Decisions, decisions

The U.S. State Department received the application from TransCanada for permission to build the Keystone XL Pipeline Extension over 3 years ago. Today, the White House made a firm decision not to decide just yet, with the State Department indicating that an actual decision is at least another year away.

Nice to see the President is focused like a laser on how to get Americans back to work.

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37 thoughts on “Decisions, decisions

  1. Jeffrey J. Brown

    http://www.jeffrubinssmallerworld.com/2011/11/10/wti-brent-spread-costing-canadian-producers-over-1-billion-a-month/
    Jeff Rubin: WTI-Brent Spread Costing Canadian Producers Over $1 Billion a Month
    Excerpt:
    “Without pipeline access to the Gulf, or to the Pacific to supply Chinese customers, Canadian oil producers get what Mid-west refineries will give them. And that’s a huge discount to what the rest of the world will pay, including U.S. refineries along the Pacific, Atlantic or Gulf coasts.
    “It doesn’t make sense for Canadian oil to flow to the market that values it the least. If Canadian oil exporters can’t get to world prices through the proposed Keystone XL pipeline to the Gulf of Mexico, they must find another route for their oil to flow.”

  2. Jeffrey J. Brown

    Here is the WTI crack spread chart from Bloomberg. You can of course go back for several years.
    http://www.bloomberg.com/apps/quote?ticker=CRKS321C:IND
    And here is the Brent crack spread chart:
    http://webfarm.bloomberg.com/apps/quote?ticker=ACK321A:IND
    Here is a WTI/Brent spread chart:
    http://ycharts.com/indicators/brent_wti_spread
    Regional US crude oil stock chart (not much change in Midwest):
    http://www.eia.gov/oog/info/twip/twip_crude.html#stocks
    Cushing inventories:
    Monthly:
    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRST_YCUOK_1&f=M
    Weekly:
    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_EPC0_SAX_YCUOK_MBBL&f=W
    Note that weekly Cushing inventories have dropped 24% since late March, 2011.
    My conclusion: Mid-west refiners are generally not passing on the benefit of lower WTI prices to consumers. They are capturing the huge increase in the WTI/Brent price spread as refining profits, at the expense of both Mid-continent producers and consumers.
    And of course, Canada is the single biggest victim of what is basically an unprecedented grab for profits by refiners. Life is good for Mid-continent refiners, until they ultimately drive away the most secure source of crude oil imports into the US. The US is currently dependent on imports for about 60% of the crude oil inputs into US refineries, and Canada supplies a very large portion of that input.

  3. Steven Kopits

    From previous thread….
    Why should consumers care about Keystone?
    It’s not clear to me that consumers should care about Keystone. However, working people should. There are good jobs–blue collar, manufacturing-type jobs–to be had in constructing the pipeline and developing the shale resource.
    Take a look at the OECD economies which are doing well: Australia, Norway, and Canada (albeit struggling a bit at the moment). Take a look at the OECD economies really struggling: Italy, Germany, Greece, etc. The consumers of all OECD countries suffer high oil prices; but those with substantial commodity–particularly energy commodity–exports are holding up pretty well. Norway has a 9% budget surplus. Australian unemployment is 5.2%. The closer the US to being a net energy exporter, the better our economic prospects.
    So it’s not about individuals as consumers; it’s about individuals as producers.

  4. Lord

    Bipartisan dysfunction. One party thinks something the other party wants should be negotiated while the other party refuses to because they want it as an issue.

  5. economonium

    Because I’m so fond of numbers, why don’t you give us the likely employment by this project, the total unemployment rate, and tell me what this represents? Then let’s balance that against the economic value of the pipeline, and any ecological impact it might have.
    It seems that Republicans always want simple posts for simple people, but this is an economics site, so can’t we do better?

  6. Walter Sobchak

    “Why should consumers care about Keystone?”
    So we don’t have to deal with the Sa’uds and Hugo Chavez?
    The country has spent more than a trillion dollars fighting wars in the middle east of the last generation. Every barrel of oil we buy from Canada is one less that we don’t have to buy from our enemies.
    You all need to focus on the real issues here.

  7. 2slugbaits

    Steve Kopits but those with substantial commodity–particularly energy commodity–exports are holding up pretty well. Norway has a 9% budget surplus. Australian unemployment is 5.2%. The closer the US to being a net energy exporter, the better our economic prospects.
    As I understand it the pipeline would not make the US anymore of an energy exporter than it is today. The export product is the oil, which would be exported from Canada.
    The $7B in pipeline construction stimulus is chump change compared to what I could identify in ten minutes and an Excel spreadsheet dump. My gripe with the Administration is that there are plenty of wrench ready projects that could be executed in a matter of weeks. Ten years of war has created an iron mountain of shot to hell military equipment. Ramping up repair of that equipment would stimulate demand for automotive, truck and aircraft components…all areas that could use some stimulus. Plus having an iron mountain of repaired equipment would make it a lot harder for the Pentagon to ask for newer, shinier toys in a few years, thereby lowering outyear DoD budgets. Instead we just park the stuff in the Sierra desert.

