Will the Keystone XL Decision Be Based on Incorrect Assumptions?

• Some of the facts about the Keystone XL pipeline project that President Obama cited in an interview last month turned out to be wrong. That's significant, if he is the ultimate decision-maker on this question.
• Whatever his assessment of the pros and cons of the project, the politics of Keystone are trumping the facts, indicating the decision is likely to be deferred as long as possible. 

When President Obama commented on the merits of the Keystone XL pipeline project in an interview in the New York Times last month, the Washington Post suggested that his remarks “give opponents reason for hope.” Although he confirmed that the White House’s main objective criterion for making this decision was still the pipeline’s greenhouse gas impact, the President also speculated about the project’s job-creation potential and the ultimate destination of the crude oil it would carry. This appeared to endorse arguments raised by opponents of the project. These issues deserve more than the dismissive treatment they received in the interview.

With regard to the number of direct construction jobs that the northern leg of the Keystone XL Pipeline (KXL) might create, I don’t know whether the right number is the 2,000 the President cited or the tens of thousands estimated in an earlier State Department study. However, fact checking by both PolitiFact and AP concluded he was wrong.

In any case, this administration lacks credibility on counting such jobs. Consider the White House's metric of “jobs created or saved” for assessing the impact of the 2009 stimulus, or the routine touting of projects with “green jobs” potential, not just in terms of their direct employment gains, but also their indirect job creation estimated via generous multiplier effects. Either indirect jobs are always relevant, in which case KXL would create far more jobs across the economy than the President seems willing to admit, or they also aren’t relevant to justifying clean energy and other, more favored infrastructure projects.

The more interesting issue Mr. Obama brought up relates to the disposition of the oil-sands crude that the KXL would ultimately carry from Alberta to the Gulf Coast. For starters, this isn’t relevant for whatever volume of North Dakota production the pipeline might also carry, since current rules prohibit its export to anywhere except Canada. Of the pipeline’s planned capacity of 830,000 barrels per day, some would be used to ship US crude to US destinations, some would carry Canadian  oil destined for US refineries in the mid-continent, while an unspecified remainder would arrive at the Gulf Coast.  However large the latter figure might be, it’s doubtful that much of it would ever leave these shores. To understand why, you need to consider the quantity of US oil imports of similar quality currently coming into the Gulf.

Overall, Gulf Coast crude oil imports have fallen by around a third since 2007, but they still amount to around 4 million barrels per day – 5x the total capacity of the KXL. Unsurprisingly, much of the crude imported into the Gulf is either sour or heavy, since the refineries in the region have invested billions of dollars in the hardware required to process such crudes, which are typically cheaper than lighter, sweeter grades. A quick glance at the countries of origin of the import mix confirms this, with suppliers such as Mexico, Saudi Arabia, Venezuela, and Iraq dominating recent imports. Imports from Algeria, Angola, and Nigeria have been slashed by surging production of light, sweet crude in Texas and other states.

In the interview, President Obama said, “So what we also know is, is that that oil is going to be piped down to the Gulf to be sold on the world oil markets, so it does not bring down gas prices here in the United States.” For him to be right about that, we must believe that the current importers of around 2.7 million barrels per day of generally similar crude from South America and the Middle East would ignore the arrival in their market of new supplies from Canada and continue to buy from existing suppliers, and that those other suppliers would be able to continue to charge the same prices as before, despite significant new competition. Although I wouldn’t argue that oil sands crude would never be exported from the Gulf, imagining that most of it would simply sail right by the closest and largest global refining center equipped to handle this type of crude oil reflects a remarkably superficial view of how oil markets actually work.

The Keystone XL decision process clearly encompasses both factual and political considerations.  On the facts alone and the criteria set by the administration, the pipeline would eventually have to be approved, since even in the worst realistic case its impact on global greenhouse gases would be minimal--on the order of 0.4% of global emissions--while it offers clear benefits including reliability of supply. The protracted delays in approving this project provide all the evidence needed to confirm that political considerations outweigh the facts. Deciding now in favor of either side offers limited political benefits but carries huge risks; continuing to leave the issue in suspense has paid dividends at little apparent political cost.

