Keystone Cynics

April 1, 2013 Topic: EconomicsPolitical Economy Region: United States

Keystone Cynics

Many of the controversial pipeline's key supporters and key opponents are merely self-interested.

Last week, the U.S. Senate passed an amendment to their budget plan approving, at least symbolically, construction of the Keystone XL oil pipeline. The Senate vote was nearly 2-1 in favor. Along with the House's passage of the Paul Ryan budget, which included authorization for the construction of Keystone, the Senate vote reflects strong public support for the pipeline. But the pipeline is far from winning final authorization. The Obama administration claims that the State Department is the final arbiter of the environmental impact of the eight hundred thousand barrel per day oil pipeline that proposes to link Canada’s oil sands with petroleum refineries along the Texas Gulf Coast. Despite a recent report issued by State that downplays environmental worries about Keystone, environmental pressure groups have pledged to block the pipeline over concerns centering on greenhouse-gas emissions.

Even Democratic senators understand that refusal to build the Keystone XL pipeline will not reduce overall greenhouse-gas emissions. Why? Because the oil that would have traveled through the pipeline to Texas refineries will be shipped to China instead. There it will be refined in dirty refineries and combusted in cars without catalytic converters. As a result, greenhouse-gas emissions from the oil that will not move through an unbuilt Keystone XL pipeline will be greater than if that same oil were refined in Texas and consumed in the United States.

Despite the Obama administration’s assertions of power over Keystone XL, it is not a given that the State Department can veto construction of the $5.3 billion pipeline and the twenty thousand high-paying jobs its construction will generate. That uncertainty stems from a bipartisan Senate bill recently introduced by Montana Democrat Max Baucus and North Dakota Republican John Hoeven. The Baucus-Hoeven bill asserts Congressional authority over the pipeline under the Constitution’s Commerce Clause. There is similar legislation pending in the House, so there could be a showdown between the legislative branch and the executive branch this spring.

Senate Democrats from red states are under pressure from their constituents to get the Keystone pipeline built. That pressure was evident in the 66-33 defeat of California Democrat Barbara Boxer’s amendment to “study further” the proposed oil pipeline—as if there are any unanswered questions after five years of “study.”

Why should Democrats join with Republicans to oppose the president and his progressive and environmentalist allies? The answer is simple: jobs, gasoline prices and the approaching midterm elections.

Over the last two months, gasoline prices at the pump have risen fifty-three cents per gallon, to a national average of nearly $3.80. This happened despite a no-growth economy, persistently high unemployment and plunging labor-participation rates. With the summer driving season approaching, war drums beating in the Middle East and rising political uncertainty in a suddenly post-Chavez Venezuela (a key U.S. oil supplier), red state and toss-up state Senate Democrats do not want to be labeled as supporting policies linked to high gasoline prices. They know that high fuel prices depress retail sales and hiring. With the full economy-dampening effects of Obamacare likely to be felt by Election Day in November 2014, these Democrat pols are desperate for any economic growth and moderation of unemployment. Keystone XL is one of the two keys that unlock such economic growth. The other, of course, is fracking, which has unleashed an ocean of cheap, domestic natural gas.

Opposing the president and the “greens” on Keystone, which will lower gasoline prices by increasing the supply of crude oil from stable and friendly Canada, is good politics for toss-up and red state Democrats. According to the Cook Political Report, Roll Call and other election oracles, there are up to eight incumbent Democratic senate seats (Alaska, Arkansas, Iowa, Louisiana, Montana, North Carolina, South Dakota and West Virginia) that are deemed tossups in 2014. No Republican senate seats are in that category. These Democrats see Keystone XL as a necessary, if not sufficient, pro-growth policy on which to run and retain Senate hegemony—or at least to preserve their own political skins.

 

Even President Obama may reverse his earlier opposition to Keystone. If he does, it will be for the same reasons that are motivating the toss-up and red-state Dems. The president wants to use the last two years of his term to ensure the future of Obamacare and to pass other progressive legislation. A transformation agenda, like that of his first two years in office, will not be possible if Obama cannot control both legislative chambers, as he did in 2009-2010. Approving Keystone not only will allow the president to argue that he is pro-growth, but it will help hold those Democratic Senate seats that are in jeopardy. By helping Harry Reid preserve those Senate seats, Obama helps his own legacy.

Of course, the president would have to sacrifice one huge political ally if he promoted the pipeline. And it’s not progressive environmental groups. Having secured reelection in 2012, the president does not need their continued support. But he must be worried about billionaire Warren Buffett, who loaned Obama his name (the “Buffett Rule”) in what can be described as an exchange for delaying Keystone XL.

Why would Buffett oppose Keystone XL? After all, doesn’t the Omaha businessman want economic growth? And surely Buffet is savvy enough to understand that building the pipeline actually will not increase air pollution, as is claimed by his economically illiterate environmentalist fellow travelers. Of course Warren Buffet is savvy. Indeed, he is as savvy as savvy gets, and this quality is displayed by his opposition to Keystone.

If Keystone is built, the oil from North Dakota, production of which now exceeds six hundred thousand barrels per day, will have a second outlet to the nation’s refineries. Right now, nearly every barrel produced in North Dakota’s Bakken formation must ride on Warren’s railroad, the Burlington Northern Santa Fe. As a result of his politically engineered monopoly over Bakken oil shipments, Buffett’s railroad is earning increasing amounts of money.

But as Buffet earns more, Bakken producers earn less; without a second outlet, which would be afforded by the Keystone pipeline, the price commanded by Bakken oil is $20 per barrel below the world price. That price differential is required to pay for the much more expensive transportation (via trucks and trains instead of pipelines) of the Bakken oil to refineries.

But what are the twenty thousand construction jobs that could be generated from Keystone XL construction—not to mention better oil pricing for Bakken producers and the multiplier effect of those jobs and those oil revenues—when the forty-four-billion-dollar crony capitalist’s empire is at risk of losing its chokehold on the bonanza? The answer is obvious for Warren Buffett. But the answer is not so obvious for President Obama.

Will Buffett or faster economic growth win in 2014? Obama has been known to throw over allies (Reverend Wright, Bill Ayers) when it enables his political survival. It’s a good bet he will do it again and approve the Keystone pipeline this summer.

Jay Zawatsky is the CEO of havePower, LLC (a natural gas infrastructure developer) and a professor of business, economics, and finance at Montgomery College in Rockville, Maryland.

Image: Wikimedia Commons/PDTillman. CC BY 2.0.