Keystone XL and US Energy Security – You can’t have it both ways.

Energy security has been one of the key issues in the discussion over the Keystone XL pipeline approval in the US – if you’ve not been following this, here’s a great primer from CFR’s Michael Levi. Some fuel was added to this fire with an article this morning in The Hill in which Steven M. Anderson, a retired US Army brigadier general, claims that Keystone XL would be welcome news to America’s enemies, some of whom continue to supply the US with oil.

Interestingly, if you look at the top sources of US oil imports, many including Canada, Mexico, the UK, and Brazil would hardly qualify as enemies, but certainly Venezuela and Saudi Arabia have less than amicable relationships with the US and Iraq is another issue altogether. The US will clearly benefit from less demand for oil from unfriendly states – that I get. Beyond that, I cannot follow Mr. Anderson’s logic.

Anderson  writes:

The Keystone XL pipeline doesn’t help (the US “petro-addiction” – my quotes).  This pipeline would move dirty oil from Canada to refineries in Texas and would set back our renewable energy efforts for at least two decades, much to our enemies’ delight.  It would ensure we maintain our oil addiction and delay making the tough decisions regarding energy production, management and conservation that we need to start making today.

The premise of this quote is that, if Keystone XL is not approved, the US would see it as more necessary to invest in renewable energy or domestic oil production, presumably to avoid consuming oil from the enemies to which Mr. Stevens refers.  There’s some potential that could occur, but it order for investments in these alternatives to be more viable than they are today you simply have to believe one of two things.

First, you could believe that without Keystone XL, the US will be capacity-constrained with regard to crude oil imports, leading to domestic shortages and driving a wedge between US crude oil prices and world prices – in other words, you have to believe that the US will be less energy secure, at least in the short term, without Keystone XL.

There is no sign that this will occur.  As it stands, North America is long crude oil, with increasing production in both the US and in Canada and basically flat-lined demand for refined products. If anything, that wedge is driving the other way, hence the demand for infrastructure to move crude to the coasts, not the other way around.   Opponents of the pipeline are quick to point out that there is no threat of a physical supply shortfall in the US without Keystone XL being approved.

The second thing you could believe is that, because we are kindly Canadians, we will sell our oil to the US at below the world price, eh.  That’s true today (both that we’re kind and that we sell our oil below world prices) as we are selling mostly into the landlocked market in the US Midwest, and the Cushing backlog leads to depressed prices.  The motivation for Keystone XL is unlocking part of that Cushing backlog, and allowing Canadian producers to get closer to the world price of oil for their product, while Gulf Coast refiners pay closer to what their counterparts in the interior are paying for feedstock.  The overall effect of this (higher feedstock prices in the midwest, lower prices on the Gulf Coast) is likely a wash, but the key is that Keystone XL is tied to selling Canadian oil to the US for more money, not less.

Opponents of Keystone XL are quick to tell you that the pipeline will not enhance energy security, if anything it will increase oil prices, and yet somehow it’s going to lead to less investment in alternatives and energy self-sufficiency and somehow now it will also lead to MORE dependance on foreign oil?  These simply can’t go together.

If you want to believe that not approving Keystone XL will drive more investment in alternatives, you have to believe that not approving it will increase oil prices above what they would be with the pipeline in place. If this is not true, the value of alternative energy sources in the US is Keystone-XL-agnostic or worse.  If you want to believe it will increase demand for foreign oil, you have to believe in some sort of odd oil multiplier whereby increasing supply of North American oil into the US by 750,000 barrels per day somehow increases total oil demand by more than that.  Again, unless you believe that it will have a significant effect on price, how will it possibly affect oil demand? Simple answer? It won’t unless it leads to a significant decrease in the landed price of oil in the US.

One of Mr. Anderson’s points is bang on. He writes that:

Further focus on efficiency and innovation is the only realistic method of reducing US dependence on oil imports – especially from those nations hostile to us.

That said, if you believe that not approving Keystone XL will move the US in this direction, you have to be willing to present a compelling argument – pick your poison. Either Keystone XL will decrease US energy security and reduce access to oil at any given price thereby driving investments in efficiency and alternatives, or it won’t.  Just don’t pick and choose your position on these issues based on what suits you at the time.