Keystone XL Could Boost Global Oil Consumption By 500K Barrels A Day

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A new study from the Stockholm Environment Institute (SEI) focuses on a greenhouse gas impact of the Keystone XL pipeline that hasn’t received much attention: how the pipeline could affect the global oil market by increasing supply, decreasing prices and therefore driving up global oil consumption.

Even if those effects are small in global terms, they could be significant in relationship to Keystone XL and U.S. climate policy, argue Peter Erickson and Michael Lazarus, senior scientists in SEI’s U.S. Center, in a new paper, Greenhouse gas emissions implications of the Keystone XL pipeline.

The more suppliers there are in the market for oil, the more they compete and that drives down prices for consumers,” Erickson said.

Climate policy and analysis often focuses on energy production and consumption, but rarely considers how energy infrastructure might shape energy use and the resulting greenhouse gas emissions.

The Keystone XL pipeline proposal to connect Canadian tar sands production with the Gulf of Mexico’s refineries and ports have brought these questions to light. U.S. President Barack Obama has said he will only approve Keystone XL if it “does not significantly exacerbate the problem of carbon pollution.”

To gauge the pipeline’s potential impact, Erickson and Lazarus built a supply-and-demand model using publicly available supply curves and peer-reviewed demand elasticities (the extent to which changes in oil consumption respond to changes in oil prices).

They examined three possibilities — 1) That the Keystone XL permit is rejected, and the same amount of oil would reach the market by other means; 2) if half of the oil reaches the market anyway; and 3) that none reaches the market.

For the last two cases, the researchers found the pipeline’s impact on global oil prices, though modest (less than one percent), would be enough to increase global oil consumption by hundreds of thousands of barrels per day.

The cheaper oil and fuels are, the more people will consume them,” Erickson said. “The cheaper it is, the more people drive. The more expensive it is, the less people drive. In economic terms, that’s called an elasticity of demand.”

The scientists looked at these variations in demand over the longer term.

People don’t tend to, on a day-to-day basis, pay a lot of attention to gas prices in terms of how much they drive,” Erickson said. “But over time, if prices go up, people make bigger decisions about the type of vehicle they’ll buy or where they’re going to live.”

What they found was that if none of the oil would otherwise reach the market, Keystone XL could increase global oil use by as much as 510,000 barrels per day, or 62 per cent of Keystone XL capacity. Including those price effects, the pipeline’s annual emissions impact would be 93 million tonnes of carbon dioxide equivalent per year, four to five times greater than the greenhouse gas implications of simply displacing average crude imported into the U.S. with tar sands crude.

While the State Department has considered how Keystone might affect overall levels of Canadian oil sands production, it is not clear if and how they considered how such increases in production would affect global consumption — an effect we found could be significant,” Erickson said. “This is an important gap that needs to be addressed if President Obama is to make a fully informed decision about the pipeline.”

The GHG implications of Keystone XL can also be looked at in the context of the U.S. pledge to reduce emissions to 17% below 2005 levels by 2020, Lazarus said.

The potential impact on global GHG emissions could be as high as 1–2% of current U.S. emissions,” he said, “and greater than the emission reductions that several proposed federal climate mitigation policies could achieve in 2020, such as U.S. Environmental Protection Agency performance standards on industrial boilers, cement kilns and petroleum refineries.”

The authors conclude by noting that the answer to the question of whether Keystone XL will “significantly exacerbate the problem of carbon pollution” is likely to hinge upon how much the pipeline increases the global oil supply, and through its price effects, global oil consumption.

Some have argued that if Keystone XL is not built, then other modes, particularly rail, would be used to transport an equivalent amount of oil. However, there is far more prospective Canadian tar sands production (4.5 million barrels per day) than the 830,000 barrels per day that Keystone XL can carry, so rail routes may be needed and used whether or not the pipeline is built, Erickson said.

Additionally, Brian Ferguson, CEO of major oilsands producer Cenovus, was quoted this week as saying: “If there were no more pipeline expansions I would have to slow down.”

So, whichever way you slice it, Keystone XL will have a significant climate impact —by enabling more development of Alberta’s oil industry, but also by increasing the global oil supply and consumption.

Image credit: Tail pipe exhaust via Shutterstock.

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