A different version of this posting was previously published on Energy Trends Insider. 

Will Energy Determine the 2012 Election?

A year from today Americans will know who will serve as President from 2013 to 2017. Even though $4 gasoline was still fresh in the minds of voters, energy played only a minor role in the outcome of the 2008 election, overshadowed by two wars and a crippling financial crisis. Will that be the case again in 2012, or will energy loom larger, propelled by its close connection with the economy? Several Republican candidates have already raised energy as a campaign issue, and the administration has repeatedly emphasized the linkages between energy, jobs and taxes. Whether any of those arguments gains traction in a race that at this point seems likely to be dominated by unemployment and deficits could depend on how deftly the administration handles decisions such as the Keystone XL Pipeline permit, as well as the degree to which voters become interested in the details of the country's shifting energy balances.

From day one, the Obama administration has taken a calculated risk on energy by focusing most of its non-crisis-response attention on promoting renewables such as biofuels and wind, solar and geothermal power. According to the latest figures from the Energy Information Agency the combined contribution to our total energy diet from these sources increased from 2.2% in 2008 to 3.2% in 2010. Rightly or wrongly, the Solyndra fiasco could leave voters questioning the wisdom of the whole suite of renewables policies that promise large future benefits but have had little tangible impact so far. Nor do the administration's efforts to claim credit for increasing US oil production look very credible when they demonstrably reflected the characteristic time lags of investments made during the Bush years, and occurred largely in spite of policies such as the Gulf of Mexico drilling moratorium and various onshore lease cancellations.

Meanwhile, the single largest energy development of recent years, the harnessing of vast shale gas resources, which last year supplied the equivalent of more than triple the combined output of US wind, solar and geothermal power, has occurred against a background of governmental ambivalence and occasional outright hostility, as in the case of New York's state moratorium on hydraulic fracturing, or "fracking". Unless the Obama administration moves to embrace shale gas, which David Brooks of the New York Times referred to in his column last week as a "wondrous gift", it might not be very hard for the President's challenger next year to portray his policies as being focused on only 3% of the energy that drives the economy, while neglecting the other 97%.

In that context, the Keystone XL decision could prove crucial. The State Department has signaled that the decision, which was anticipated by year-end, might be delayed into next year or beyond. Recent remarks hinted that the President may make the call personally. And in an interview during last Thursday's Washington Post Smart Energy Conference, Energy Secretary Chu backed away from his previous partial endorsement of the project. Taken together, these moves have me questioning the conventional wisdom that expects a grudging approval of Keystone. Turning it down outright, or killing it by attaching a set of uneconomical conditions to a contingent approval, would play well with portions of the President's base, but it might be hard to defend to independent voters later, particularly if higher oil prices or some event moved energy up the list of top election issues. Delaying a decision past the election would probably satisfy no one.

Whoever wins in 2012, the nation will need a renewed energy policy that balances the need to continue funding research and development aimed at delivering renewable energy technologies that can compete with conventional energy with little or no need for further subsidies, while simultaneously and just as vigorously promoting domestic and wider North American production of the conventional energy sources we will still need for at least another several decades, if we don't want to return to our former trend of becoming steadily more dependent on imported energy. Even if today's 3% from new renewable sources grows to 30%, we will still depend on oil, gas, nuclear and coal for the other 70%, nor can we rely on energy efficiency to end our reliance on the latter sources. I look forward to seeing more detailed energy proposals from both sides over the next year.

The American Jobs Act's Poison Pill(s)

I had a completely different topic in mind for today's posting, but I'll have to come back to the energy implications of a potential European financial crisis later. Since President Obama's jobs speech to Congress last week I have been awaiting the text of the actual proposed bill, rather than the summaries I'd been seeing. It finally came out at the end of the day yesterday. I feel obliged to point out a few provisions that haven't been widely advertised, either in the original speech or on the fact sheet that the White House published. These include several measures related to alternative energy, such as the inclusion of some project categories within the purview of the proposed National Infrastructure Bank, or the funding for putting solar panels on abandoned and foreclosed buildings as part of their rehabilitation. However, I'm not sure how much any of this matters, because the bill sent to the Congress also includes a slate of provisions that were certain to be regarded as a "poison pill"--sections that would preclude passing it on the all-or-nothing basis that the President seemed to be pushing for last Thursday. Energy features prominently in these poison pill measures.

