolic victory for the planet — and isn’t that what this is all about: feeling virtuous? The planet doesn’t care if we burn the fuel or if China does, and it cares not whether the oil is transported by pipeline or by tanker.

  2. If we want to kick the habit, we need to cut off the supply. I can’t make an argument within the confines of capitalism for my position against fossil fuels. I care about the living planet, not the economy, so I can’t meet you on your turf and try to placate you and all of the people who think like you by pretending that preventing tar sands extraction is not only good for the environment, but wise financially as well.

    Here’s the bottom line for myself, and many other opponents to the Keystone XL pipeline: We believe that the needs of the natural world outweigh the needs of the economic system.

    I’ve seen humans live without fossil fuels, but I have never seen them live without a functioning climate, clean air, or living oceans.

    I agree that massive reductions in demand are necessary. We need to cut back consumption of fossil fuels, which you would think would be easy when you really add up how much energy goes to wasteful, unnecessary ends. But even this suggestion is doom for the economy. If people cut back on driving down to the Best Buy to grab a DVD and a new cell phone case before zipping over to the nearest chain restaurant for jalapeno poppers, the economy will crumble. Debt based, bond sale based economies don’t function if investors believe tomorrow will have lower returns than today.

    So again, we come to the core of it all; we must be willing to let the economy go in order to save the planet, and ultimately ourselves and everyone we have ever loved.

  3. So you’re saying nothing should be done about new oil sources so that the price (and value) of oil will continue to rise and consumers will choose cheaper/cleaner alternatives? Supply and demand logic doesn’t take into account the cost of burning fuel. Is there a mechanism to “de-value” oil or cast it as a liability or even a threat?

  4. Well, I suppose those do-goody-do-gooders could see blocking Keystone XL as a meaningful symbolic act in addition to a move in the right direction.

    But I think we are far, far ahead of the game if we disparage any effort…because well…logically it only makes sense. We simply should not do anything unless we can get immediate action on pricing oil and get India and China on board. I’m going to go eat cheesecake.

    Thanks for the pep talk, Severin. See Steven Colbert on “The New Abnormal.”

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