Editor's Note: This is a guest post from David Livingston, an associate in Carnegie’s Energy and Climate Program, where his research focuses on trade, markets, and risk.
The biggest story in U.S. energy politics at the moment is the proposed Keystone XL pipeline, which would transport oil sands from Canada to the U.S. Gulf Coast, where it could be refined and sold into more profitable markets. The project, long delayed as Congress and the President mull over whether a required permit will be issued, has sparked a heated debate. Both sides agree on only one thing: that the pipeline’s eventual fate is a seminal moment for U.S. energy policy.
Yet the truth is that this issue is a distraction from the pressing task of establishing a comprehensive, consistent, and credible American oil policy that reconciles the realities of today with the long-term imperative to decarbonize. A new model, such as a national petroleum emissions intensity standard, is in every American’s interest. This would work by establishing a mandatory gradual reduction in the carbon intensity of domestic and foreign oil consumed in the United States, thus promoting a more transparent market and allowing the market to identify the lowest-cost means of achieving a cleaner petroleum mix.
To begin, much of the debate surrounding the Keystone XL pipeline has treated oil sands production growth as inevitable. It is not. Canadian oil sands have tended to demand prices $10 to $20 per barrel below U.S. benchmark (WTI) crude oil prices. The State Department’s impact analysis of Keystone XL estimated that at sustained WTI prices between $65 to $75 per barrel, the pipeline could materially impact oil sands production growth by providing access to more sources of demand and buoying the price that producers receive.
Global prices have now plunged far below this narrow band, meaning that even if Canadian oil sands could access global market, they would not receive sufficiently high prices to stimulate future supply growth.
No one can predict oil prices over the coming decade, let alone over the months or weeks ahead, but it is clear from the past that we should be skeptical of Pollyannaish oil sands production forecasts.
In 2006, the National Energy Board of Canada anticipated that Canadian oil sands production would reach 3.2 million barrels per day with WTI at $50 per barrel, a price quite similar to today’s. Over the subsequent 8 years, WTI prices hovered at around twice that level, and due to the North American shale boom, Canadian producers also enjoyed key inputs - such as natural gas and condensate - at costs far lower than expected.
Despite these highly favorable conditions, oil sands production today has missed the forecast by around 40 percent. A mixture of cost inflation and frozen politics can be blamed, but the fact remains that oil sands have dramatically underperformed. It is not unreasonable to expect that in a sustained low oil price environment, oil sands production (and concomitant U.S. imports) could fall off significantly. Even if prices recover, cost inflation and underperformance will likely continue to see production fall short of base-case scenarios.
This very uncertainty over the future of the oil sands patch underscores a larger point, however. Pipelines are fixed and immutable. The oils that flow through them are not. Some Canadian oil sands producers will improve their performance over time, while others are likely to grow only more energy (and carbon) intensive. The variance between the most and least carbon intensive Canadian oils is surprisingly high. Those using the pipeline as a metaphor for its oil miss this important point, and likewise miss the opportunity to judge individual oils by their climate impact rather than their geographic provenance.
After all, even if imports of Canadian oil decrease over time, extra heavy oil will continue to enter U.S. markets, whether by pipeline, rail, or ship. The Gulf Coast of the United States is a hub for complex refineries that operate best with heavier and often more carbon-intensive crude oil. Even if U.S. light oil production continues to grow, there will be demand from America’s refining complex for petroleum with higher-than-average greenhouse gas emissions.
The administration, for example, has expressed interest in swapping light, sweet U.S. crude for more heavy, carbon intensive Mexican oil desired by U.S. refineries. Meanwhile, Venezuela’s socialist government is teetering on the edge of collapse in the face of low oil prices and economic mismanagement. If pro-market forces were to eventually assume power in the oil-rich country, then Venezuela’s vast reserves of heavy bituminous oil, the largest in the world and fraught with environmental risk, could be opened up for investment and production by U.S. companies. In all likelihood, they would quickly find a home in U.S. refineries.
The priority, then, should be not on picking fights over individual infrastructure projects, but instead on establishing fair, comprehensive, and empirically-based frameworks for guiding energy policy over the coming decades.
For example, emissions intensity standards are a potent tool for ensuring that the oil consumed in America becomes cleaner over time, while at the same time encouraging alternative fuels and avoiding the arbitrary targeting of any single country or resource. This market-based framework, when designed correctly, would pass muster with U.S. free trade commitments and encourage a “competition of the cleanest” in the petroleum sector, rather than war of words as seen in the current fight over Keystone XL. A robust, defensible standards would focus on individual, field-specific crude oils rather than broad oil categories (i.e. “shale” or “oil sands”), and it would also include a mechanism to conservatively account for uncertainty in emissions intensities. By doing so, industry and national governments will be encouraged to gather and disclose better data, and the standard as a whole would only grow stronger over time.
For all the vitriol, the Keystone pipeline saga will not result in the gathering of any additional valuable data on the performance of various oils over time, nor will it help the U.S. weigh the costs and benefits of other unconventional oil sources that emerge in the future. A national emissions intensity standard would answer this call, create a platform for meeting climate goals in the transport sector, and elevate policy above politics.
Photo Credit: Map of proposed Keystone XL pipeline path via U.S. Department of State