Obama Wants More Infrastructure Investment, Will Democrats Go Along?

NOTE: Once more into the breach from Fred Thompson.  The title refers to this piece by Kevin Drum. 

“The proposed Keystone XL project consists of a 875-mile long pipeline and related facilities to transport up to 830,000 barrels per day … of crude oil from Alberta, Canada and the Bakken Shale Formation in Montana. The pipeline would cross the U.S. border near Morgan, Montana and continue through Montana, South Dakota, and Nebraska where it would connect to existing pipeline facilities near Steele City, Nebraska for onward delivery to Cushing, Oklahoma and the Texas Gulf Coast region.”

I should acknowledge up front both that I am an infrastructure enthusiast and that I think Keystone XL is a very smart infrastructure project. Montana, North Dakota, and probably Alberta crude would sell for $20 a barrel more than it does now if it could be cheaply transported to Houston, Texas. A rough, quick and dirty calculation suggests that XL, which will move 800,000 barrels a day at low cost, would generate about $6 billion in net benefit per year; that’s a present value of approximately $120 billion (i.e., the size of Oregon’s annual state product). But like all big infrastructure projects Keystone XL has an environmental downside, in this instance arguably a very big one. James Hansen, for example, asserts that its effects would be both catastrophic and irreversible.

Most of the principled disagreement over the Keystone XL pipeline appears to reflect different counterfactuals. By principled I mean arguments that do not involve the rejection of anthropogenic climate change or denial that prudence requires that we take the possibility of catastrophe very seriously and take action to avert or, if that is not possible, mitigate its dimensions.

The key counterfactual has to do with what will happen if Keystone XL is not built. Opponents claim that the crude oil it would carry will remain in the ground, resulting in a net reduction in the output of greenhouse gases. Proponents believe that Canada’s tar sands will be exploited at more or less the same rate whether XL is built or no.

Can we bring some simple economic thinking to bear on this issue? Perhaps, but before that some context. First, nearly all of the crude oil exported from Canada will be refined and consumed in the United States. Second, most of the Canadian crude now consumed in the US comes here via pipeline and is refined in Oklahoma, Missouri, and Illinois. Relatively small amounts are shipped by rail, some all the way to Texas and New Jersey, but not much. A handful of fairly small pipelines carry oil from Alberta through British Columbia and Washington. Some of the crude they carry is refined in Washington State but most of it is shipped on to California. Third, Keystone 3, which runs from Oklahoma to Texas, will be completed this year. Consequently, because the refineries there can process the Canadian stuff much more efficiently, a lot of the Canadian crude now refined in Illinois and Oklahoma will soon go on to Texas. Fourth, Canadian crude going to Texas will replace Venezuelan, Mexican, and Nigerian crude that now arrives by ship. Expansion of the pipelines from Alberta to British Columbia and Washington would replace oil from the Mideast (where California gets most of the oil it refines).

Building Keystone XL also means that the crude oil produced in North Dakota and Montana, the bulk of which is now moved by train to refiners, would instead be transported by pipeline. Consequently, building XL would have the immediate result of reducing the amount of crude transported by rail in the US. Whether it would also forestall an increase in rail shipments from Canada to the US is more iffy.

Initially, many of Keystone XL’s opponents implicitly took the ‘no effect’ position. They argued that XL is unneeded, that XL’s only effect would be to make the route traveled by crude from Alberta to Texas less circuitous, and that existing pipelines and railroads have more than enough capacity to move Canadian crude to the US: “Keystone XL’s capacity won’t be needed until sometime after 2020 at the earliest and maybe not until after 2030.” Consequently, most of the opposition focused on XL’s threat to the Ogallala Aquifer and the environmentally sensitive Sand Hills area of Nebraska. It was only after Keystone changed XL’s proposed route to avoid the Sand Hills that opposition coalesced around the argument made all along by XL opponent James Hansen that “If this project gains approval, it will become exceedingly difficult to control … exploitation of tar sands [which] would make it implausible to stabilize climate and avoid disastrous global climate impacts.”

The crux of this claim is that extraction and use of fossil fuels like oil and coal are directly related to the cost of transport. “If a pipeline provides cheaper transport, it’s going to suppress the cost of fossil fuels, prolonging their use. The cost of transport and the price of fossil fuels cannot be separated.” With respect to oil from Alberta’s tar sands, “the payoff from getting bitumen out of the sand is very low, it has to be heated to make the oil flow. The acidity of the oil is high and it’s full of stuff that no one wants to burn. Lacking the pipe line, there won’t be enough margin to support moving the product by rail.” Clearly, at least some opponents of the Keystone XL understand that the relevance of transportation costs to the extraction and use of crude oil depends on whether its producers are marginal suppliers or infra-marginal suppliers and by how much. If they are marginal suppliers, transportation costs are critical, if they are infra-marginal suppliers, not so much.

What is the weight of the evidence on this issue? My reading of the evidence is that, at $50 a barrel, the tar sands would be marginal suppliers. At $100 a barrel, exploiting this resource is a license to print money, even if the cost to get it to refiners is >$20 a barrel. Right now Alberta is an infra-marginal supplier. That is also the case with respect to North Dakota and Montana. Of course, one can imagine contingencies in which things would be otherwise. The price of oil could drop, for example, or, some time in the future, producers may choose to exploit harder to access or process tar sands. Clearly, there are circumstances in which transportation costs would affect the exploitation and use of these resources, although it is hard to imagine situations in which they would matter as much as the development of production technologies. The bottom line is that success in the fight against greenhouse gases does not depend in meaningful ways on this or any other infrastructure project. 

What does the fight against greenhouse gases depend upon? The enactment of measures such as carbon taxes, the payoff to investments in alternative technologies, and, to a lesser extent, trade policy. How would a carbon tax work? A carbon tax would drive a  Investing in technologies that provide substitutes for coal and petroleum: conservation, solar and wind power, nuclear power, algal biofuel, even natural gas and methane hydrates, will further reduce the demand for fossil coal and oil. That’s the next most important thing we can do. At best, fights about infrastructure are sideshows; at worst, distractions from issues that really matter in the fight against pollution and global warming.

wedge between the price paid by consumers and the price received by producers, reducing both supply of (production) and demand for fossil fuels (consumption) and encourage alternative, less carbon intense technologies. For example, a carbon tax of approximately $50 a barrel would render Alberta a marginal supplier (assuming fixed technology) and go a long way toward preempting more intensive exploitation of this resource. It doesn't matter whether the tax is levied at the pump or on the producer/importer and it most emphatically doesn't matter what you call it, the incidence of an excise tied to carbon content would be the same, as would the effects on consumption and production. Enacting something like a carbon tax is the most important thing we can do to fight greenhouse gases.