Costs and Benefits of the Keystone XL Pipeline

With new pressure on the Obama Administration to approve the Keystone Gulf Coast Expansion Pipeline, I thought it would be helpful to review some of the debate.

One issue that received a good deal of attention was the possibility that oil would spill from the new pipeline and contaminate water supplies in Nebraska and elsewhere. Let me begin with the report from the U.S. State Department:

Keystone has agreed to incorporate the 57 Project-specific Special Conditions developed by PMSA [the Pipeline and Hazardous Materials Safety Administration] into the proposed Project….

In consultation with PHMSA, DOS determined that incorporation of the Special Conditions would result in a Project that would have a degree of safety greater than any typically constructed domestic oil pipeline system under current regulations and a degree of safety along the entire length of the pipeline system that would be similar to that required in high consequence areas as defined in the regulations….

DOS calculated that there could be from 1.18 to 1.83 spills greater than 2,100 gallons per year for the entire Project.

Although small spills will still occur, pipelines are by far the most efficient way to transport petroleum, and we could hardly do without them. The United States already has over a quarter million miles of oil and natural gas transmission lines, and millions more in gas distribution lines. TransCanada, the company that proposes to build the Keystone extension, claims:

There are currently 21,000 miles of pipelines crossing Nebraska, including 3,000 miles of hazardous liquid pipelines. Many of these pipelines co-exist within the Ogallala aquifer.

Major U.S. oil, gas, and product pipelines. Source: World Factbook.

Although a significant portion of the oil transported through Keystone XL would be light sweet crude from North Dakota and Montana, a majority would come from Canada’s oil sands.

Proposed BakkenLink Pipeline in North Dakota and Montana.
BakkenLink and the Keystone Gulf Coast Expansion.

The most important issue for opponents of the pipeline is that getting a usable product out of the Canadian oil sands releases significantly more greenhouse gases than conventional oil resources. Charpentier, Bergerson and MacLean (2009) surveyed a number of different studies of the size of this effect, with each study’s estimate represented by a bar on the graph below. Whereas extracting one barrel of crude oil and delivering it to the refinery from conventional sources has been estimated to release 27 to 58 kilograms of CO2 per barrel, getting a barrel from surface-mined oil sands would emit 62 to 164, and estimated releases from in situ production range from 99 to 176.

Well-to-refinery entrance gate greenhouse gas emissions in kilograms of carbon dioxide equivalent per barrel of synthetic crude oil. Source: Charpentier, Bergerson and MacLean (2009).

However, this is much less alarming than it sounds, since far more CO2 is emitted when the final gasoline is combusted in the vehicle than in the production of the synthetic crude liquid itself. When one asks how much carbon dioxide is emitted when I drive a vehicle for one kilometer whose original energy source was oil sands rather than conventional crude oil, the differences are relatively modest.

Well-to-wheel greenhouse gas emissions in grams of carbon dioxide equivalent emitted per kilometer driven. Source: Charpentier, Bergerson and MacLean (2009).

In any case, U.S. production of oil from conventional sources has been declining for some time, and it’s simply not realistic to use conventional oil as the standard of comparison. Enhanced oil recovery and conversion of natural gas to liquid fuels are also associated with higher greenhouse gas emissions per kilometer driven than conventional petroleum; see for example Brandt and Farrell (2007). And if the end result of the U.S. refusing to buy the Canadian oil would be for them to build a pipeline westward to ship it to the Chinese or shipping the oil by rail or truck, there would be added greenhouse gas emissions associated with the transportation.

The extraction of the oil sands is also environmentally more destructive than conventional sources, though it would be an unusual step for the U.S. State Department to be the arbiter of what happens inside Canadian borders. And again perhaps a better standard of comparison is deep-sea or arctic production. It is quite possible that we’ll need these, and oil sands, and very significant U.S. conservation, to cope with the challenges over the next decade.

In terms of the potential impact on U.S. employment, TransCanada makes the following claim:

TransCanada is poised to put 13,000 Americans to work to construct the pipeline– pipefitters, welders, mechanics, electricians, heavy equipment operators, among other jobs– in addition to 7,000 manufacturing jobs that would be created across the U.S. Additionally, local businesses along the pipeline route will benefit from the 118,000 spin-off jobs Keystone XL will create through increased business for local goods and service providers.

The U.S. State Department estimates that the direct construction employment would be about half of TransCanada’s figure, which comes from a relatively small component of the total spending:

The construction work force would consist of approximately 5,000 to 6,000 workers, including Keystone employees, contractor employees, and construction and environmental inspection staff. That would generate from $349 million to $419 in total wages. An estimated $6.58 to $6.65 billion would be spent on materials and supplies, easements, engineering, permitting, and other costs.

One should also emphasize that these are temporary jobs, as any construction work by definition must be. Once the infrastructure is constructed, the work of those who were employed in building it is finished. On the other hand, presumably the objective of any stimulus program is precisely to provide temporary employment opportunities. A recent report from Cornell University Global Labor Group came up with much more modest estimates of the short-term employment boost from the spending other than the direct construction would be 33,000 to 44,000 person-years.

In terms of “permanent” employment effects, I did not see either the State Department or the Cornell report mention TransCanada’s claim that the pipeline would generate a present value of $5.2 billion in property tax revenue over its lifetime. Even if the only jobs you counted were government workers, that should be enough loose change to buy you something.

And that brings me to a deeper issue here. The goal in my mind is not to “create jobs” in the sense of paying somebody to do nothing. Instead, the goal is to create new real income and wealth. I think a key measure to look at is not the cost of the project (how much is going to be spent on people and pipes), but instead its value added. And this has been the main reason that Keystone has always looked to me like it should be an easy decision. Light sweet crude in North Dakota is still selling for $20/barrel less that you could get for it if you could find a cheap way to transport it to the Gulf of Mexico. A quick calculation suggests that infrastructure that could move 500,000 barrels a day would generate $3.6 billion in annual value added. That benefit would go to the people who work to build the pipeline, motorists who buy the gasoline, workers and companies that produce the oil, and the government that collects taxes from all the rest.

This post originally appeared at Econbrowser and is posted with permission.

One Response to "Costs and Benefits of the Keystone XL Pipeline"

  1. Jim in MN   January 18, 2012 at 11:57 am

    Wait a minute, you say everyone missed the point of the XL pipeline, and then you say the point is…to move North Dakota product.

    So then we don't need the tar sands after all. Or is that not what you meant? Why build a pipeline from Alberta just to pick up the Bakken spur? That sounds economically stupid based on the information you provide.

    Is it or is it not a boondoggle (sorry, 'strategic investment')?