Joe Nocera Still Loves Keystone XL, Is Still Confused About The Basic Economics Of Oil Markets

By Dr. Jim Barrett

It’s nice to know that the Joe Nocera at the New York Times can be taught. The last time I read one of his columns, he made the mistake of calling people “boneheaded” because they understood the economics of oil markets in a way that he clearly didn’t. He actually claimed that taxing oil production would increase oil production.

This time out, Joe has clearly showed that he learned his lesson: Don’t call people “boneheads” while displaying your own ignorance. Unfortunately for Joe, the lesson seems to have ended at not calling names, because his ignorance is once again on full display.

As with his last column, the discussion is about the Keystone XL pipeline which would bring crude from the tar sands of Canada to oil refineries in Texas. If you haven’t been paying attention to the issue, environmentalists and others oppose the pipeline on the basis of both local environmental issues surrounding the possibility of a leak in sensitive areas and on the global environmental grounds that developing Canada’s tar sands would be catastrophic for climate change.

Nocera, who to his credit admits openly to being a “longtime supporter” of the pipeline, abandons his previous comically flawed attempt at making economic arguments. This time, he attempts a political one: Allowing the pipeline to go through the U.S. will help us achieve “energy independence.”

Ignoring both the fact that the tar sands crude would flow to Texas refineries and then exported to other parts of the world as well the odd trend of treating Canada as though it were part of the U.S. (I wonder how Canadians feel about that), Nocera’s new energy security argument is just as flawed as his old economic one.

The problem is that even if Canada were just a northern U.S. state and even if all of the oil it produced were consumed in the U.S., the pipeline wouldn’t bring us any closer to actual energy independence. The reason is economics (sorry Joe, the stuff is everywhere). Oil is sold on global markets. The price oil is the same no matter where it is sold and who is buying it. If a buyer in Japan is offering $100 for a barrel of oil, and a U.S. company is only offering $80, the Japanese buyer will get it. That’s just how markets work. If the U.S. wants oil, we’re going to have to pay the market price.

The companies developing Canadian tar sands are not going to sell us that oil at below market rates because we are neighbors or because they like us. American oil companies don’t even do that. If global oil prices go up, we pay more for oil no matter who we buy it from.

Despite Nocera’s claim that “[w]e would no longer need OPEC,” (the oil producing cartel centered in the Middle East) we would still be very much subject to their whims and the impact it has on global oil markets. Whether or not the Keystone pipeline gets built, OPEC will still be a major supplier of oil. If OPEC decides to decrease production, global oil prices will rise, and the existence of the Keystone pipeline won’t change that. Fighting in the Middle East, sadly common, will still send global oil prices rising as it always has, and unless the Canadian oil companies promise not to raise their prices or only to sell to Americans (which they have literally sworn they won’t do (see video below), oil from the Canadian tar sands will go through the same price gyrations as all the other oil in the world.

Energy independence in the way most people think of it has always been something of a mirage. It has never really been about being able to get the oil want. It has always been about getting it at the price we want. If Venezuela (a member of OPEC) decides it doesn’t want to sell oil to the U.S. any more, there are other suppliers can get it from. We may have to pay more to get it, and that is the problem.

To be truly independent, we would have to sever ourselves from global oil markets. That is only possible if we can both supply all the oil we need and are willing to ban all oil exports. Otherwise the global price signal will find its way into our market. Even if we pretend that Canada is a part of the U.S., and even if this new and suddenly much larger U.S. could supply as much oil as it consumes, no one has ever seriously proposed banning oil exports, and so energy independence has never seriously been on the table, with or without the Keystone pipeline.

If we want to be free from the influence of oil markets, we have to be free from oil. To the extent that allowing the Keystone pipeline to go through slows or diverts investment from alternative energies and efficiency efforts, it actually makes us more dependent on oil markets, more vulnerable to volatile price swings, and less secure.

— Dr. Jim Barrett is Chief Economist at the Clean Economy Development Center

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22 Responses to Joe Nocera Still Loves Keystone XL, Is Still Confused About The Basic Economics Of Oil Markets

  1. Jim says:

    Your argument is very compelling, but the fact that burning as little as one fourth of the remaining fossil fuel reserves will result in irreversible, catastrophic climate change is also very compelling.

    Doesn’t it make sense then, that while we convert to non-fossil based renewable energy, that we pick and choose which fossil fuels we extract from the earth? We have after all, more fossil fuels than we can safely use. There is absolutely no reason that we need extract the most polluting and least energy efficient fossil fuels.

  2. fj says:

    Dependency on fossil fuels is a huge drain on the world’s economies and accelerating as climate change accelerates.

    And we are now in a fossil fuel bubble which will cost the economy a six trillion dollars financial collapse when it goes.

    San Francisco and others are rapidly divesting which makes good economic sense.

    It is the law that publically traded companies must declare their exposure to climate change and the insurance and fossil fuel industries are the worst.

    And the insurance industry is changing dramatically to limit it’s exposure.

    The fossil fuel industry is trying to intrench the exposure even more. This is plainly misguided and is amplifying risk.

