Keystone Cops Vs. Goodfellas
Published: Nov 11, 2011
By Liam Denning
A DOW JONES COLUMN
There's a scene in Martin Scorcese's "Goodfellas" where gangster Henry Hill's wife tries to put a halt to his carousing by throwing his car keys out the window. It doesn't work--there are, after all, plenty of other cars available.
Environmental opponents of the Keystone XL oil pipeline might find themselves ultimately as frustrated as Mrs Hill. The pipeline, designed to bring oil from Canada down through the Midwest to the Texan coast, has been delayed again at the White House's behest. While there is a distinct whiff of election year politics about the decision, the ostensible reason is concern about the pipeline crossing sensitive areas in Nebraska and a desire to reroute it.
But XL has long been opposed for another reason: the oil it would be transporting from Canada to the U.S. comes from tar sands. This "dirty oil," as the Natural Resources Defense Council calls it, is responsible for higher carbon dioxide emissions than conventional oil, largely because of the extra energy required to extract it. Moreover, any new pipeline that reinforces America's so-called addiction to oil is unwelcome. The thinking here is that, like Mr Hill's car keys, if you can't get your hands on the oil, you can't use it.
Such thinking is flawed, however. Oil is a global market and simply making the logistics for its use harder doesn't stop it getting around. Indeed, this underlies the wide and persistent price gap has opened up between West Texas Intermediate and Brent crude oil grades. There is a glut of WTI in the Midwest due to pipeline constraints. The discount at which it trades to Brent reflects the higher cost of moving it to market by road and rail. And as the International Energy Agency pointed out in its latest Oil Market Report, such forms of transport are much more energy-intensive than pipelines, meaning more fuel is burned. Ironically, the big winners from the XL delay should be Midwestern refiners like ConocoPhillips and Western Refining, who can profit from using cheaper crude grades to produce products like gasoline that are priced more in line with world markets.
Above all, though, it's a mistake to think that if Canada cannot send its oil south to the U.S. that it will simply leave it in the ground. The fastest growing market for oil is Asia, where the IEA expects demand to rise from 17.7 million barrels per day in 2010 to almost 30 million barrels per day by 2035.
There are plans already to build pipelines west to Canada's coast Pacific coast, from which oil can be sent to Asia, where it will be burned all too readily. Moreover, there's a good chance that once the export facility was set up, the Canadians could send their oil anywhere by tanker--including to the U.S. Gulf Coast for refining.
Ed Westlake, chief oil and gas analyst at Credit Suisse, puts it this way: "From a transportation perspective, which is more environmentally risky: Shipping crude [by pipeline] across the Rocky Mountains to the British Colombia coast, loading the crude onto tankers which sail down the California Coast, through the Panama Canal and into the Gulf of Mexico or building a pipeline to the latest safety specifications?"
(Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-2801 or by email at liam.denning@wsj.com)
