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Ed Dolan

Ed Dolan

Edwin G. Dolan holds a Ph.D. in economics from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth…

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Fareed Zakaria’s Unconvincing Arguments to Build the Keystone XL Pipeline

Watching the Sunday talk shows this week, I learned that the influential journalist Fareed Zakaria has now joined the chorus urging construction of Keystone pipeline. If built, that pipeline would carry bitumen, a form of asphalt that can be used as a substitute for conventional crude oil, from Canadian oil sands to refineries on the Gulf of Mexico. The pipeline has been opposed by environmental groups and championed by many in the energy industry. After much waffling, the Obama administration appears ready to let it go forward. In a Time Magazine editorial this week and a segment on CNN, Zakaria maintains that is the right decision. I find his arguments unconvincing.

His first argument is that the oil derived from Canadian tar sands will be developed at about the same pace whether or not there is a pipeline to the U.S. Stopping it might make us feel good, but it wouldn’t do much about climate change.

It is very likely true that blocking Keystone would not stop the development of Canadian oil sands in its tracks. Whether or not it proceeds at “about the same pace” is another question. If Keystone is, as its backers argue, the lowest-cost way to get Canadian bitumen to market, then failing to approve it would raise the delivered cost of the product. Other things being equal, we would expect that to slow development. On the other hand, if Keystone is not the least cost means of delivery, or if its cost advantage is trivial, then it would seem that we would gain little by building it. You can’t have it both ways.

But, you might say, if we block Keystone, and the oil goes to China instead, won’t they gain the benefits of this low-cost energy source that we cut ourselves off from? Not really.

First of all, Canadian bitumen is not a low cost substitute for crude oil. Its large scale extraction is profitable only so long as crude oil prices remain high. Developing the oil sands is not going to cause oil prices to fall the way fracking has caused natural gas prices to plunge.

Related article: Keystone XL a Bullet Compared With Other Pipelines

Furthermore, the global oil market, by and large, operates according to the law of one price. If China were to substitute Canadian bitumen for conventional crude oil that it would otherwise import from somewhere else, the world price of crude would fall that much below what it would otherwise be. The economic effect of the extra oil supply would be felt everywhere regardless of whether China or the United States actually took delivery of Canadian bitumen.

Zakaria doesn’t get everything wrong, though. About two-thirds of the way through his editorial, he throws this in:

Environmental groups are approaching this project much as the U.S. government fights the war on drugs. They are attacking supply rather than demand. In this case, environmentalists have chosen one particular source of energy–Alberta’s tar sands–and are trying to shut it down. But as long as there is demand for oil, there will be supply. A far more effective solution would be to try to moderate demand by putting in place a carbon tax or a cap-and-trade system.

Now we’re getting to the heart of the matter. Yes, using a carbon tax or cap-and-trade to raise the price of energy up to a level that reflects the full environmental costs of its production and use would make a big difference. In fact, if we had a national energy policy based on full-cost pricing, it is unlikely we would be debating Keystone in the first place. With such a policy, our energy use per capita and per dollar of GDP would decline to the levels of other advanced countries that have more realistic energy prices. Germany gets 44 percent more GDP per kilogram of oil equivalent than does the United States, the UK 67 percent more, and Switzerland 123 percent more, according to World Bank data. With efficiency like that, the United States would already be self-sufficient in energy. We wouldn’t need Alberta’s bitumen, or Venezuela’s, or anyone’s.

Related article: Environmentalists Futile Battle Against Keystone XL

With full-cost energy prices, a lot of smaller things would fall in place, too. We wouldn’t be hearing another of Zakaria’s arguments, namely, that if we don’t build Keystone, refiners will transport their Canadian bitumen by train. He is right to point out that transporting oil by train burns a lot of diesel fuel and emits a lot of CO2. But with a carbon tax or cap-and-trade scheme in place, transporting oil by train would very likely be prohibitively expensive.


The bottom line: If we make full-cost energy pricing our starting point, rather than throwing it in as an afterthought, the whole Keystone debate looks different. The arguments in favor of the pipeline begin to look absurd. What they amount to is saying that since we are stuck with an energy policy that keeps prices low and encourages wasteful use at the expense of both the environment and national security, then we might as well make matters worse still by tapping ever dirtier supplies to feed our bloated appetites.

Fareed Zarkaria is a smart guy and one of my favorite journalists. He’s wrong about Keystone, but does seem to have a grasp of the underlying principles. I’m hoping that as he thinks things through, he’ll see the inconsistencies in own arguments. When he does, his next Time editorial won’t be titled “Build that Pipeline!” but instead, “Fix that Energy Policy!”

By. Ed Dolan

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  • Bob van der Valk on March 11 2013 said:
    I interviewed Senator Simpson at the Western Petroleum Marketers Association Convention held at the Mirage Hotel in Las Vegas. He gave the keynote address on Wednesday, February 20, 2013.