  3. David F Collins says:

    In the same NYT essay, Mr Nocera made a very snide dig at Dr Hansen:

    “I couldn’t help myself: I asked Oliver what he thought of Hansen’s willingness to chain himself to the White House fence to protest the pipeline.

    He couldn’t help himself either. Given the dirty oil in California, he replied, ‘he should be chaining himself to a mannequin in Rodeo Drive.’”

    Dr Hansen, not an economist, had showed how Mr Nocera had utterly bungled the economics of a Carbon Tax. So all Mr Nocera can do is get personal. It makes one wonder about the NYT, publishing the blather of such a petulant, snarky ignoramus.

  4. Camburn says:

    The pipeline will be built. IF it isn’t, alternative pipelines will be.

    Pipelines are still the safest way to move oil.

  5. Daniel Coffey says:

    Interesting point, but it seems to engage in the rather risk-o-philic proposition that getting to the edge of disaster will be followed by a miraculous pulling away just in time; this is no Hollywood movie. Maybe we ought to consider the respite a gift of time in which to get on to 100 percent large-scale non-carbon energy systems such as solar PV, wind and geothermal. I say large-scale because small is not enough and far, far too slow and unmanageable to be useful for electrifying transportation and decarbonizing electricity production at a scale which will be meaningful.

  6. MS says:

    I don’t get the argument. The tar sands ARE developed. It’s not like Keystone is the key to making them reality. And they will continue to be developed, Keystone or no Keystone.

    Keystone is only about whether tar sands oil will join other heavy oil to pass through pipelines to US refineries, or whether the US will keep using rail and oil tankers (which are much worse for the environment).

    Don’t get me wrong, I bike commute to work to lessen the impact on the environment. But as long as we are dependent on oil (which will be for a while, at least) there are a lot worse villains than Keystone.

  7. Theodore says:

    Energy independence alone has been a sufficient reason to build 100% renewable energy since before 1970. Is global warming a hoax? Who cares? I don’t. We still need renewables in any case.

  8. fj says:

    Going full out as mentioned is great but . . .

    Back to the future. In some cases small is best.

    With rapid deployment of bikeshare happening right now — early-stage net zero transit — in New York City, NYC DoT Commissioner tweeted “Come to New York and help save the planet.”

  9. An NYT opinion piece today by Alter and Fishman points out that even if we do achieve energy independence, it’ll likely drive the international price of oil down, causing stress in OPEC countries, resulting in unrest that would probably increase our involvement with them, rather then decrease. That sounds right.

    The comment above is also right–the way to energy independence is to displace oil with renewables and conservation. Ironically, that may also reduce revenue to unstable oil-producing countries. So it’s in our interest to get them off oil, too.

    Saudi Arabia is already moving toward solar big way, towards becoming the, ah, well, the Saudi Arabia of solar.

    Without oil revenue, they have to do something to keep social order. Free energy from the sun is part of the answer.

  10. fj says:

    It is well documented that the very nasty stuff the pipeline is proposed to deliver is not needed or wanted; and it would be a very bad thing if that nasty stuff was to be delivered: devastating to economy contributing to the six trillion dollar fossil fuel bubble as detailed in a recent BloombergNews report and would greatly contribute to rapidly accelerating climate change as delivery of this crud ramps up.

  11. Ed Leaver says:

    It boils down to Frog Soup: markets operate on the margins, and the “optimal” conditions they reach are not necessarily global. Your first point may be read two ways: “Dependency on fossil fuels is a huge drain on the world’s economies and (the dependency and drain are both) accelerating as climate change accelerates.” Insurance companies are one thing, but their limiting their exposure to at-risk assets merely(!) confirms their corporate actuarial belief that climatologists are right. OTOH, FF corps(es) are exposed to climate change only if there is a viable mechanism to wean their customers — that would be a global us — off their product. San Francisco’s ff stock divestiture merely expresses her citizens’ belief such a mechanism is forthcoming. But the actual effect is tempered by the same citizenry’s continued consumption of fossil fuels. PetroSlurp has a sobering graphic over at The Oil Drum.

  12. Alex R says:

    Maybe, but it won’t be as easy, and presumably not as economical, to attempt alternate routes. The fact remains that this project has been vigorously pursued for a reason: Because it’s the most favorable to expanding tar sands operations and enhancing accessibility to international markets. How that will not boost North American fossil carbon emissions (when we’re supposed to be trying to reduce them) is beyond me.

  13. Ernest says:

    Of course, I prefer the pipeline not be built simply on the climate change argument. True, oil is traded on the global market. But as a point of argument (to be fair to the other side), is that Canada is a neighboring friendly country. The middle east unfriendly, and unstable. The probability and manageability of supply disruption on the global market is more adverse in the middle east. This is likely the reasoning the Obama administration will go with on the point of “energy independence”.

  14. fj says:

    There are definitely viable means to wean global customers off fossil fuels as detailed on these pages; and the genesis of an economically dangerous fossil fuel financial bubble valued at six trillion dollars as detailed in a recent BloombergNews report.

