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February 7, 2014

An Economic Analysis of Keystone XL

February 7, 2014
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Last week the State Department released its assessment of the Keystone XL pipeline, and it was quite awkward for President Obama, who wants to appear solid on environmental issues while also helping the economy. Specifically, the State Department report said that the construction of the pipeline would create 42,100 jobs, and that it would not significantly increase greenhouse gas emissions. Thus the government’s own report pulls the rug out from the critics urging Obama to kill the project. In this post I’ll walk through these two issues of jobs and emissions, from an economic perspective.

Jobs, Jobs, Jobs

On the jobs front, Obama pooh-poohed the numbers when Bill O’Reilly raised them in an interview. Critics of Keystone point out (correctly) that the State Department analysis says 42,100 jobs will be created during the construction of the pipeline, which will only last a couple of years. After its completion, they explain, the pipeline will only create a few dozen permanent new positions.

Yet hold on a moment. The whole point of the Administration’s various “stimulus” programs was to provide a shot in the arm to the economy during the recession, so that the economy could get back on its feet. Just recently, in the debate over extending unemployment insurance, proponents claimed that it would boost spending and thus support jobs. Was this not supposed to be a very temporary support program—perhaps for one to two years? Or did the proponents want this and other stimulus measures to be in place permanently?

Beyond noting the inconsistency on the issue of “temporary” job creation, we should point out the broader problem: The purpose of business projects is not to “create jobs” but rather to efficiently transform resources into goods and services for consumers. Other things equal, it’s actually better if a business can achieve a given outcome with fewer labor resources, because that allows workers to do more tasks and boosts total output.

Look, suppose the operators of Keystone promised that they would alter the design, and periodically insert gaps into the pipeline where workers would need to manually move the oil across the gap, using buckets. With this new design, the pipeline would “support” 35 million permanent jobs, with workers tied up day and night moving the oil with buckets. Should the president now be more interested in approving the project? We sure hope not, since it would be a ridiculous waste of labor resources.

Ending the Recession

Regardless of what the official declarations may be, average Americans know that we are still in a recession right now. The problem is that unemployed workers do not appear as profitable investments for firms. One obvious way to ameliorate this problem is for the federal government to get out of the way and remove arbitrary government barriers to mutually advantageous transactions.[i] The beauty of “job creation” through this route is that it doesn’t rely on artificial support from the government, but rather allows the market to perform normally and channel workers to where they can contribute the most to the economy. Rather than being a drain on taxpayers, voluntary private sector operations work in the opposite direction.

Climate Change

The most awkward thing for the critics of Keystone is that the State Department report concluded that “approval or denial of any one crude oil transport project, including the proposed Project, is unlikely to significantly impact the rate of extraction in the oil sands or the continued demand for heavy crude oil at refineries in the United States” (page ES-16 of the Executive Summary).

Thus, environmentalist critics of Keystone are failing to use the economist’s familiar tool of marginal analysis. It’s not enough to say, “Moving tar sands from Canada to Texas will cause climate change.” No, to make the case for blocking Keystone the critic must show what would happen in the alternative scenario and explain why that outcome would be preferable.

In this case, if the Keystone XL is not built, the oil will be transported by other means such as rail, barge, and tanker. Much of it the oil will still come to the United States, and some will likely go to Asia.  So whether or not the Obama Administration approves the project, the Canadian oil sands will be extracted, and ultimately the carbon dioxide contained in these deposits will be released into the atmosphere. If a decision (such as approving Keystone) won’t affect carbon dioxide emissions, then a standard cost/benefit approach shouldn’t count them as costs of the policy.

Conclusion

The recent State Department analysis of the Keystone XL Pipeline confirms that it would create tens of thousands of jobs in the short term—just when the Administration (in other cases) argues that we need them most urgently. Moreover, this “stimulus” would cost taxpayers nothing, and indeed would bring in more revenue, as well as making the energy sector more productive. The State Department report even defanged the usual climate change objections, by arguing that project would have little net effect on global emissions, as the Canadian oil would simply be shipped elsewhere.

 


[i] Some libertarian critics of the Keystone pipeline have objected to the use of eminent domain laws to seize land from farmers. Such critics would presumably argue that if governments at all levels respected property rights, then the energy infrastructure would look different, as builders might have to go around recalcitrant owners rather than taking the shortest path. However, this sophisticated discussion would have nothing to do with the federal government vetoing the whole project.


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