Do Greens Oppose Keystone XL Because It Would Increase Gas Prices or Lower Them? Yes!

by Marlo Lewis on August 14, 2014

in Blog

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High gasoline prices are unpopular in America. For green politicians and activists, public anger over high gas prices has long been both a challenge and an opportunity.

It’s a challenge because greens advocate carbon taxes and cap-and-trade, which are designed to jack up gas prices, and biofuel mandates, which have the unintended (although not unforeseen) consequence of inflating fuel costs.

It’s an opportunity because angry people want someone to blame, predisposing many to believe green propaganda that oil companies collude to “manipulate” markets, “gouge” consumers, and amass “obscene” profits. The Federal Trade Commission’s most recent major investigation found no evidence of such skullduggery, BTW.

Since the only logic behind the anti-KXL campaign is political, we should not be surprised that greens denounce the pipeline both because it will increase gas prices — and because it will lower them!

For years green activists told us that, in addition to wrecking the climate system, the KXL will — horror of horrors — increase Midwest gasoline prices. Department of Energy analyst Carmine DiFiglio handily debunked that theory. It’s not my purpose to review the issue here. The point rather is that Tom Steyer, Bill McKibben, Sen. Ed Markey, Carl Pope, NRDC, and other prominent Keystone foes warn that the pipeline will raise gas prices — as if they consider that a very bad thing.

This week, however, Keystone opponents are abuzz about a new study warning that the KXL could be ‘worse than we thought’ because it could increase global oil supply and, thereby, lower gasoline prices. Lower prices = more consumption = more carbon dioxide (CO2) emissions.

Specifically, the authors, Peter Erikson and Michael Lazarus of the Stockholm Environment Institute, estimate that if all 830,000 barrels per day (bpd) of oil flowing through the pipeline is additional oil in the global supply, KXL would lower global oil prices by $6 per barrel (see chart below). Consumption would then increase by an additional 0.6 barrels for every barrel produced, which in turn would increase global carbon dioxide-equivalent (CO2e) emissions by 110 million metric tons per year. That’s about four times the emissions increase (27.4 tons) in the high-end scenario of the State Department’s January 2014 Final Supplemental Environmental Impact Statement (FSEIS).

Erikson and Lazarus, Keystone XL Impact on Oil Supply & Prices

Erikson and Lazarus begin and end their study by quoting President Obama’s announcement that the decisive question for him is whether the KXL would “significantly exacerbate the problem of carbon pollution.” They fault State’s FSEIS for ignoring the KXL’s potential impacts on global petroleum supply and prices. They obviously hope their study influences Obama’s decision.

It does not deserve to. The authors acknowledge having no “new insights” on how much additional oil sands extraction KXL would induce. More importantly, even if KXL did increase incremental emissions by 110 million tons annually, it would still not “significantly exacerbate” the alleged problem of carbon “pollution.”

Some quick background. In June 2013, President Obama declared in his Georgetown University climate speech that he would approve the KXL “only if the project does not significantly exacerbate the problem of carbon pollution.” Six months later, State’s FSEIS concluded the KXL would at most increase CO2-equivalent emissions by less than 30 million metric tons annually. In fact, the pipeline might actually alleviate the supposed problem.

How so? According to State, no single infrastructure project would “significantly impact” either the “rate of extraction” of Canada’s oil sands or the “continued demand for heavy crude oil” by U.S. refineries. The determining factors are “expected oil prices, oil-sands supply costs, transport costs, and supply-demand scenarios” (FSEIS Executive Summary, p. 16).

Thus, if the KXL is denied, U.S. refiners will still import roughly the same amount of Canadian crude, they’ll just obtain it by alternative routes such as smaller pipelines, trains, and barges. Per barrel of oil delivered, the alternative transport modes are estimated to emit more CO2 than the proposed KXL (FSEIS Chapter 5, p. 3-5). Policy implication: If you care about the planet, approve the pipeline! As you can imagine, anti-Keystone activists were not pleased.

In their study, Impact of the Keystone XL pipeline on global oil markets and greenhouse gas emissions, Erikson and Lazarus argue that State’s assessment of the availability of alternative routes is “too optimistic” because “regulatory, environmental and local community barriers faced by other pipeline and rail options could ultimately restrict expansion of oil sands production.”

Well, okay, but State was tasked to analyze the market and environmental impacts of the KXL, not the political impacts of the greens’ war on fossil fuels. Thus, State analyzed whether KXL would have significant impacts on oil sands extraction, not whether political suppression of all oil transport would have significant impacts.