    One-half billion Chinese cyclists (in China alone) and rapid deployed bikeshare in NYC (miniscule in comparison) chimes in with the pretty much indisputable reality that something is not impossible if it already exists.

  15. fj says:

    Not sure how a “friendly neighbor” would go about shipping this stuff across your front lawn.

    Manageability of supply disruption comes with broad deployment of distributed energy sources like solar and wind. You do not solve a security problem with a very wasteful dangerous failing legacy system based on fossil fuels.

    Fossil fuel dependency domestic or otherwise is treated as a liability by the US Army as do many others in this country and worldwide; and is currently considered a very dangerous economic liability as well.

    Any decision affirming the need for the pipeline for “energy independence” is pure “method of mass deception” reminiscent of the prior administration’s reason for the Iraq War based on Sadam Hussein’s non-existent nuclear capability where approval of the pipeline threatens to contribute to a level of devastation on a much larger scale.

  16. Frank Zaski says:

    While all the attention is given to the Keystone XL, the expansion of the Enbridge Alberta Clipper tar sands pipeline thru ND and MN to a port on Lake Superior is being overlooked.

    Enbridge, the company that leaked 1 million gallons of tar sands oil into the Kalamazoo River, is planning to expand this tar sands pipeline from 570,000 bpd to 880,000 bpd. The Keystone XL capacity is 800,000 bpd. See page 16566

    There are plans to ship this oil thu the Lakes. Increased transport of refined and tar sands oil in pipes and especially on the Great Lakes greatly increases the chance of spills that could do major damage.

    The Great Lakes provide drinking and other water to tens of millions of US and Canadian citizens and businesses, a multi-billion dollar tourist, boating and fishing industries and tens of thousands of jobs, a multi-billion dollar increase in shore-line property values, and immeasurable recreation and quality of life value.

    The Great Lakes are fresh water, surprisingly shallow and much more vulnerable. The average depth of Lake Huron is only 195 feet, Lake Erie 62 feet and Lake St. Clare 10 feet. (Tankers travel 26 miles over this lake thru a channel.)

    Four large ships have sunk in the great Lakes in the past 55 years. And, the Exxon Valdez spilled only 260,000 barrels in 1989 and the much larger Alaskan coastline still hasn’t recovered. Last summer, the largest ship on the Great Lakes was grounded because of low water levels.

    The profits of a few Canadian companies and a little more oil or the US are not valid reasons to endanger the tremendous water, jobs, wealth and quality of life the Great Lakes provide

  17. dick smith says:

    I have one question for him. How much CO2 does Mr. Nocera really believe the world’s nations can safely emit from now to 2050?

    Pipeline opponents have been very clear about this. So far, Mr. Nocera has not.

    At their 2009 Copenhagen conference, the leaders of 167 nations (including the U.S. and China) agreed that we cannot safely warm the planet more than 2 degrees Celsius (3.6 F) from preindustrial levels. Based on a study by Meinshausen et al. published in Nature in 2009, pipeline opponents say that to stay below 2C, we must emit less than 500 billion tons of CO2 from 2013 to 2050.

    That’s a global “carbon budget”, Mr. Nocera. Unless you support a higher carbon budget, there’s no conceivable argument for the KXL pipeline.

    So, Mr. Nocera, what do you consider a safe global carbon budget for the next 37 years?

  18. Ben Lieberman says:

    Imagine that Joe Nocera covered gun violence the same way he covers climate change.

  19. Jim B says:

    Yet it seems we are still hell bent on extracting and burning any and all types of fossil fuel we can figure out how to extract by any means possible.

    “Clean fuel” is just a ridiculous ad slogan seen on TV. As we a learning, natural gas for example might actually be worse than coal when we consider the ACTUAL amount of methane that is leaked into the atmosphere.

  20. Bill says:

    You-all might like (James) Kunstler’s take on this – as always, pretty satisying –

  21. Ernest says:

    Of course I’d prefer renewables as the genuine solution to energy independence. This is long term. But if one were still dependent on oil, and we still are, and will be for awhile, given the number of ICE cars around. Having a global supply dependent on friendly and stable countries is still preferable to unfriendly and unstable ones.

    There is a certain (political) logic (whether you agree or disagree with it) to Obama’s “all of the above strategy”. He doesn’t want the hassle of an all out war against the fossil fuel industry. It impedes his other political agenda. Technologically and economically, we are still largely dependent on fossil fuels. A responsible president would do whatever he can to lessen the risks to economic disruption with the reality at hand. He would also pave the way for alternatives such as renewable energy, hopes the cost eventually drops enough to compete with the fossil fuel industry. When this happens, market forces take over. Renewables will scale and explode in a massive way simply through economic logic. This is probably going to be the more likely path of “change” than the carbon tax, given the current political environment and entrenched interests. But first, you need to find a way to keep renewables alive (which the Repulicans are trying to kill in favor of “tried and true proven technology”).

    Then there’s the climate change issue. The “all of the above” strategy may be too slow what what really needs to be done.

  22. Mulga Mumblebrain says:

    Whatever his owners tell him it is. Simples!