Paying with our Money and our Future: The Hidden Costs of the Keystone XL Pipeline
On January 18, 2012, President Barack Obama rejected the proposed Keystone XL pipeline. It would ship up to 590,000 barrels per day of “bitumin,” a kind of crude oil, ripped from the tar sands of Canada 1,700 miles south to refineries lining the Gulf of Mexico.
Environmentalists cheered the decision, with Frances Beinecke, president of the Natural Resources Defense Council calling it “a victory of truth over misinformation,” and environmental author-turned-activist Bill McKibben saying it “isn’t just the right call, it’s the brave call.”
Despite such celebrations, the battle over Keystone, which has become a real and symbolic battle over oil and its role in global warming, is not over, for two reasons.
First, Obama did not denounce the merits of the pipeline itself, but instead condemned the “rushed and arbitrary deadline” set by congressional Republicans, forcing him to accept or reject the proposal by February 21, 2012. “This announcement is not a judgment on the merits of the pipeline, but the arbitrary nature of a deadline,” he said in the Washington Post.
Second, and more importantly, there is an immense amount of money at stake, held by some of the continent’s most powerful interests. The names of some stakeholders–Royal Dutch Shell, for example–are well known. But others whose riches ride on the debate’s outcome, including Charles and David Koch, tied as the 18th richest persons in the world according to Forbes magazine, have tried to keep a low profile.
On Jan. 30, 2012, as if to underline the on-going nature of the debate over the pipeline, Sen. John Hoeven (R.-ND) and 44 others, all but one Republican, introduced legislation in the United States Senate that would authorize “TransCanada Keystone Pipeline, L.P….to construct, connect, operate, and maintain pipeline facilities… for the import of crude oil and other hydrocarbons at the United States-Canada Border at Phillips County, Montana.”
As the debate intensifies, arguments over the Keystone XL pipeline have grabbed the front pages of newspapers and headlines of the evening news shows. But the media has focused little attention focused on the real consequences of the pipeline, among them, a probable increase by some estimates of gasoline prices in the Midwestern United States of 30 cents per gallon for regular and 10 to 20 cents per gallon elsewhere.
But that is not where the flow of money will stop. Oil from Canada’s tar sands will supply a feedstock to the U.S. refining industry, which is enjoying explosive growth in exports. In the words of CNN Money, “The United States is awash in gasoline. So much so, in fact, that the country is exporting a record amount of it.”
In September 2011, the United States exported 430,000 more barrels of gasoline a day than it imported, according to the U.S. Energy Information Administration. That is about twice what it exported at the start of the year, and “experts and industry insiders say the trend is here to stay,” reported CNN Money.
Moreover, all of the places in the United States where Canadian tar sands oil might arrive, and from which gasoline, diesel fuel and other refined products made from it, would be shipped are so-called foreign trade zones.
This means that exports to other countries–but not sales within the United States–are exempt from taxes.
These places include Houston, Port Arthur, Corpus Christi and Freeport, Texas as well as New Orleans, Lake Charles, LaPlace and Baton Rouge, Louisiana. Canada’s system is a bit different, but the bottom line is the same: “If you export the goods from Canada, you do not pay duties and taxes,” explains one official government publication. (http://investincanada.gc.ca/download/1027.pdf) What the oil and products made from it will generate, however, is profit–and lots of it.
There will be increased profit from the sale of the increased output of oil and gas that will be sold on the world market. There will be increased profit from the rise in the price of tar sands oil already being imported into the United States. And, there will be increased profit from the rise in the price of gasoline, diesel, heating oil, chemicals and other products, regardless of where the crude from which they are made imported from.
While Congress has haggled over whether and how much to either cut or increase taxes, almost no attention has been paid to the massive transfer of wealth that would likely result from construction of the pipeline. As much as 30 cents per gallon of gasoline would be taken from the pockets of U.S. drivers and transferred to the accounts of some the world’s richest corporations and people.
