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