Grantham on Keystone XL

From Advisor Perspectives:

Two Afterthoughts on the Risks and Return of the Keystone Pipeline

The XL Pipeline has become an intense issue in which facts tend to be swamped by political leanings and financial interests. Everyone can recognize that in a perfect environmental world there would be no pipelines; it is hard to argue that they improve nature. But they are a necessary environmental evil to facilitate a modern economy. As always, it is a question of degree: how bad is this particular pipeline and how useful is its construction to the health of the U.S. economy?

The bad news about the diluted bitumen (or dilbit) that would come from the Canadian Tar Sands to fill the pipeline is that it is not crude oil. It is more toxic than crude oil, far heavier, and more expensive to clean up. We have good data on this because of a major leak in 2010 into the Kalamazoo River from a pipeline carrying dilbit. The first problem came from the benzene, a light petrochemical that is added to the dilbit, without which the dilbit is too thick to actually move along a pipeline. After the leak of over a million gallons, which ran for 17 hours before pumping finally stopped, the benzene evaporated into a brown poisonous gas, necessitating the immediate evacuation of all neighboring houses. The second problem was that after the loss of its benzene the diluted bitumen became just plain bitumen – close to the tarry stuff that goes on roads – and sank to the river bottom, where it bounced slowly along, creating lasting damage for scores of miles. The cost so far, for work that still continues two and a half years later, has reached an estimated $1,000 a gallon, over 20 times the already heavy cost of dealing with regular oil in a river leak. These details can be checked in a detailed report that won last year’s Pulitzer Prize for American Journalism from InsideClimate News.2

So much for the risks. Now what about the rewards? The main potential reward, especially in an economy that is having the slowest recovery ever recorded, is in job creation. Job creation turns out to be an incredibly complicated economic issue, depending on the unique circumstances of each project and how it interacts with competing projects. If there were armies of unemployed welders and other construction workers sitting around, one could easily imagine that almost every job needed would draw from the unemployment pool and would be true job creation. But what if there were intense competition for every welder, every oil worker, and most heavy construction workers? Then we would not be in the job creation business but in the job competition business, deciding which potential employer will bid up wages and which will go without workers. A recent Bloomberg article opened with the question, “How high is the demand for welders to work in the shale boom on the U.S. Gulf Coast?” It then answered, “So high that you can take every citizen in the region of Lake Charles between the ages of 5 and 85 and teach them all how to weld and you’re not going to have enough welders,” citing a source from Huntsman Corp. “So high that San Jacinto College in Pasadena, Texas, offers a four-hour welding class in the middle of the night” because the equipment is finally available then.

The article points out that in the Gulf area shortages of welders, fabricators, pipe fitters, and oil and gas workers are pushing up wages so fast that expansion projects are running well over budget already and some, like a $20 billion gas-to-liquids plant slated by Royal Dutch Shell Plc for Louisiana, have already been canceled. Labor conditions in the Gulf Coast will be especially tight in 2016 and 2017 and projects along the Houston Ship Channel alone are expected to employ more than 250,000 workers, according to the Port of Houston Authority.

Attempts to calculate investment opportunities opened up by cheap local supplies of natural gas or to estimate the time it will take to absorb the current surplus will have to take into account this chronic shortage of workers with the required skills. In this area – oil and chemicals in the Gulf – as in many others, the shortfalls in the quantity and quality of U.S. training programs are playing a painful role.

Considering the above, it is clear that the XL Pipeline will not “create” jobs. Every one of its potential workers, almost all of whom already travel widely for jobs, could get a job several times over if given an hour on the telephone. What is happening here is an allocation of limited manpower resources: will we use them to extend chemical plants to capitalize on the incredible U.S. advantage in cheap natural gas; will we extend our fracking of U.S. sweet crude; or will we transport Canadian diluted bitumen, the most dangerous and toxic of all fuels, in order to increase the price for a handful of Canadian Tar Sand producers who currently suffer from constrained delivery capabilities and hence lower local prices? Even ignoring the severe environmental risks, it should be an easy decision on economic grounds alone.

Here’s how Wikipedia describes the issue for Canada:

Getting to tidewater

Canada’s oil sands for example are landlocked and it is crucial to the petroleum industry that transportation of petroleum products keeps pace with production. Currently landlocked Canadian oil sands petroleum products suffer huge losses on price differentials. Until Canadian crude oil, Western Canadian Select, accesses international prices like LLS or Maya crude oil by getting to tidewater (south to the US Gulf ports via Keystone XL for example, west to the BC Pacific coast via the proposed Northern Gateway line to ports at Kitimat, BC or north via the northern hamlet of Tuktoyaktuk, near the Beaufort Sea.,[15] the Alberta government (and to some extent, the Canadian government) is losing from $4 – 30 billion [16] in tax and royalty revenues as the primary product of the oil sands, Western Canadian Select (WCS), the bitumen crude oil basket, is discounted so heavily against West Texas Intermediate (WTI) while Maya crude oil, a similar product close to tidewater, is reaching peak prices.[16] Calgary-based Canada West Foundation warned in April 2013, that Alberta is “running up against a [pipeline capacity] wall around 2016, when we will have barrels of oil we can’t move.”[15]

Frustrated by delays in getting approval for Keystone XL (via the US Gulf of Mexico), the Enbridge Northern Gateway Pipelines (via Kitimat, BC) and the expansion of the existing TransMountain line to Vancouver, British Columbia, Alberta has intensified exploration of two northern projects “to help the province get its oil to tidewater, making it available for export to overseas markets.” [15] Canadian Prime Minister Stephen Harper, spent $9 million by May, 2012 and $16.5 million by May, 2013 to promote Keystone XL.[17]

In the United States, Democrats are concerned that Keystone XL would simply facilitate getting Alberta oil sands products to tidewater for export to China and other countries via the American Gulf Coast of Mexico.[17]

Port Metro Vancouver has a number of petroleum terminals including: Suncor’s Burrard Products Terminal, Imperial Oil Limited’a Ioco in Burrard Inlet East, Kinder Morgan Westridge Kinder Morgan Westridge in Burnaby, Shell Canada’s Shellburn, Chevron Canada Ltd.’s Stanovan in Burnaby [18]

So, if Keystone XL goes through, US will gain some temporary labor requirements to build it, and possibly some refining jobs.  But then the price for the bitumen will increase, so the price of the gas will increase, and some of the gasoline will be shipped out, increasing US gas prices even more.  So we get higher gas prices for everyone in the US also, in the end.


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