  8. Tommy

    economonium: If you’re fond of numbers, you can look them up. They are all over the web. One number you could find if you put forth just a bit of effort is 20,000. That number is an estimate of immediate jobs created by just beginning construction on the pipeline.

  9. Steven Kopits

    Walter -
    Oil affects the economy through price, not volume. You can always buy oil if you are willing to pay the price. Conversely, oil prices can bring down the economy even in the absence of an supply shock. 2008 was an example.
    Thus, even if we import oil only from Canada, we will not be immune to price shocks from events in the Middle East.

  10. Steven Kopits

    Slugs -
    The pipeline would also move Bakken oil. It’s not just for Canada. Bakken oil is, in fact, making the US less of an oil importer.
    The value of defense spending is conditional. Buying tanks or jets doesn’t improve well-being by itself. Such assets do protect the interests of the United States, depending on the circumstances. But weapons, left unused, do not improve welfare. Indeed, weapons used can reduce welfare, too, depending on the specific situation.

  11. 2slugbaits

    Steve Kopits Weapons can also be exported. The very first project I ever did with DoD was a study of income elasticities for various categories of weapon systems.

  12. Klio

    Nice to see the president has made the firm choice to protect our air and water quality, that he has a vision of the US beyond fossil fuels, and that instead of short term gain with great consequences he is focusing on the creation of sustainable competitive jobs instead of hunting Dodos.
    Or not.

  13. Jeffrey J. Brown

    Some perspective on annual global production data: Five annaul “Gap” charts follow, showing the gaps between where we would have been at the 2002 to 2005 rates of increase, versus the actual data in 2010 (common vertical scale):
    EIA Total Liquids (including biofuels):
    http://i1095.photobucket.com/albums/i475/westexas/Slide1-18.jpg
    BP Total Petroleum Liquids:
    http://i1095.photobucket.com/albums/i475/westexas/Slide06.jpg
    EIA Crude + Condensate:
    http://i1095.photobucket.com/albums/i475/westexas/Slide05.jpg
    Global Net Oil Exports (GNE, BP & Minor EIA data, Total Petroleum Liquids):
    http://i1095.photobucket.com/albums/i475/westexas/Slide07.jpg
    Available Net Exports (GNE less Chindia’s net imports):
    http://i1095.photobucket.com/albums/i475/westexas/Slide08.jpg
    I would particularly note the difference between the first chart, total liquids, and the last chart, Available Net Exports (ANE).
    CERA, et al tend to focus on the total liquids data while ignoring the GNE & ANE data. Since Yergin is now calling for less than a one percent per year rate of increase in total liquids productive “capacity,” which is similar to what we saw from 2005 to 2010 in the EIA total liquids data (+0.5%year), it seems to me that Yergin is, almost certainly without realizing it, in effect predicting a continued decline in GNE & ANE:
    Daniel Yergin Massively Reduced His Energy Estimates
    http://www.energybulletin.net/stories/2011-10-24/daniel-yergin-massively-reduced-his-energy-estimates

  14. Brian

    2slugs: I actually agree with you! Stimulus spending to repair or military infrastructure (ships, planes, etc.) would be a good idea right about now.

  15. Kristin

    Aren’t we supposed to evaluate decisions on their costs and benefits? The Enbridge Energy pipeline in Michigan has spilled 800,000 gallons of oil into the Kalamazoo River and it is costing them $700 million to clean it up. At that rate we could just pay 20,000 people each 35k and still come out ahead in terms of both jobs created and environment saved. It seems so stupid to permanently risk destroying an untold volume of farmland in the Midwest in exchange for 20 thousand temporary jobs to transport a temporary resource. It seems like a much better long term plan to use high oil prices to incentivize us to reduce our energy and fossil fuel use.

  16. 2slugbaits

    Kristin And Enbridge is one of the main pipeline interests in the Bakken field.
    My understanding is that Enbridge estimates it will cost $700M to clean up, not including fines and penalties. Much of that cost will be covered by their insurance. But the taxpayer is also on the hook. To date EPA has spent an additional $37M in taxpayer dollars. I guess if Mitt Romney and Rick Perry had their way the EPA would have been abolished and the taxpayer might have saved $37M…I suppose that’s one way of looking at it.
    http://www.epa.gov/enbridgespill/index.html
    And just the other day there was a major oil pipeline spill that resulted in an ongoing fire in Nigeria. The oil spill did a lot of damage to fresh water as well.
    http://articles.boston.com/2011-11-09/business/30378480_1_oil-spill-royal-dutch-shell-plc-bayelsa
    And how would you like to drink this:
    http://www.globalpost.com/photo/5680927/nigeria-oil-spill-2011-11-10

  17. HRPufnstuf

    perhaps change (at least the Hamilton portion) of this blog to the “troglo-econbrowser,” take some peyote and free classes at your university and completely refresh your approach to the discipline…

