Lessons that Greens should Learn from Keystone (Part 2 of Series)

Today we build on Part 1 of this series: How conflict over environmental issues (e.g., Global Warming) is being used to divert the Public's attention from energy policy objectives of Special Interests -- such as exporting U.S. oil.

The Court of Public Opinion: In a just released Washington Post Poll, Americans approve of building the Keystone XL pipeline by a margin of 3 to 1 -- concluding that economic benefits far outweigh environmental risks.

While support for Keystone from Republicans (and Independents) would be expected, polling data also reflects that ~50% of Democrats support the project (with wide division by income levels). Looking at other national polling, this reaction shouldn't come as a surprise to Environmental Interests. In the latest Pew and Gallup research, "Strengthening the Economy" is the top priority -- with "Global Warming" almost dead last in importance. By making Global Warming the focal point of the Keystone XL debate, Environmental Interests never connected with the American Public (including ~50% of Democrats) on pocketbook issues they consider most important. Even though reputable independent sources say that Keystone will create only about 35 permanent jobs, what most Americans are hearing and believing is very different. Clearly, public opinion is tuning out environmental messaging.

At the risk of becoming irrelevant outside their Base, Environmental Interests need to use Keystone as a wake up call to: (1) Connect better on key economic issues; (2) Hold Republicans much more accountable for their "double-speak" messaging; (3) Do some soul-searching for pragmatic solutions in the real world.

Inconsistency in Republican Values: In past messaging of why Keystone XL is needed, proponents used three core building blocks. But in current efforts to end the +40 year ban on exporting U.S. oil, Republicans are now making a 180° about-face from the very "core principles and values" they originally made why Keystone is important:

Republican Messaging: Need for Keystone

Republican Messaging: Need to Export U.S. Oil

Objective of Special Interests All Along:

If "core values" of independence from Mid-East oil, lower gasoline prices, and job creation are important to Keystone XL, these same underlying values should also apply equally to any other national energy policy issue.

Independence from Mid-East Oil: As discussed in Part 1 of this blog series, Keystone is crucial in expanding the existing north/south pipeline capacity to move U.S. and Canadian oil to both Gulf Coast refineries and ports (for potential foreign market

exports of crude and refined products such as gasoline). However, Keystone XL does not address two major issues with America's current or future dependence on Middle-East oil: (1) The lack of East/West pipelines to move oil to major markets in California and the Atlantic Seaboard which are heavily dependent on foreign oil; (2) The Jones Act.⁽¹⁾

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(1) The Jones Act is a ~100 year old maritime U.S. shipping law which explains how importing oil from Middle East countries can be cheaper than transporting oil via tanker from the U.S. Gulf Coast area to East and West Coast markets.

Republican bravado that Keystone XL would achieve U.S. energy security from Mid-East oil if not a "pants on fire" statement, is pretty darn close to it. But even if the "energy security" aspects of Keystone are simply a matter of overselling potential benefits (which happens all the time on both sides of political theater), a deeper trust problem exists as to exactly what are the Republican core values and principles?

Republican Double-Speak on the Importance
of Independence from Middle-East Oil

In arguments to end the +40 year U.S. oil export ban, current Republican messaging emphasizes the importance of America standing for "free and open market international trade". But in making this free trade argument, what happened to the "core value" of oil independence? Per the Energy Information Agency's long-range forecast through 2040, U.S. foreign oil dependency (currently at ~40%) is expected to remain above +30%.

Historical and Projections of U.S.
Oil Production & Consumption: The Cato Institute (a leading Conservative/Republican Think Tank) has a guiding policy paper which explains why free-trade must always be the underlying core value and that actions to achieve U.S. oil independence have been, and always will be bad policy. Under this view of conservative principles, the international market should always be the driver.

But the point in today's blog is not about the pro's or con's of international trade. It's about "trust", and how this is broken when "doublespeak" occurs on core principles. Is independence from Middle-East oil important or not? In supporting Keystone XL, it's important -- but in exporting U.S. oil, it isn't.

"Oh What a Tangled Web We Weave When First We Practice to Deceive". -- Old English Proverb.

A key to Republican success in achieving public opinion support for Keystone XL is the simplicity of their messaging. After all, it's just common sense that if oil supplies increase (by removing "big-government" barriers) that gasoline prices will decrease. This is just basic economics -- Right? Well, not exactly. Since 2008, total U.S. oil production has now increased 50% as a result of amazing technology breakthroughs in fracking and horizontal drilling. So with this record growth (especially during the past three years), what's happened to gasoline prices? While pump prices have decreased slightly, they sure haven't returned to $2 levels as promised by many prominent Republican leaders.

