Five Fallacies of the Keystone Oil Pipeline

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There's been a lot of buzz about Keystone oil pipeline recently, but unfortunately, the facts about the project have been obscured by political wrangling.

That's not good for the investors who have money at stake. So here's what you really need to know about the Keystone oil pipeline - and more importantly, the five biggest fallacies being espoused by unscrupulous politicians and the debate-warping mainstream media.

First proposed by TransCanada Corp. (NYSE:TRP) in 2008, the 1,700-mile Keystone oil pipeline would carry 700,000 barrels of crude per day from the Canadian oil sands in Alberta to refineries in Port Arthur, TX.

As far as facts go, that's about all the politicians in Washington agree on. Now here's where the truth ends and the spin begins:

Fallacy No. 1: The Keystone pipeline will create 20,000 jobs ... or 100,000 jobs.

TransCanada commissioned a study that said construction of the pipeline would create 20,000 construction jobs, and more than 100,000 spin-off jobs. Republican (and a few Democratic) supporters have been only too happy to repeat these numbers in speeches in support of the pipeline.

The State Department, in its study, came up with a more modest figure of 5,000 to 6,000 construction jobs.

The discrepancy comes from how the TransCanada study calculated the jobs. That study used a "one person, one year model." So if it takes 6,500 workers two years to build the pipeline, that's 13,000 jobs, with the other 7,000 coming from supply manufacturers.

And if that math isn't fuzzy enough for you, take a look at the calculations for the 118,000 spin-off jobs.

That number is based on the one person, one-year model in addition to something called the multiplier effect, which takes the capital costs of the project and feeds it into a formula. In short, these job numbers are about as reliable as a politician's campaign promise.

And yet one more delicious irony: Back in 2009, Republicans complained that the $787 billion stimulus package failed to create long-term stability given that many of the jobs created only lasted as long as the public works projects that were proposed.

Democrats defended the temporary nature of the employment, arguing that it was a necessary step in order to boost economic demand around the country. Now it's the Democrats arguing that the Keystone project fails to create permanent jobs, while Republicans argue the project is needed to combat unemployment.

Fallacy No. 2: Keystone pipeline will increase greenhouse gases, worsening climate change.

Well, yes and no.

The argument from Democrats is that the process of extracting the oil from the Athabasca fields will generate greenhouse gases. Sure enough, it does. But stopping the Keystone pipeline won't change that unless it prevents production, a long shot at best.

You see, the Keystone pipeline isn't the only game in town. At least one other proposed pipeline would run across British Columbia to Canada's west coast, where it would be exported to Asian markets.

The greenhouse gas impact studies assume no Keystone pipeline means no production from the Athabasca oil sands, and assume as well that the Keystone pipeline would pump nothing but oil sands product at 100% capacity 100% of the time - not likely.

The true impact of the Keystone pipeline on global greenhouse gas emissions isn't clear, but would be far lower than its opponents claim.

Fallacy No. 3: The United States is dangerously reliant on hostile energy sources.

Republican presidential candidate and former Utah governor Jon Huntsman claimed in a November speech that the United States spends $300 billion a year on oil imports from "unfriendly regimes."

While the dollar figure is about correct, much of that imported oil is coming from nations friendly to the United States.

According to the Energy Information Administration (EIA), countries in the Western Hemisphere supply 49% of our imports. In 2010, Canada supplied 25%, Saudi Arabia 12%, Nigeria 11%, Venezuela (a Western Hemisphere unfriendly) 10%, and Mexico 9% last year. Only 18% of U.S. oil imports came from the Persian Gulf.

What's more, we're seeing an increase from our friendly neighbors. Crude figures through August 2011 show Canada still in that 25% range, with Mexico now second, at 12.7%.

Second, while the United States does do business with some unfriendly trading partners, so does every other country in the world. The rising costs of energy have less to do with political tension between the United States and its trading partners, and more to do with the combination of growing demand in China and other emerging economies, as well as supply concerns stemming from the reduction in easily accessible sources of energy.

Fallacy No. 4: The Keystone pipeline will improve our long-term energy independence.

Republican candidates and pundits have argued that the pipeline is essential for the future energy security of the United States. However, this view is sorely misguided.

The pipeline will connect refiners, as Money Morning Global Energy Strategist Dr. Kent Moors recently noted in his Oil & Energy Investor newsletter. The oil that reaches Gulf refineries could ultimately be consumed in the United States, but the finished products could just as easily be exported to China, Japan, or any other oil-hungry nation.

Energy companies will look to sell their oil to the highest bidder.

In fact, the United States is currently a net exporter of gasoline. In September, the U.S. exported 430,000 more barrels of gasoline than it imported. The country is now on track to become a net exporter of refined oil products for the first time in 62 years.

Meanwhile, domestic prices at the gas pump are poised to rise to record levels.

Because of the nature of the global oil market and domestic supply, the Keystone pipeline would contribute very little, if anything, to U.S. energy independence.

Fallacy No. 5: The Keystone pipeline could result in a disastrous oil spill.

This is another point opponents have made that, while not exactly wrong, is misleading.

Just about every energy project carries the risk of an accident. The real question is whether, for any given project, that risk is acceptable.

If governments cancelled energy projects on the basis that a bad accident could happen, very few would ever be approved, including oil pipelines, natural gas fields, and nuclear power plants. We'd all be sitting in the dark.

The State Department's study of the Keystone pipeline said there are reasonable ways to manage the environmental risks. And pipelines are generally considered the safest way to transport oil.

Another complaint made by Democratic opponents is that the pipeline would cross the environmentally sensitive Sand Hills area in Nebraska, which sits atop the Ogallala Aquifer.

That, too, is wrong.

TransCanada in November reached an agreement with Nebraska officials on an adjustment to the pipeline route that would detour around the Sand Hills region, negating that objection.

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