Course:ECON371/UBCO2011WT1/GROUP8/Article 5: The Keystone Decision

Article

http://www.montrealgazette.com/business/backtracks+Keystone+decision+2011/5648741/story.html

Summary

The U.S. State Department backed away from its commitment to decide on the Keystone XL oilsands pipeline by the end of 2011. A States Department spokesperson said they’d like to get it done by year-end but they were concerned about thoroughness and obligations to the American people to ensure a rigorous and transparent review. The Keystone XL pipeline would carry up to 830,000 barrels of oil per day from Alberta to Texas, promising to create up to 20,000 new jobs. Obama expressed particular concern about environmental worries. U.S. environmental groups are adamantly opposed to the project and express concerns about greenhouse gas emissions caused by oilsands production and threat of possible pipe leaks. TransCanada, the company responsible for the pipeline proposal, has agreed to 57 additional safety measures aimed at preventing leaks, providing a degree of safety greater than any typically constructed pipeline in the U.S.

Economic Analysis

The Keystone XL decision has been a hot topic in the news lately and has been a source of much controversy for the U.S. State Department. The decision to accept the $7-billion project has been pushed back by President Obama in hopes of making the final decision in the best interest of the country.

The cost benefit analysis is a difficult evaluation due to the variety of inputs and outputs such as job creation, direct revenue, spillover revenue, and environmental effects. TransCanada, the company responsible for the project, has publicized quite clearly the benefits from the project such as the creation of 20,000 new jobs, not to mention the jobs in manufacturing for the 2,700 kilometers of pipe required for the project. On the cost side however, there is a lot more uncertainty. Opposition to the project brings up environmental issues such as the carbon footprint caused by oil sands production and the risk of leaks in the pipeline. It is difficult to compare the costs and benefits without monetizing the environmental effects.

It is also important not to forget the opportunity costs of the project. The demand for oil is very inelastic and if the proposal is rejected the U.S. will still need oil supplied from else where. What are the environmental effects of an alternative oil source such as Saudi Arabian oil? What is the difference in the carbon footprint between oilsands oil and Saudi oil? Saudi oil production burns off the natural gas that escapes when extracting oil whereas it is captured and sold in Canada. The oil still travels through pipelines to the Mediterranean where it is transferred to oil tankers. What are the environmental risks of a burst in the Saudi pipeline? The Keystone has 57 additional safety measures aimed at preventing and containing leaks, does the Saudi pipeline operate at such high standards. Once the oil reaches the Mediterranean it is transferred to oil tankers and shipped to the U.S. What is the risk of a spill on an oil tanker, and if a spill does occur can it be contained, what are the damages? So the cost benefit analysis should not be an analysis of the total cost and benefits of the project but an analysis of the opportunity costs of the project. While the job creation and benefits to the economy may not outweigh the total environment costs of the Keystone Pipeline, does it outweigh the difference in environmental costs between the Keystone Pipleline and the alternate source of crude such as Saudi oil.

Prof Comments

The costs and benefits are certainly hard to measure. In this specific situation though, there is a lot of politics going on. The politics is, in economic terms, about claiming and asserting property rights. It is essentially a battle about who has the property rights, because that will determine who is entitled to compensation for damages, or who has the authority to stop the project. There is also the strictly political dimension, which is about 'buying' votes.

6.5/10