    He said the Keystone XL pipeline will be recommended for approval by the State Department and President Obama will in turn approve it in the next two months. He was unequivocal when pushed on how he knew it would definitely be approved. Simpson's response was Richard Trumka, the President of the AFL-CIO, has been putting pressure on the White House to get the project going as jobs with his organization are involved at a time when membership has been dropping in the labor movement.

    The KXL pipeline will be coming through Prairie County in which Terry is located. A ramp-up to ship at least 100 thousand barrels of Bakken shale crude oil is already being constructed in Baker, MT about 90 southeast of Terry.

    Bob van der Valk
    Terry, Montana
  • laurent on March 12 2013 said:
    With the Keystone XL pipeline, gasoline prices are unlikely to fall under $3 and OPEC is sure to earn at least $850 billion per year.

    The Keystone XL pipeline can be used if oil prices remain above $85 a barrel.

    The most expensive oil fields essentially set the floor of oil prices, worldwide.

    For every $10 increase per barrel of oil price, OPEC's earnings soar by $100 billion per year.

    So, with the Keystone XL pipeline, OPEC is sure to earn at least $850 billion per year.
  • juliorf on March 12 2013 said:
    Barrel for barrel, tar sands oil is even worse for the climate than conventional oil. http://clmtr.lt/cb/pWG0Qd
  • Dwijen Banerjee, Ph.D. on March 12 2013 said:
    Further to Ed Dolan’s comments, I would like to add that yes, I agree with you, Fareed Zakaria is a smart journalist from the top IV school,I watch his program GPS regularly,however,I would have preferred he discussed this matter with a panel of expert as he does in other subjects,instead of providing his own personal view.I agree with Ed with Fareed’s comment that “They are attacking supply rather than demand”. Yes,as long as those environmentalists come to demonstrate against the “dirty oil sands” by driving their car or fly regularly by air,then we need oil and as I mentioned in my book on oil sands 'in my opinion it will be much better to depend on the dirty oil from our good neighbor,than depending on the rest of the world'.As far as transporting the bitumen(derived from the oil sands)from Alberta to the south by train,it is not any easy job. First and foremost, you have to remember that bitumen is solid/ semi-solid at ordinary conditions; you need heated train to load and unload the bitumen, imagine that, energy coming from where, other than burning the diesel Fareed mentioned.As done in the pipeline, if you dilute it, you will be transporting diluent along with the bitumen.
    KXL pipeline is not the problem,rather oil sands industry has to improve its public image.I would also like to suggest to the Canadian Government to take some action, and force the oil companies(of course against their lobbying)to make the oil sands “recovery and upgrading” much cleaner by imposing some strict regulations such as:(1) No more burning of natural gas for the recovery process i.e.,steam generation for the SAGD,instead,Gasify(yes not burn) dirtiest portion of the dirty oil, i.e., use its own fuel(2)No more diluent for transportation(save on natural gas)and(3)Upgrade bitumen to cleaner synthetic crude in Alberta under centralized controlled environmental conditions (e.g.,produce hydrogen from the syngas of the gasifier. Bringing the raw bitumen in different refineries at various parts of the US and refining there,is not a solution,you are distributing the problem under uncontrolled environment.
    The natural gas saved above,should be used to meet the demand,replacing partially the bitumen derived transportation fuel. As it is well known that the natural gas burns much cleaner than the bitumen derived fuel,overall CO2 emission will decrease a lot(calculating all the way from “well-to-wheel”).
    All my suggestions above are technically possible. Sure it will cost money, but one has to pay for driving their car in a secured energy supply and oil companies have to share their profit margin.
  • Josh Energy Citizens on March 13 2013 said:
    The problem with this argument is that it ignores the fact that China has become a major consumer of oil. Also, Canada’s Minister of Natural Resources has made it quite clear that the region will be developed and the oil sold, no matter what happens with KeystoneXL (http://goo.gl/MOFS1). In the long run, it’s better for the environment and better for American energy security to build KeystoneXL.
  • Gobbleguts on March 15 2013 said:
    Sorry Ed, Fareed's comments made much more sense than yours
  • Hawk on March 15 2013 said:
    While it is true that curbing demand would be an ideal solution to the Carbon problem. The Keystone XL pipe line is a symbolic "line" that should not be crossed. Environmentalists who voted are looking to Obama to live up to his goal of real change. blocking the XL will send a message that it is not OK to trash the environment anymore.
    There is no reason we can not stop the pipeline AND put a tax on Carbon emissions. If more citizens understood the real science, this would be done.
  • Gail in AZ on April 21 2013 said:
    I read Fareed Zakaria's defense of Keystone recently in a magazine - I forget which one. I normally find him to be a really bright guy with good arguments, but I was floored that he did not even mention the danger of oils spills from the pipeline. Add that to the other problems, and you have overwhelming reasons not to go forward with this disaster-waiting-to-happen. The jobs created will not begin to balance the death and destruction that will result from poisoned aquifers and contaminated lands. If it comes to Canada taking the US out of the loop, so be it. It's a loop we should avoid.
  • Paul Bewildered on January 31 2014 said:
    There are 55000 miles of pipeline already

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