Gaming out the larger political struggle over the future of North American energy is not the proper business of an EIS. At this point, what is clear is that during the past two years, crude-by-rail shipments from Canada to the U.S. have increased dramatically as markets improvise around Obama’s deny-by-delay tactics.

When fully operational, the KXL would have the capacity to transport 830,000 bpd. Although State considers it “unlikely” that approval or denial would significantly change oil sands extraction, the FSEIS, as a sensitivity case, estimates the KXL’s incremental CO2 emissions under the assumption that all 830,000 bpd would be additional oil in the global supply. Depending on the type of crude used as a reference for comparison, State estimated that an additional 830,000 bpd of Canadian crude would increase annual CO2e emissions by 1.3-27.4 million metric tons (FSEIS Executive Summary, p. 15).

Using International Energy Agency elasticity of demand and supply estimates, Erikson and Lazarus calculate that “for every barrel of increased production” attributable to the KXL, “global oil consumption would increase 0.6 barrels owing to the incremental decrease in global oil prices.” They conclude:

As a result, and depending on the extent to which the pipeline leads to greater oil sands production, the net annual impact of Keystone XL could range from virtually none to 110 million tons CO2 equivalent annually. This spread is four times wider than found by the U.S. State Department, who did not account for global market effects.

Several things to notice here. First, crude oil prices are by far the single largest factor determining gasoline prices. Erikson and Lazarus implicitly cast doubt on earlier green claims that KXL would have no effect on gasoline prices or actually increase gasoline prices.

Second, Erikson and Lazarus offer no “new insights on whether Keystone XL will ultimately enable higher oil sands production levels,” because at this point it is unknown “whether alternative transportation options can fully substitute for Keystone XL.”

Third, although some portion of the oil delivered via the KXL might not enter the global supply by other means, it is implausible that all 830,000 bpd would otherwise remain in the ground — or even that a substantial portion of it would. On this point, economist Andrew Leach thinks Erikson and Lazarus “fail Econ 101”:

So, is it possible that the State Department under-estimated the impact of oil sands production changes on world oil markets? Perhaps. However, it’s certainly incorrect to assume that the existence of single pipeline impacts all oil sands supply costs, or that not allowing it would render that oil supply unavailable at any price. For this analysis to hold water, you’d have to show that the barrels which would be transported by Keystone XL are, in fact, the marginal future barrels of oil sands production.  With projects like rail terminals, pipelines east and south, and other infrastructure underway to move oil sands, Keystone XL barrels would be far from marginal.

Fourth, and most critically, even if we assume (1) that all 830,000 bpd of Keystone crude is additional oil in the global supply, and (2) that each additional barrel increases global consumption by 0.6 barrels, the resulting uptick in “carbon pollution” would be of no practical consequence.

MAGICC is a model developed by the U.S. National Center for Atmospheric Research, with funding from EPA, to determine the impact of changes in greenhouse gas concentrations on global-mean surface air temperatures. The model uses climate sensitivity estimates and emission scenarios from the IPCC’s 2007 Fourth Assessment Report (AR4). A slew of recent papers in the peer-reviewed literature since 2011 indicates that AR4 substantially overestimates climate sensitivity (the amount of warming from a given increase in CO2e concentrations).

Cato Institute scientist Chip Knappenberger testified last year before the House Science Committee on the potential climate change impacts of the KXL. Using MAGICC, Chip calculated that even if all 830,000 bpd flowing through the KXL were additional oil in the global supply and incremental CO2e emissions increased by 181 million metric tons per year, the pipeline would contribute “about 0.0001°C of annual warming — one ten-thousandths of a degree.” Here’s how he put those numbers in context:

In other words, if the Keystone XL pipeline were to operate at full capacity until the end of this century, it would, worst case, raise the global average surface temperature by about 1/100th of a degree Celsius. So after nearly 100 years of full operation, the Keystone XL’s impact on the climate would be inconsequential and unmeasurable.

Note: Erikson and Lazarus assume that an additional 830,000 bpd would increase CO2e emissions by 110 million metric tons, not 181 million, as in Chip’s calculation. So in Erikson and Lazarus’s worst case, the KXL would contribute about 0.006ºC of warming by century’s end. If the recent papers on climate sensitivity are correct, the KXL maximum theoretical contribution to global warming is even more miniscule.

Global-mean surface temperature fluctuates by more than 0.006ºC naturally from year to year. By any reasonable standard, an infrastructure project that has no perceptible or verifiable impact on global-mean surface temperature cannot “significantly exacerbate the problem of carbon pollution.”



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