I can't do justice to a 155-page legislative draft in the few hours I've had to review it. I'll restrict my comments today to the "offset" provisions that escaped being mentioned in the administration's fact sheet and reserve comment on the other aspects of the bill for a later date, if necessary. It seems clear from reading Sections 431-442 that the architects of this bill view the US domestic oil and gas industry as a declining cash cow, rather than as the source of new jobs and growth that I described in last Thursday's posting. Those sections set out to repeal every single oil and gas industry tax benefit of which I was aware, and a couple I hadn't even heard of. Included are the Section 199 manufacturing tax credit enjoyed by every other manufacturing company in America, along with portions of the tax code designed to prevent US companies from being subject to double taxation on their global income, protections that I believe their non-US competitors enjoy automatically under the territorial tax systems in use in most developed countries. In a different context I wouldn't have found any of this surprising, but rather a measure of consistency, since the administration has pursued the termination of these benefits in every budget proposal since 2009 and in a number of bills introduced by its allies in Congress.

The surprise comes from their inclusion in a bill intended to provide immediate relief for the large number of Americans still out of work, and possibly to avert a double-dip recession--a bill described as consisting mainly of provisions that have been backed by both parties at various times. However, the legislative history and likely fate of the poison pill provisions is abundantly clear: they have failed every time they were proposed, including in the previous Congress in which the President's party held overwhelming majorities in both houses. Along with the other "offset" provisions, such as those limiting itemized deductions for taxpayers making more than $200-250,000 per year, or going after the tax treatment of hedge fund income and corporate jets, it's hard to see their inclusion in the American Jobs Act as anything other than politically motivated. This morning's headlines reflect the entirely predictable reaction to them.

It's not that these measures aren't a legitimate subject for debate and action. However, that debate is part and parcel of the growing bipartisan consensus on the need for comprehensive reform of our convoluted tax code, in which the majority of current deductions and exemptions, including those for energy, would be sacrificed in exchange for the lower tax rates necessary to make all US businesses--not just a chosen few--more globally competitive. Squandering that opportunity to pay for a short-term boost to the economy would, among other outcomes, leave the US energy sector less competitive and the nation worse off in the long run. Meanwhile, when the Congress rejects these poison pills and proceeds to cherry-pick among the bill's headline measures, it might also adopt the American Jobs Act's final provision, which dumps the problem of paying for it in the laps of the Supercommittee appointed to find the remainder of the deficit reductions agreed in the Budget Control Act of 2011--already a pretty tall order.

If there was ever a chance for a "clean" jobs bill to pass intact, the pursuit in this venue of the administration's long-standing agendas with the oil and gas industry, hedge fund managers, and corporate jet owners erases it. Whatever the outcome of the negotiations with and within the Congress over this bill, you can count on hearing a lot more about these issues between now and next November.

Turning to Energy for Jobs

Yesterday's Energy Jobs Summit at the US Capitol, hosted by The Hill and API, focused on the potential of the energy sector to add large numbers of new jobs to help alleviate the national jobs crisis that President Obama will discuss in tonight's speech. The figures presented by API and others were impressive, with the oil and gas sector alone capable of creating over a million jobs if provided increased access to US resources. Panelists also discussed "green jobs", including those from energy efficiency projects. Yet I was struck by the inherent tension between today's job-creation imperative and our long-term need for an energy sector that is as productive and cost-effective as possible, in order to support economic growth and reemployment in the roughly 92% of the economy beyond energy. That makes highly productive private-sector energy jobs requiring little or no public investment especially valuable.

