Keystone XL Pipeline: EPA’s Double Spin on Oil Prices

As discussed previously on this blog, EPA in a Feb. 2 comment letter challenged the State Department’s assessment that the Keystone XL Pipeline (KXL) is actually the low-carbon option facing U.S. policymakers.

State reasoned that if permission to build the KXL is denied, roughly the same quantity of oil-sands crude would reach U.S. refiners, it would just come by alternate routes. The alternatives, principally rail, would consume more energy than a single large pipeline. Thus, compared to the proposed KXL, the alternatives would emit 28% to 42% more carbon dioxide (CO2). See p. ES-34 of State’s Final Supplemental Environmental Impact Statement (FSEIS).

Policy implication: Approving the KXL is the ‘climate-friendly’ choice.

To rebut this analysis, EPA seized on a passage in the FSEIS in which State opines that the extra cost of transporting crude by rail could make new oil sands development uneconomical if long-term prices fall below $75 per barrel (ES-12). Noting that prices in recent weeks have been as low as $50 per barrel, EPA speculates that approving the KXL could “change the economics of oil sands development and result in increased oil sands production, and the accompanying greenhouse gas emissions, over what would otherwise occur.”

Predictably, anti-Keystone groups hailed EPA’s letter as proof that the KXL would “significantly exacerbate the problem of carbon pollution” and, thus, fail President Obama’s national-interest ‘litmus test,’ announced in his June 25, 2013 climate change speech at Georgetown University.

Keystone bashers conveniently overlook the obvious. Oil prices are volatile. Prices are low today but neither EPA nor anyone else knows what the price of oil will be a year from now, much less over the lifetime of the proposed project.

As TransCanada, the company seeking to build the KXL, pointed out last week in a comment letter rebutting EPA, Canadian oil sands development took off in late 2008, when oil prices were $41 per barrel, and increased through 2009, when oil prices were generally under $75 per barrel.

Here’s the kicker. When it comes to the KXL, EPA views the recent decline in oil prices as a big deal. But when it comes to the agency’s fuel-economy regulations, EPA regards low oil prices as a nothingburger.

EPA Administrator Gina McCarthy recently described recent oil prices as a short-term blip that will not influence consumer buying habits and should not modify federal motor vehicle fuel-economy standards. “We don’t think that this small timeline, where there is this extreme fluctuation, is going to continue,” she said.

Well, Ms. McCarthy, if the fall in crude oil prices is an “extreme fluctuation” on a “small timeline” that’s not “going to continue,” then said fluctuation is unlikely to influence long-term oil sands investment, and should not affect any rational assessment of whether building the KXL would be in the national interest. Right?