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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.