In a new study released at the summit, Wood Mackenzie estimates that the US oil and gas industry could increase its employment by 1.4 million by 2030, with a million of those jobs attainable by 2018--more than half in the next two years--under new policies that would lift the current bans on offshore drilling outside the established areas of the Gulf of Mexico and on shale drilling in New York, speed up permit issuance in the Gulf, open up new onshore acreage for leasing, and approve the Keystone XL pipeline. In the process, domestic production of oil and gas liquids could eventually nearly double, while natural gas output would grow by over 60%. Even better, from a deficit-and-debt reduction perspective, this effort would require no new government expenditures and stands to contribute a cumulative $800 billion in additional federal and state royalties and tax receipts.

The potential jobs impact is extraordinary, when you think about it. Oil and gas is an incredibly capital-intensive industry with very high worker productivity--one reason that salaries in the industry tend to be much higher than average. An industry like that is hardly the first place one might think to look when seeking massive job growth. The fact that such growth is even possible is both a validation of the tremendous untapped resource potential we still possess, and an indictment of decades of bipartisan energy policy mismanagement that has preferentially outsourced US energy production, rather than exploiting our own resources.

What about the contribution of "green jobs"? The growth of cleantech--renewable energy and energy efficiency--can certainly contribute to US job growth, yet we should understand clearly that such jobs won't spring forth spontaneously from the private sector without substantial continued government incentives and subsidies. Nor are those a guarantee of success. The US wind industry installed just 2,151 MW of new capacity in the first half of 2011. While that was considerably better than last year's pace of 1,250 MW, it's still 47% below installations in the first half of 2009, despite last December's against-the-odds extension of the Treasury renewable energy grants, which paid out $2.2 billion to wind projects this year. And the recent solar bankruptcies and the aggressive offshoring by solar manufacturers fighting to stay competitive with Asian suppliers also demonstrate that green jobs, other than those in installation and construction, are just as vulnerable to global competition as in any other US manufacturing industry.

Conventional energy jobs aren't immune from competition, either. I was startled to read yesterday that regional refiner Sunoco plans to exit the refining business after more than 100 years. Its two Philadelphia-area refineries will either be sold or shut down by mid-2012, with 1,500 jobs at stake. Prospects for a quick sale of these facilities look poor, because these plants are among the most exposed to global oil prices that have been running more than $20 per barrel higher than for crudes produced in Canada and the US mid-continent. Idling these plants would take a big bite out of east coast gasoline supplies and inevitably lead to both higher product imports and higher gasoline prices in the northeast and mid-Atlantic regions. As someone pointed out at yesterday's session, it's a sad commentary that Sunoco can make more money selling sodas and snacks at its retail facilities than it can refining crude oil.

That dynamic makes the production-related jobs in the Wood Mac study even more attractive: Despite being tied to a depleting resource, US oil & gas exploration and production enjoys a greater sustainable competitive advantage in the global marketplace than either refining or cleantech manufacturing, at least when it has sufficient access to domestic resources.

However, these opportunities also pose a test of our seriousness on the jobs issue. Opening up the Virginia and California coastlines, for starters, along with the coastal plain of the Arctic National Wildlife Refuge to exploration raises a host of NIMBY and environmental concerns. I don't want to trivialize them, but I would suggest that the time when we could afford such sensibilities may have passed, heralded by our continued descent in the rankings of national global competitiveness and the rapid growth of our indebtedness. Creating a number of "green jobs" comparable to Wood Mac's estimate of 1.4 million from oil and gas would require the expenditure of tens to hundreds of billions of dollars the federal government doesn't have, and that the current Congress seems unlikely to be willing to appropriate. It would also risk embedding expensive energy at the core of the US economy, hobbling our non-energy economy, where most Americans are employed.

Yesterday's energy jobs summit was held in the new Capitol Visitor Center, which I hadn't seen before. It's a gorgeous facility and a suitable addition to the paramount edifice of our democracy. However, I was also struck by the contrast it provided with the meeting's subject matter. Recall that the Visitor's Center ended up costing over $600 million, well over twice its original plan. I hope that when the President presents his jobs program tonight, it will be grounded in the crucial distinction between that kind of government-funded, "shovel-ready" project that might put some of our fellow citizens back to work for a few years and an energy-and-jobs resurgence funded entirely by companies and their investors.