As the pipeline distributes oil to the Gulf, it redistributes wealth upward. In the aggregate, the price increases triggered by construction of Keystone would amount to a, if you will, hidden tax of about $44 per year on every man, woman and child in America. Unlike the money collected by the government, however, the increased profits of roughly $13.8 billion would go not to support food stamps, buy fighter jets or bolster Social Security. Instead, it would find its way into the bank accounts of men and women in the wood-paneled offices of Houston, Calgary and Wichita.
Although few are aware of it, a great deal of tar sands oil that proponents want to pump all the way to Texas and Louisiana already makes its way out of Canada. But it goes only as far as Cushman, Okla., where the glut of oil depresses gasoline and diesel prices throughout the Midwest and much the rest of the United States. 3 In Oklahoma City, Oklahoma, for example, regular gasoline was selling for $3.17 a gallon on Feb. 14, 2012 at the Road Star station at 5501 NE 10th St. near Sooner Rd. In nearby Wichita, Kan., 162 miles away, regular was $3.25. But 1,337 miles away from the tar sands oil glut, in similarly sized Baltimore, Md., a gallon of regular cost $3.43, with a national average of $3.48.
Politicians who refuse to increase the taxes of millionaires have eagerly lined up in Congress in support of increasing the price of gasoline for working people to benefit a handful of billionaires. Every Senator that supported Hoeven’s bill to mandate approval of Keystone also voted against debating a proposal by Sen. Bob Casey (D.-Penn.) to increase the tax on the income of millionaires.
Secure Energy or Dirty Oil?
Proponents of the Keystone pipeline argue, as did the Financial Times on Nov. 6, 2011, that the oil is “a reliable source of supply from a friendly country.” Opponents say it is the dirtiest oil on earth, one whose use would increase global warming at the exact time humanity should be slowing it. Pipeline supporters say the decision is about jobs and energy security. Opponents say the issue is the unnecessary acceleration of global warming and devastation of local ecosystems.
There is no doubt that exploiting tar sand oil is a nasty process. Trees are snapped like twigs and torn from the earth. The remaining brush and soil are ripped away, exposing the tarry sands, rich in oil-like bitumen.
One barrel of oil requires two of sand. A shovel operator sits 30 feet above the mine floor in a Bacyrus 495 cab large enough to hold only him, a microwave and a water cooler, and manipulates the massive scoop, filling it, then dropping 80 tons of tarry sand into a Caterpillar 797B truck. Five massive scoops fill the megatruck and it pulls away as another pulls in. Nearly 24 hours a day, 365 days a year, the scoop operator swivels and fills each truck with a load about the weight of a Boeing 757 jetliner.
Within view of the operator, the Athabasca River runs a few hundred yards from the tar sands. The river begins in the pristine meltwater from the snow pack and glaciers of the Canadian Rockies, tumbles down waterfalls, rushes over waterworn rock to form world-class rapids, cuts through ancient stone gorges and finally arrives at the tar sands, to become what some call the River of Death.
To float bitumin free from the sands to which is glued, the noxious mess dumped from trucks must be saturated with hot water. The estimates vary, but generally agree that one barrel of oil requires three to five barrels of water.
The Athabasca’s torrent is diverted, heated, and added to the sand, which is slurried into a paste that is agitated to release bitumen. Tiny air bubbles attach to bits of bitumen and float them into a skimmer. Residual water and solid waste is pumped into massive lagoons separated from the river by thin strips of soil, while the bitumen is eventually upgraded into synthetic crude oil, then pumped south to the United States.
The wastewater—about 500,000 barrels per day—is pumped into massive lagoons and seeps into the Athabasca. Downstream, researchers have found elevated and abnormal levels of cadmium, copper, lead, mercury, nickel, silver, and zinc.
The Regional Aquatics Monitoring Program (RAMP), a government-supported and industry-funded agency claims that the Athabasca River’s quality is not impacted by tar sands development. But scientists at the University of Alberta found that “the oil sands industry substantially increases loadings of toxic metals”. One group concluded in 2009 that tar sands mining, treatment and waste disposal resulted in higher concentrations of polycyclic organic matter “that were likely toxic to fish embryos.”
