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Confused Thinking on Keystone XL

by Michael Levi
June 6, 2011

The endgame appears nigh for the seemingly endless battle over the Keystone XL pipeline, which would carry about 800,000 barrels of oil sands product from Alberta to the Gulf Coast. I still stand by what I wrote in a 2009 study – the potential climate damages and energy security advantages of oil sands development are both widely overblown – but given the amount of misinformation and confusion circulating, I thought I’d weigh in on one important detail in the debate.

Opponents of the pipeline have been making two big claims: further development of the oil sands would massively increase global greenhouse gas emissions, yet such development would have almost zero moderating effect on oil prices. But here’s the thing: it’s pretty much impossible for both of these claims to be simultaneously true.

To make the case that Keystone XL would greatly increase greenhouse gas emissions, one has to start by arguing that blocking the pipeline would substantially curtail oil sands production. That’s a debateable point, but let’s take it as true. To come to the proposed conclusion, though, one has to also argue that the foregone production won’t be replaced by another source – say, OPEC crude. Otherwise, the emissions impact is largely a wash.

But there’s a catch: the models that project essentially zero impact of oil sands production on global crude oil prices do so because they assume that changes in oil sands production would be largely offset by countervailing changes in production volumes elsewhere. Remove that assumption, and the impact of changes in oil sands production on world crude prices would be much more substantial.

Some will counter that I’m being narrowminded in assuming that lower oil sands production would be substituted for by higher oil production elsewhere. Why couldn’t it be substituted for by renewable fuels or efficiency? Alas, the accounting doesn’t work that way. Let’s say we massively increase the use of alternative fuels and efficiency. We’ll still face the tradeoffs I’ve just outlined: cuts in oil sands production will still either be washed out by production increases elsewhere, leading to minimal climate and price impacts, or they won’t, leading to non-trivial consequences on both fronts.

So analysts have a choice: either they can argue that Keystone XL would have a substantial impact on both greenhouse gas emissions and oil prices, or they can conclude that it will have neither. Both of these are respectable positions. (I lean strongly toward the latter.) What is not right is to mix and match assumptions so that one predicts an outcome that is not consistent with itself.

Post a Comment 6 Comments

  • Posted by Greg Molaro

    I don’t think you’ve got it entirely right. Although the environment is important, the XL decision will be made on its financial merit.

    Canadian crude sells at a heavy discount to the world price. Last week the difference between LLS and Edmonton Par (WTI equivalent )was $14 per bbl. That means the refineryies in Minnesota and Chicago were HUGELY profitable.

    If XL made sense; why not reverse Conoco’s Seaway pipeline?? The line already exists. The answer is simple, WTI bbls are seriously constrained comming out of Oklahoma. Like Alberta’s bbls they are being sold at a $14 discount and Conoco has a huge refinery feeding off this supply at Wood River.

    So what does this mean… XL will likely force Chicago/Minnesota and Wood River to pay a world oil price for Oklohoma and Canadian bbls.

  • Posted by Lee Black

    Michael,

    I’d appreciate it if you’d write on the possible dangers of Natural Gas drilling in regard to the process known as ‘fracking’.

  • Posted by Marlowe Johnson

    Michael,

    Perhaps I’m not clear on what you mean by minimal, but to the extent that oilsands produce much more GHGs per barrel than other conventional sources, there would be an impact on that front, even if production were shifted elsewhere. Or are you assuming that a decline in oilsands production would be offset by increase in other unconventional sources?

    FWIW, I suspect how you define ‘substantial’ is what really matters in the end and depends entirely on one’s perspective. After all, Alberta’s GHG emissions have risen ‘substantially’ due to oil sands production. OTOH, the net impact on atmospheric concentrations is somewhat smaller…

  • Posted by Hans Nicolaisen

    I doubt that the tar sands will ever affect oil prices much one way or the other. If anything, world oil price will affect the extent of their future development. And while they are certainly a “dirtier” source of oil compared to conventional sources when it comes to GHG emissions, what fraction of global GHG do they contribute compared to, for instance, coal burning in the US, China, and India? This is not to say I’m an advocate of further development of the tar sands, or the Keystone project. But things have to be put in perspective.

    Perhaps more to the point, the need to develop the Alberta tar sands, as well as heavy oil from Orinoco, demonstrates how close we are to scraping the bottom of the oil barrel.

  • Posted by dtingey

    I’d really like to hear the case for allowing the tar sands to be developed because it helps deal with the big picture of climate change mitigation..how will developing XL and the Northern Gateway and building new rail capacity to move bitumen help stabilise atmospheric concentrations of CO2? By all means lets keep things in perspective. Please, someone, make the case.

  • Posted by Karlin

    As for the question of higher emissions, or not, of Tar Sands bitumen as compared to conventional oil, I don’t think all the important factors are being considered.

    Surely the huge amount of natural gas being used to get the tar out of the sand [using steam] has to be added to the equation.

    [ML: It is.]

    One-third of Alberta’s annual natural gas production is used up in the Tar Sands operations!! [sidebar - is it true that no royalties are paid on natural gas used in tar sands ops?]

    It is dirty energy, and the tar sands should not be allowed to expand, for the public good. Distastefull as it may sound, “Occupy Your Tar Sands” because natural resources belong to the people when they are in the ground. We should be able to say “leave it there, it is ours and we say so”.

    Only 1% of people want to use it.

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