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Does the editor of Science understand ‘the Dismal Science’?

February 23rd, 2014 · 4 Comments

Reading the latest editorial by Marcia McNutt, the editor of Science magazine, makes one wonder: Does she understand and have any respect for ‘the Dismal Science‘?  Very simply, McNutt failed to demonstrate basic knowledge about economics (that ‘dismal science’) and failed to consider basic business calculations (and ignored many other reasons why Keystone XL is not in the US national interest) in what is thus a flawed argument in favor of the Keystone XL pipeline.

To be clear, counter to McNutt’s erroneous assertions:

  • Building Keystone XL will accelerate and expand the exploitations of Tar Sands and, therefore,
  • Keystone XL pipeline will lead to increased greenhouse gas emissions (and other environmental damage).

McNutt opens her editorial, simply entitled Keystone XL, with an affirmation of her personal commitment (and suffering?) to help address climate change:

I drive a hybrid car and set my thermostat at 80°F in the Washington, DC, summer. I use public transportation to commute to my office, located in a building given “platinum” design status by the U.S. Green Building Council. The electric meter on my house runs backward most months of the year, thanks to a large installation of solar panels. I am committed to doing my part to cut greenhouse gas (GHG) emissions and minimize global warming.

She then turns to an outright statement supporting the Keystone XL pipeline: “I believe it is time to move forward on the Keystone XL pipeline …” In short, McNutt falsely asserts that Keystone XL is irrelevant for the speed and extent of Tar Sands exploitation:

Certainly, some fossil fuel deposits remain untouched because there is no pipeline to transport the resource; a good example is natural gas on the Alaskan North Slope. … the absence of Keystone XL has not stopped development of the Canadian oil sands; unlike the situation on the Alaskan North Slope, truck and rail are viable alternatives to a pipeline between Canada and the United States.

Even after accepting that Keystone XL would not accelerate extraction of the Canadian oil sands

Hmmm … let us take a moment to compare “truck and rail” with pipeline:

rail is significantly more expensive.

The State Department estimates that shipping tar sands by pipeline costs about $8 to $10 per barrel.

Make the switch to rail, and the price shoots up to $15 to $17 per barrel, with some estimates as high as $31.

Business is in the business of making profits.  Investors are in the business of putting their money where it will have the highest likelihood of making profit.  According to the (flawed) State Department analysis, there is a minimum of $5 higher cost per barrel (and thus a minimum of $5 lower profit) per barrel if one has to move by rail (forget ‘truck’, which is far more expensive) rather than pipeline. And, this differential might be as high as $23 per barrel.

If, let’s say, the “cost’ for newly invested Tar Sands production is $65 per barrel (a reasonable figure), a $23 per barrel cost of transport via rail means a total price delivered to a Gulf Coast refinery would be $88 per barrel.  At $100 per barrel, that is a 12% profit figure — a very low figure in the high risk environment of fluctuating petroleum prices with uncertain fiscal risks due to the potential for carbon prices, other potential drivers of reduced demand, and looming Black Swan introduction of clean/renewable fuels at prices competitive — without subsidies — $88 per barrel.  The rational investor would be leery of putting in $billions with that low a profit margin with those high uncertainties.  Put in the pipeline, and that profitability figure potential skyrockets.  A $73 total cost provides a 27% profit projection with significantly greater buffer against those uncertainties.

Additional to the cost to transport the fuel, there is another reality:  the majority of Tar Sands bitumen is now sold in the interior of the United States where — due to a glut of supplies from the Bakken fields and Canadian Tar Sands — there is a significant price discount compared to world oil prices.  Opening up Keystone will end that glut (likely forever) which means that all Tar Sands fuels — even that production not shipped to coastal refineries for the world market — will fetch a higher price than they do currently which provides increased profitability projections for any firm or investor considering building additional Tar Sands production capacity.

In other words, Keystone XL would change the game as to the profitability of tar sands exploitation.

Additionally, McNutt’s comment about truck and rail is true — in a limited fashion (for example, only a relatively small amount of tar sands bitumen is moving by rail). To provide a perspective on that ‘limit’, the Keystone XL pipeline’s 830,000 barrel per day capacity is roughly the equivalent of 1500 rail cars per day of additional capacity.  Even within the reality that rail movement of oil in North America has skyrocketed in recent years, that is a huge additional capacity increase.

The issue is not “untouched” Tar Sands but whether Keystone XL will lead to increased incentives for investing in and expanding Tar Sands exploitation.

The most cursory analysis of the economics provides a clear understand that building Keystone XL would, contrary to McNutt’s failure to consider the Dismal Science, drive accelerated and expanded Tar Sands production and, therefore, increased greenhouse gas emissions which will have a significant detrimental impact on our ability to mitigate climate change and undermine our chances of forestalling catastrophic climate chaos.

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Tags: analysis · economics · Energy · tar sands · trains

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