The biggest environmental threat caused by tar sands oil production is not contamination by heavy metal and toxic chemicals, massive scarring of the earth, unbridled consumption of pristine water or the relentless march of steel piping across 1,700 miles, but global warming. Further exploitation of the tar sands is, in the words of Simon Dyer of the Canadian environmental group the Pembina Institute,” a decision point for North America and the world.”
Canada’s tar sands are estimated by oil company BP to be more than 175 billion barrels of recoverable oil, just behind Venezuela at 211 billion and Saudi Arabia’s 264 billion But most of that is so far untapped, with Canada accounting for only little over 4 percent of global oil production in 2010. One explanation for Canada’s relatively low standing among oil-exporting nations is the cost of producing tar sands bitumin.
Saudi oil is light and comes out of the ground relatively easily, at a cost often of less than $10 a barrel. Canadian tar sands oil is heavy, sticky and can cost more than $60 a barrel to extract. As oil prices have risen, however, so has the interest in exploiting the tar sands.
Even if emissions from the production processes were equal, Canada’s emissions of carbon dioxide would rise due to increased tar sands production. But they’re not. To extract bitumin from tar sands and convert it into something resembling conventional crude oil requires more energy barrel-for-barrel, which translates to increased pollution. How much more pollution is a matter of dispute. The Toronto Globe and Mail reported in August, 2011, that a Canadian government study had concluded that development of the tar sands would “single-handedly undo greenhouse gas gains made by weaning the country’s electrical supply off coal.”
The Money Behind the Pipeline
As environmental and energy issues take the headlines, it’s the money behind the scenes that drives the debate.
According to Argonne National Laboratory, Canada’s tar sands already yield more than one million barrels of synthetic oil per day, which is about 40 percent of Canada’s total oil production This output is expanding rapidly. Approximately 20 percent of U.S. crude oil and products come from Canada, and a substantial portion of this amount comes from tar sands. Indeed, Orion magazine reports that Alberta’s tar sands are now America’s leading source of crude oil.
Mother Jones magazine writes that “long before the Keystone XL became a cause célèbre, tar sands oil was already ubiquitous in America: It goes to fuel our cars and corporations’ trucking fleets, and it’s used in the production of products from aluminum cans to asphalt.” Mother Jones has created an interactive map, based on data supplied by San Francisco-based environmental advocacy group Forest Ethics, showing refineries from Anacortes, Washington, to Warren, Pennsylvania, that already use tar sands oil.
Koch Petroleum, a privately held company based in Wichita, Kansas, and owned by Charles and David Koch is among the largest importers of tar sands oil. Reuters, citing a SolveClimate News analysis, reports that Koch imports close to 25 percent of the oil sands crude already brought into the United States and “is well-positioned to benefit from increasing Canadian oil imports.”
Canadian tar sands oil is also a big profit center for Royal Dutch Shell. According to The Times of London, Shell made post-tax profit of $21.75 per barrel of tar sands oil in 2006, compared to just $12.41 per barrel on ordinary crude. Texas oil company Valero owns several Alberta, Canada, area refineries, as well as another in Port Arthur, Texas. A Valero spokesman, Bill Day, calls Canada “a tremendous potential supplier for us.”
TransCanada, developer of the Keystone XL Pipeline, estimates that the price of tar sands oil would increase about $3 per barrel as a result of the pipeline. Its estimate is one of the most conservative. For Koch Petroleum, which imports 400,000 barrels daily, this would translate to a jump in profits of about $1.2 million per day, or $438 million per year.
Rising tar sands prices would likely lift all oil prices. Recall that the current glut of tar sands oil is depressing U.S. prices of gasoline, diesel and other petroleum products, regardless of the source of the oil being refined. TransCanada’s Louis Fenyvesi insists that while tar sands crude is cheaper than oil from the Persian Gulf, the savings would be passed along to motorists. “That will have a positive impact on gasoline prices in the Midwest and other markets served from the Gulf Coast,” Fenyvesi told the Journal Star of Lincoln, Nebraska.
