The Keystone XL Pipeline Veto Was Dumb February 26, 2015

President Obama’s veto of the Keystone XL Pipeline earlier this week was a dumb decision.

The president thinks that his veto of the Keystone XL Pipeline is an environmental decision. He says that it is about greenhouse gases and climate change and that it is important to make a stand so that the world can get off of oil and fossil fuels.

He is wrong. The Keystone XL Pipeline is about energy and is, therefore, about the economy. The U.S. economy has been getting stronger lately because of energy. And, the veto will ensure more oil transport by rail that is far more dangerous and much more likely to create environmental problems than building the pipeline.

The U.S. energy boom of the last few years was funded by billions of dollars of capital. In a zero-interest rate world, investors are desperate for reasonably low-risk investment opportunities that pay a better return than they get from savings accounts, CDs and treasury bonds.

Investment banks found the opportunity in the U.S. exploration and production business. Here, investors could sell debt, buy high-yield corporate bonds or buy preferred shares and get good returns. And the risk was manageable. It is, after all, in the United States and theoretically backed by a hard oil and gas asset in the ground.

All this money and spending generated a lot economic activity in the form of oil field and service jobs, and a boost to all of the businesses that were needed to house, feed and transport the workers, and provide the materials for the exploration and production. As we produce more of our own energy, we import less oil and keep more dollars invested at home. When we refine the oil produced in the U.S. and sell it around the world, we bring more revenue into the country.

Which brings us to the real reason for the Keystone XL Pipeline.

Most U.S. refineries are not designed to refine light oil. The pipeline supplies the heavy crude that we need to blend with the light crude that is produced from the tight oil plays. Then we can refine the oil and export refined products around the world.

In addition to moving heavy oil from Canada, the Keystone XL Pipeline would also move a lot of light crude oil from North Dakota that is presently being shipped by rail. In case you hadn’t noticed, there have been a lot of rail accidents, explosions and spills recently because rail is a much riskier way to move oil than by pipeline. And without the Keystone XL project, oil from the Canadian oil sands will also be moved by rail—some of it to the U.S. and some to refineries in eastern Canada.

So, what has vetoing the Keystone Pipeline really accomplished?

It just makes things harder, more expensive and creates a lot more risk and environmental danger than the alternative of building the pipeline. It slows down the economic benefits of the oil boom, adds cost, and fails to add the jobs that building the pipeline would create. And it does nothing to stop the production of tar sands in Canada.


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