Without a price on carbon, oil will find a way

at 09:55 AM ET, 11/17/2011

Last week, environmentalists and Nebraska activists won a huge victory when the White House delayed the Keystone XL pipeline, which would have transported oil from the tar sands in Alberta down to Cushing, Okla., and on through to Texas refineries on the Gulf Coast. Yet as it turns out, blocking Keystone alone won’t stop the flow of oil from Alberta and elsewhere. Yesterday, the world got yet another reminder of how hard it is to prevent oil from coming to market (or tamping down on emissions) without taxing or capping carbon. As long as oil demand stays high, the oil will keep flowing.


(Jeff McIntosh/AP)
Here’s some background: One of the most bizarre features of the oil market in the past year has been the fact that crude oil sold in the Midwest — and run through Cushing — has been much, much cheaper than crude oil sold in the rest of the world. This disparity has been due to two things. Fighting in Libya took a lot of Middle East oil off the global market, causing prices to rise. Meanwhile, in the Midwest, there’s been a glut of oil stockpiled at Cushing, thanks to a boom in shale-oil production in places like North Dakota. Much of that oil in Cushing hasn’t been able to reach the broader world. There just weren’t enough pipelines to carry it out.

Now, one of the things the Keystone XL pipeline would’ve done was bring oil from Cushing down to the Gulf Coast, so that it could reach Texas refineries and ship out to the global market. Canadian producers were losing nearly $1 billion a month from the fact that they couldn’t sell at those higher world prices. That, in turn, was hampering development in places like Alberta. And after environmentalists and Nebraska activists teamed up to block the Keystone pipeline, it looked like things might stay that way. Or so they thought.

But just yesterday, Enbridge Inc. bought up the Seaway pipeline that was shipping oil from the Gulf Coast to Cushing, and the company now plans to reverse the pipeline’s flow, bringing up to 400,000 barrels of Cushing oil down to the coast. As my colleague Steve Mufson observes, this will accomplish part of what the Keystone XL pipeline was planning to do (that pipeline had about 750,000 barrel-per-day capacity). And, as a result, the price of oil in the Midwest has been shooting back up. The mysterious gap between the two oil prices is narrowing.

In the end, this will likely mean more oil production in Canada and places like the Bakken shale field in North Dakota, as those producers can now enjoy the higher Brent price for their goods. (Or at least they will until there’s another glut — as Fadel Gheit, an oil analyst at Oppenheimer & Co., told me, production in places like North Dakota is outracing pipeline capacity thanks to new shale drilling technology, which means new pipelines will be needed as the price spread keeps reappearing.)

That shouldn’t be a surprise. Even if the Keystone XL pipeline gets killed, there are all sorts of ways for oil to get from Canada and Cushing down to the coast. Not only are there various other pipelines in the works, but oil companies could even start shipping by rail if they find it profitable to do so. As an analysis commissioned for the Energy Department by Ensys noted, “It would take a total moratorium on new pipeline — and also rail — capacity” to stop the development of Canada’s oil sands. That’s unlikely.

So while blocking a pipeline here or there can hamper oil production, it’s certainly not a long-term solution for those who worry about the global-warming effects of carbon-intensive oil sands in Alberta and elsewhere. The only sustainable way to get those emissions under control is with a price or cap on carbon — either a tax or cap-and-trade system — and by reducing demand for oil. (And if Canada doesn’t want to cap carbon, the U.S. could tax crude imports at the border.) Without a carbon price, oil will always find a way, as long as people want to use it.

 
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