But according to an analysis by Canadian economist and consultant Philip Verleger, inserted in the Congressional Record by Rep. Dennis Kucinich (D.Ohio), the Keystone XL pipeline would increase gas prices by 10 to 20 cents per gallon across the United States. The greatest price increase would occur in 15 mostly central states: between Illinois west to North and South Dakota.4 where prices would increase by an estimated $6.55 per barrel of crude oil in the Midwest and $3 average per barrel across the United States.
People throughout the world are paying higher prices for gasoline than U.S. drivers. That includes drivers in the East African nation of Eritrea ($9.46 a gallon), Kenya ($5.94), Chile ($5.18), Nicaragua ($5.07), India ($4.94) and El Salvador ($4.70). In Oslo, Norway, the price of gasoline in 2008 was $9.85 per gallon. In one study, consumers in nearly three-quarters of about 150 nations surveyed paid more for fuel than Americans.
An analysis conducted by Purvin & Gertz Inc. for TransCanada, Keystone’s builder, explained—
“Existing markets for Canadian heavy crude, principally PADD II [U.S. Midwest], are currently oversupplied, resulting in price discounting for Canadian heavy crude oil. Access to the USGC [U.S. Gulf Coast] via the Keystone XL Pipeline is expected to strengthen Canadian crude oil pricing in [the Midwest] by removing this oversupply. This is expected to increase the price of heavy crude to the equivalent cost of imported crude.”
The “equivalent cost of imported crude” is much higher than current prices in the United States, so overnight, those who already own tar sands oil see the price of their oil jump sharply. As the price of tar sands crude rises so, too, do the prices of all other crude and refined products. This has already happened once.
The February, 2012, prices for so-called “Brent” crude oil, the benchmark used for Europe and much of the world, and “West Texas Intermediate (WTI),” the benchmark used in the United States, were $118 and $101 respectively. U.S. prices for not only oil but gasoline and other products made from it remain depressed in part because of the glut of tar sands oil. As Forbes magazine recently explained, “Oversupply at Cushing is one of the major factors behind the spread between U.S. oil prices, measured by the West Texas Intermediate contract, and Brent, the international benchmark.” If the Cushing glut is reduced or eliminated, the spread between WTI and Brent will narrow or perhaps disappear altogether.
The potential for the price increases that would follow in the United States was illustrated in November, 2011 when Enbridge, an Alberta, Canada pipeline company and competitor of TransCanada, announced that it had bought a half interest in the 500-mile, 30-inch diameter, Seaway Pipeline running from Cushing to Houston, and would reverse its flow, sending tar sands oil south to the Gulf, thus easing the bottleneck.
When news of the Seaway reversal broke, oil prices surged past $100 a barrel in New York. The spread between the prices of Brent and WTI crude had reached $27.88 on October 14, but narrowed to less than $9 on Nov. 19, 2011. The increase in that single day, boosted the annual profits of the Koch brothers by $2.7 billion. The spread has since re-widened but nevertheless is still lower than it was previously.
In the words of the Montreal Gazette, “That spread has been pushing up profits for energy companies with refineries in the U.S. Midwest, whose market for refined products is tied to global prices but whose crude supplies have been tracking cheaper WTI prices.” (http://www.montrealgazette.com/business/Enbridge+TransCanada+ramp+race+Texas/5723041/story.html).
Arguments and Counter-Arguments
Those favoring Keystone XL argue that:
u25cf The pipeline will create jobs. Television advertisements produced by the American Petroleum Institute cite what the Los Angeles Times calls “an industry-backed study” done by the Perryman Group concluding that Project XL would create 20,000 jobs directly and almost 120,000 indirectly. But Sean Sweeney, director of Cornell University’s Global Labor Institute, told the Times “That number is unsubstantiated. No study has actually claimed or supported those numbers.”
u25cf The pipeline will increase America’s supply of “friendly” oil. U.S. Senator Mike Johanns (R-NE) is not alone in referring to the tar sands oil as “friendly.” According to one survey, 79 percent of broadcasters, 59 percent of cable commentators and 45 percent of newspapers and magazines support construction of the pipeline.