  18. RB

    Jim’s point appears to be that the oil is going to get used anyway. The opposition is saying this :
    Commentators who argue that the Keystone XL pipeline is no big deal tend to focus on the rate at which the pipeline delivers oil to users (and thence as CO2 to the atmosphere). To an extent, they have a point. The pipeline would carry 500,000 barrels per day, and assuming that we’re talking about lighter crude by the time it gets in the pipeline that adds up to a piddling 2 gigatonnes carbon in a hundred years (exercise: Work this out for yourself given the numbers I stated earlier in this post). However, building Keystone XL lets the camel’s nose in the tent. It is more than a little disingenuous to say the carbon in the Athabasca Oil Sands mostly has to be left in the ground, but before we’ll do this, we’ll just use a bit of it. It’s like an alcoholic who says he’ll leave the vodka in the kitchen cupboard, but first just take “one little sip.”
    Sometimes, revolutionaries succeed. I’m sceptical though that the environmentalists will win on this one.

  19. tj

    I think re-routing the pipeline is a nice compromise, but it should be fast-tracked.
    To the enviro’s, we need you to offset the ‘full speed ahead’ mentality the far right has on environmentally unfriendly projects.
    However, when it comes to enery, you have to realize that the world is not at a point where we can cast fossil fuel aside and ‘go all in’ on green energy.
    If we place uber taxes, fees, EPA hurdles, etc on the production of fossil fuel, we will destroy (or not save) countless jobs. We will drive up the cost of home heating/cooling, the price of every good that has a high transportion cost component. We will make life extremely difficult for the folks who are fixed income, and the people who are barely making ends meet now.
    We need a balanced approach that allows a side by side approach in which we continue to exploit domestic fossil fuel resources while at the same time, pours funds into R&D for other energy alternatives, nuclear included.

  20. 2slugbaits

    tj Re-routing the pipeline would be a good start. That would dampen a lot of my opposition. Of course, we still have to address the CO2 issue. The best way to handle that would be through the market using some kind of carbon tax. The impact on the poor is a problem, but it could be ameliorated with tax rebates. As I recall the CBO’s analysis of the now dead cap & trade bill found that such a rebate would actually be a net positive for the bottom quintile.
    A couple weeks ago Nordhaus had an update to his RICE model and I believe the new price is $44/ton. And Nordhaus’ numbers tend to be on the conservative side because he operates in the “most likely” range rather than in fat tails.
    I’m a big fan of flattening the marginal rate of technical substitution curve. In practice that means having lots of alternative energy sources that can be easily substituted one for the other. You mentioned nuclear power. This might surprise you, but I tend to agree. There are obvious risks, but I think they are manageable.

  21. colonelmoore

    Canada is running into resistance from some of the 1st Nations tribes that don’t want their pristine lands disturbed by oil pipelines transporting oil to China. Read that as them having political power and using it to extract more equity out of the project.
    Canada will not put a carbon tax on its fuel exports and China will not tax itself. Tankers consume a lot more fossil fuel crossing the Pacific than piplelines use. China is as big as the United States so after that oil is unloaded the oil or refined products get transported as far as they would get transported in the United States. If you are looking at CO2 emissions whatever we are doing by encouraging the Pacific pipeline is counterproductive.

  22. The Engineer

    “Mid-west refiners are generally not passing on the benefit of lower WTI prices to consumers.”
    I can confirm this. Mid-continent refineries are now profitable like they have literally never been before. They have gone from millstones around the necks of their IOC parents to cash cows.

  23. 2slugbaits

    colonelmoore The pipeline is supposed to go to New Orleans. By my reckoning that makes for a longer tanker haul to China than starting from western Canada. In any event, China doesn’t have to impose a carbon tax on itself; the WTO rules allow countries that import Chinese goods to add the carbon tax as a tariff on imports.

  24. JDH

    2slugbaits: I believe the comparison that colonelmoore was making was between (1) shipping Canadian oil to China via tanker, and (2) shipping Canadian oil to the U.S. via pipeline. The U.S. currently imports 3.4 million barrels per day from Saudi Arabia, Venezuela, Nigeria, and Iraq. An extra 500,000 b/d through Keystone XL is not going to cause oil to be exported from Port Arthur. Instead, it would cause less oil to be imported via tanker into Port Arthur.

  25. Anonymous

    Steve K
    “Oil affects the economy through price, not volume.”
    Um, what? You have pointed to 2008 as evidence for this claim, but 2008 shows only that price matters. It does not show that volume does not. There has been a good bit of work done on interruptions to oil supply and the price reaction, much of which suggests that volume is critical.
    In the absence of hard evidence that volume doesn’t matter (because logically, volume sorta has to matter), what you are engaging in is a fallacy of false dilemma. Just because price does matter does not mean that volume does not.

  26. Anonymous

    And today, they announce they’re moving the pipeline route outside the environmentally sensitive Sand Hills area. So … it looks like Obama telling them there won’t be approval for a while made them move.
    It wasn’t a shovel ready project. It seems to be getting there; they have agreed to find a new route but there is no route yet.
    Again, not shovel ready. Events proved that.

  27. ds

    I’m confused by the statement that the project is another year away. When I follow the link, it says they’re on track to make a decision by end of this year.
    Has something changed since this post was made?

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