Tech 101
There are about 180,000 miles of oil pipeline in the United States, but all of this mileage put together has not generated 1% of the controversy as a pipeline that would add a mere 1% to the total— the Keystone XL Pipeline connecting Alberta’s oil sands to refineries in Texas and Louisiana. Since it crosses an international boundary, Keystone requires US State Department approval, which has not been forthcoming under the Obama administration.
Keystone has become a cause célèbre on both sides of the political aisle. President Obama has made numerous statements criticizing the pipeline and has vetoed the legislation mandating its approval. Conversely, Republican Senate Majority Leader Mitch McConnell had promised to make Keystone the first legislative priority in Congress when he took office.
Many arguments have been advanced against Keystone. First and foremost, opposition to the pipeline rests on environmental objections. Environmentalists deem crude oil produced from Canadian oil sands to be uniquely damaging due to its carbon intensity when compared with other types of crude. When the environmental arguments failed to gain considerable traction, opponents shifted to economic arguments. These include assertions that Keystone will not reduce at-the-pump gas prices in the US, and that most Keystone oil will be exported.
Unfortunately, these political and environmental arguments have created more heat than light. A straightforward economic analysis of Keystone demonstrates that its benefits will not be as great as its advocates say, but they will be material. The environmental effects are likely modest and outweighed by the economic benefits.
The Economics of Keystone
The direct economic effect of Keystone is quite straightforward. It would reduce the cost of transporting crude oil from Canada to the US Gulf Coast. Without Keystone, rail is the most economical way to transport the oil to the Gulf refineries. US government reports estimate that rail shipment costs about USD 10/bbl more than transportation via Keystone. This means that the benefits in terms of reduced transportation costs are on the order of USD 8 million/day, which is USD 10/bbl multiplied by the 830,000 BOPD Keystone can transport in lieu of more expensive trains.