However, the argument that oil from Canada will lessen U.S. dependence on the Persian Gulf fails to take into account that cars burn gasoline or diesel, not crude. Oil from Keystone XL does not necessarily equal gasoline for U.S. consumers. Refineries in Port Arthur, Texas alone have spent over $20 billion in upgrades to enable them to turn thick-and-toxic tar sands oil into refined products such as gasoline. They sell refined products on the open market to the highest bidder, and prices are currently higher outside the United States.
Royal Dutch Shell, owner of 60 percent of the giant Athabasca Oil Sands Project in Alberta, according to Canada’s Financial Post, has already spent about $7 billion for the largest expansion of its Port Arthur refinery in 30 years. Its capacity more than doubled, from 275,000 barrels of crude oil per day to 600,000. That makes the refinery the nation’s largest and one of the biggest in the world, according to Texas Gulf Coast On-Line.
u25cf A veto of Keystone XL will cause Canada to sell tar sands oil to China. Perhaps to force the U.S. into approving the pipeline, the Canadian government has said that if Keystone is definitely rejected developers will simply sell the oil directly to fuel-thirsty China. The oil would be shipped via the “Northern Gateway” pipeline proposed by Enbridge Energy from from Alberta to British Columbia, where it could be exported to China and other Asian markets. That pipeline wouldn’t cross American soil, so U.S. approval is not needed.
But according to National Geographic, the trans-Canada project “so far appears a pipe dream.” There is steep opposition from Canadian environmentalists and native Indian nations that control parts of the route through British Columbia. On Dec. 5, 2011, the Gitxsan tribe rejected the proposal, saying “the Enbridge Pipeline holds no future for our children.” One month earlier the Coastal First Nation said they “categorically oppose Enbridge’s Northern Gateway Project.”
Increasing Global Warming
Writing in the Washington Post Michael Levi, a senior fellow at the Council on Foreign Relations, said that even though a gallon of gasoline refined from tar sands oil produces 5 to 15 percent greater emissions of carbon dioxide than that from conventional crude and that Canada’s oil sands are the world’s third-largest oil deposit, the pipeline’s oil would add “no more than a small fraction of 1 percent of total annual U.S. greenhouse gas pollution.”
In contrast, NASA scientist James Hansen warns that burning that oil completely would be “game over” for the planet’s fight against global warming change.
These positions sound contradictory but, in fact, Levi and Hansen are both right. Levi is correct in saying that stopping the Keystone XL will have only a minor direct impact on global warming over the near-term. According to Susan Solomon, senior scientist at the National Oceanic and Atmospheric Administration, the effects of global warming from carbon dioxide would still be felt for 1,000 or more years even if not another molecule were emitted, starting this instant. These are not just her conclusions, but those of a panel convened by the U.S. National Academy of Sciences, the world’s most prestigious scientific organization. Long before the tar sands could be exhausted, the planet’s fate will have been decided.
Hansen is also correct, however, because Keystone XL is of enormous symbolic importance. It pits the forces that have created global warming–polluters and their profits–against the interests of the public. If the United States, the world’s strongest economy, is so lacking in national will that is incapable of stopping an increase in greenhouse gases, what hope can there be of actually cutting emissions?
Over the long term, emissions of carbon dioxide must be cut if further global warming is to be avoided. The fight over Keystone pits the short-term profit of a few against the long-term survival of all.
But to slow global warming in the near term, which is essential to buy time for the cooling benefits of cuts in carbon dioxide to kick in, pollutants that cause global warming but with lifetimes ranging from a few days to a few years, must be severely and quickly reduced.
