Keystone XL: Looking Past the Rhetoric

 

Takeaway

  • Importing oil from Canada could make the U.S. less beholden to Middle East politics
  • Many Gulf Coast refineries are operating under capacity, making them vulnerable to embargoes or other types of instability
  • Oil companies could embrace a carbon tax if it leads to a more coherent energy policy

President Obama’s decision to deny a permit for the Keystone XL pipeline project earlier this month reignited a national debate about the future of fossil fuels in the U.S. The pipeline, which would be extended from Canada to the Texas Gulf Coast via Nebraska and Oklahoma, is not completely off the table just yet — a new map would need to be drawn and approved for the project to move forward. But the delay does represent a major setback for pipeline owner TransCanada Corp., which is already evaluating other options, including a westward route that would allow Canada to export directly to China.

Sheridan Titman, a McCombs finance professor and executive director of UT’s Energy Management and Innovation Center, says the consequences of Obama’s decision will likely not be as severe as many have claimed — but it does highlight complexities in America’s energy policy.

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TXE: Do you believe the environmental concerns surrounding the Keystone project were justified?

ST: There are environmental risks whenever you put up a pipeline — but we have thousands and thousands of miles of pipeline, and you need pipelines. So you can’t just say no to pipelines, and there’s nothing really special about this pipeline that makes it particularly dangerous.

There are people who have concerns about carbon emissions, and they don’t particularly like the idea of [extracting oil from] the oil sands. I think that’s the actual reason that people find this so controversial.

TXE: The oil sands will still be drilled even if the U.S. opts out of the project, correct? Won’t the emissions be the same whether we drill there or someone else does?

ST: That’s what I would think, yes. It could even be worse, because you’re shipping everything farther.

TXE: Would Keystone give the U.S. a more reliable oil supply?

ST: Politically, we’d rather get our oil from Canada. We have to worry a lot more about Middle East politics if we don’t build the pipeline.

TXE: There are differing opinions about how many jobs could be created if the project goes forward — what do you think would be the pipeline’s actual impact on the job market?

ST: I don’t think it would be absolutely huge, but we’re in a situation where it makes sense to do things that will create jobs today rather than in the future. I don’t think the number of long-term jobs that are created is going to be such a huge deal, but the number of jobs that would have been immediately created and in the next couple of years would have been very helpful. Now is when we need them.

TXE: How does the decision to delay the pipeline affect U.S. oil and gas companies and refineries?

ST: For the state of Texas, we’re better off if the refineries and chemical plants on the Gulf have access to oil from multiple sources. One criticism of the pipeline is that a lot of the gasoline being produced on the Gulf is being exported now. I think that’s great — we need things we can export. Our refineries are currently operating at less than capacity.  If we weren’t exporting gasoline, those refineries would be operating even more under capacity and they’d be making less money, and it wouldn’t be good for the economy here. We want to have things produced in Texas and that are exported.

TXE: If the pipeline doesn’t happen, will there be a negative financial effect on those companies?

ST: I don’t think it’s going to have a huge effect. My best guess of what would happen is that they’d just be importing more oil from other places like Saudi Arabia. The risk, of course, is the possibility of an embargo from the Middle East that would force some refineries on the Gulf Coast being shut down. But I don’t think that will happen.

TXE: Are oil prices likely to increase if the pipeline isn’t built?

ST: Again, I think the effect is small, but we are better off building the pipeline. … If we don’t build it, we have lost some jobs, and it’s stupid to pass on projects that create jobs when there is slack in the job market.

The opposition to the Keystone pipeline is at least a partial reaction to our inability to place a price on carbon.  I think the oil companies are at a stage where they’d like to see a coherent energy policy that addresses carbon. I don’t think they would object to a tax on carbon. Not having a coherent policy that addresses carbon leads to dumb decisions. A tax on carbon would probably lead to a decrease in the use of oil and gas, which does hurt the oil companies, but the benefits of a coherent and rational policy that would allow the energy companies to plan and invest for the future would more than offset those concerns. 

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Titman recently wrote about the Keystone XL project and other politicized energy issues in an article for Texas Enterprise’s Energy Insights series.

 

Faculty in this Article

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

About The Author

Rob Heidrick

Writer, McCombs School of Business

Born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He...

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