Yearly Average of U.S. Gas Prices In messaging on gasoline prices, Republican trust problems are two-fold: (1) What can be called an "Original Sin"; (2) Yet another 180° about-face on core values.

The Original Sin: An inconvenient fact with "Drill, Baby, Drill" is the very high cost of extracting oil from fracking/horizontal drilling -- which is 4 to 6 times higher than from conventional oil fields in the Middle East. According to Oil Analysts, the average cost of new oil production from U.S. tight oil and shale gas regions is ~$70 a barrel, with marginal costs (the last barrels produced) as high as $114 a barrel in 2012.^{1, 2, 3}

In order to achieve a return to $2 gasoline would require a precipitous price drop to ~$40 a barrel (bbl) -- a market price significantly below the costs to extract oil using fracking/horizontal or deep-sea drilling. Thus, without a continuance of high market prices (currently over $100/bbl) much of this unconventional U.S. oil would be uneconomic to extract.

Republican leaders have always known these facts of high drilling costs and the non-reality of dramatically lower U.S. gasoline prices, but continue to present a story that people "want" to hear.

More Inconsistencies in Stated Republican Core Values: "Drill, Baby, Drill" can have numerous benefits within the economy (e.g., job creation, reduced U.S. trade deficit) and even the environment. While Environmentalists are absolutely correct that fracking must be safe, this engineering advancement also has the potential to dramatically reduce man-made (anthropogenic) Global Warming (AGW). In using safe fracking practices to extract needed and high value crude oil, a resulting by-product is low cost and lower carbon emission natural gas (displacing coal in electricity generation, oil in transportation fuels).

Where there is wide disagreement with "Drill, Baby, Drill" is its impact on oil prices. Democrats commonly argue that increased production (especially through high cost fracking) wouldn't make much difference, with a belief that oil prices are determined by international markets. Republican pro-drilling proponents adamantly disagree. So, who is right?

In almost all oil transactions, the price that producers receive is derived from a market benchmark value of crude oil. In the U.S., this is West Texas Intermediate (WTI). Internationally, the benchmark is Brent. The two crude oils are of similar quality and historically have been priced very close to each other (the Democrats argument).

However beginning in 2011, prices began to differ between the two crudes. The record growth in U.S. oil production caused a buildup of crude oil inventories at Cushing, Oklahoma, where WTI is priced. This created a supply and demand imbalance at the hub, causing WTI (the U.S. benchmark) to trade lower than the international Brent benchmark.

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Note -- Most Current Oil Commodity Prices:

But instead of declaring "Victory" that increased oil production can indeed reduce prices -- Republicans are now contradicting their very own stated core values. In current efforts to end the +40 year old U.S. ban on exporting crude oil, Republicans argue that U.S. oil producers need higher prices.

In order to achieve this Special Interests' objective of higher crude prices for oil producers, the XL and other spurs of the massive Keystone pipeline project play critical roles. First, Keystone will provide pipeline capacity around Cushing, Oklahoma that will eliminate the bottleneck of oil flow (that currently results in oversupply and depresses U.S. prices) at this critical Hub where WTI benchmark is priced.

Spurs of Keystone Pipeline Project

Second, by achieving an unobstructed flow of oil to Gulf of Mexico ports coupled with eliminating the current ban on exporting oil, U.S. oil prices would be forced upward to align with the higher Brent benchmark as Producers would now have a choice to sell into domestic or international markets.

Every once in a while just the "perfect" quote comes along that makes it crystal clear where corporations loyalties are: "I don’t make decisions based on what’s good for the U.S.” -- (Exxon CEO).

What's Up Next: In our next blog, we will continue this series by looking at (1) The job creation claims used to justify Keystone; (2) Some needed soul-searching by Environmental Interests.

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Current Oil Prices: U.S. (WTI) Versus International (Brent):

Additional News Stories:
Will Keystone Reduce U.S. Gasoline Prices? (Christian Science Monitor)
Exporting U.S. Oil (N.Y. Times)
Calls to Lift U.S. Export Ban to Punish Russia (Business Week).
Approve Keystone XL to keep Russia in Check (New York Post).
Percent of Oil Demand that U.S. Imports (EIA)
Production Cost of Oil Sands in Canada
Testimony by Senator Markey on Oil Exports and Keystone
Conservatives Can Be Green
Prediction: Obama Will Reject Keystone (Rolling Stone)
Keystone XL Already Becoming Obsolete (Business Insider).

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