Such an approach has recently been proposed by Drew Shindell, an ozone, or smog, specialist and climatologist at the NASA Goddard Institute for Space Studies and a group of 23 other scientists. (http://www.sciencemag.org/content/335/6065/183) They recommend cutting emissions of black carbon, or soot, as well as natural gas and other pollutants that create ground level ozone, or smog. Such an approach would not only brake warming but avoid 0.7 to 4.7 million annual premature deaths from breathing air pollution. Since smog not only causes warming, also stunts growth and otherwise injures plants and forests, they predict that annual crop yields would increases by 30 to 135 million metric tons per year.
Thus, the struggle over whether to build the Keystone XL pipeline as a means of exploiting Canada’s tar sands, pits money on the one hand against the environment–indeed, some would say the very survival of many–on the other. What is at stake includes massive consumption of pristine waters, pollution of air, water and ground, the destruction of vast swaths of forest, and accelerated global warming from facilities resembling the scenes of a nightmare.
Construction of Keystone would sacrifice all these to enrich a relative few. Five states–Montana, Nebraska, Oklahoma, South Dakota, and Texas–stand to gain from increased taxes of between $14 and 63 million a year, according to U.S. State Department estimates. In the sixth state, Kansas, lawmakers gave TransCanada a 10-year tax exemption, according to Inside Climate News.
Once it reached the Gulf Coast, the tar sands oil would generate a profit stream as it joined the recent immense growth in the export of oil products from the United States. The number-one product exported by the U.S. in 2011 wasn’t agricultural or manufactured goods, but something that a decade ago didn’t even register on the country’s top 25 list of exports: refined fuel.
The U.S. hasn’t been a net exporter of refined fuel since Harry Truman was president. But in 2011, an estimated $88 billion worth of gasoline and related products were exported. In the words of the Newark Star-Ledger, “the thirst for gasoline elsewhere on the planet has become ravenous, and U.S. companies are happily trying to quench it.”
Keystone’s construction would pose a threat to new laws in Europe and some U.S. states such as California, Oregon and Washington to force a reduction in carbon dioxide emissions by imposing a “low carbon fuel standard.” Such laws attempt to move away from carbon-rich fuels, such as gasoline refined from conventional oil, and toward natural gas, ethanol, biodiesel and other less polluting options.
Because tar sands oil is more polluting, low carbon fuel standards effectively preclude the sale of gasoline, diesel and other fuels refined from tar sands. This is one reason that some oil companies are seeking to overturn the standards. Valero, Tesoro, and Koch, for example, spent $8.2 million or more in an unsuccessful campaign to repeal California’s landmark global warming law, AB32.
The New York Times reported that in the effort to repeal AB32 “A large chunk of the $8.2 million raised in support of the ballot proposition has come from just two Texas-based oil and gas companies, Valero and Tesoro, which have extensive operations in California (and) the Koch brothers.” Voters rejected the effort handily, delivering Valero and its allies what one Sacramento Bee columnist termed a “drubbing.”
That didn’t end the struggle, however. Valero and its allies filed suit in federal court, arguing that California had exceeded its constitutional authority. U.S. District Judge Lawrence J. O’Neill of Fresno sided with them, and struck down California’s low carbon fuel standard. That is unlikely to be the end of the fight, however. As professor Richard M. Frank of the University of California at Davis said, “It is a harbinger of legal challenges to come” over state environmental laws.
The fight over Keystone pits the survival of Earth and its inhabitants against the interests of big money. It is impossible to say with confidence who will ultimately prevail. We can be certain only that the pipeline, tar sands, and the big money of Big Oil will continue to be arrayed against actions to reduce global warming.
The cards are stacked in favor of tar sands oil and the Keystone pipeline. Barring some unforeseen turn of events, Americans will be forced to pay for tar sands oil twice.
One price will be up front, in the form of the increased gasoline costs. The second price, however, will be in something vastly more precious than mere money: the future of our country and, especially, our children.
Curtis A. Moore, an independent lawyer and writer, is author of Green Gold: Japan, Germany, the United States and the Race for Environmental Technology, and was Republican counsel to the U.S. Committee on Environment and Public Works for 11 years. He is currently completing a book on global warming and its politics in the United States. He collaborates with the Americas Program