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By William Tucker

The President’s re-election is not a week old and already he is facing perhaps his biggest test on energy – the Keystone Pipeline decision.

Ah, the Keystone XL Pipeline. Surely you remember that.  Last January President Obama was faced with the excruciating task of choosing between high gas prices and the determination of his environmental supporters, who see Keystone as the Armageddon of environmental battles.  The pressure was particularly severe because we had just had a big run-up in oil prices and turning down the pipeline would mean the President risked being perceived as indifferent to consumers.  (Although there are always those commentators who will tell you that supply-and-demand doesn’t exist and importing more oil would not change prices and might even raise them.)

So the President did what any sensible politician would do and punted a 70-yarder, pushing the decision right past the election.  But now here we are and once again it’s time to face a decision.  The situation is perhaps a little worse now because the President made a big show of being a supporter of oil production during the campaign.  

Many commentators are talking about Keystone as if it were a done deal.  How can the President go back on his support for more energy now? But observers north of the border are more skeptical.  They sense that the US may not be such a reliable trading partner.  They’re already dealing with China as an alternate market for the abundant Alberta Tar Sands.  But that creates its own problems since British Columbia is arguing that it won’t allow the pipeline to be laid across its territory to the Pacific without getting a healthy cut.  

And the Chinese are beginning to wonder about the reliability of North American connections as well.  The Chinese National Offshore Oil Company (CNOOC) just put in a bid for Nexen, the Canadian oil company, that was 61 over the share price.  Yet the Canadians are dallying and there is talk about blocking the sale for national security reasons.  That’s the same wall that CNOOC hit when it tried to buy Chevron in 2005.  Why are they taking all these U.S. and Canadian dollars for manufactured goods when we won’t let them buy anything with it?

At the same time, President Obama’s environmental supporters are drawing the line in the sand.  They’ve scheduled a big Washington demonstration for next Sunday to remind the President of his obligations to them.  Bill McKibben, head of, has sworn to make Keystone the Gettysburg of the global warming war.  Now the President could always appoint another study group and kick the can down the road another year or two, but that’s not likely.  So there’s going to be a decision.  And it’s going to be rough either way.

So what is this whole Keystone issue about anyway?  Well, you may remember all that talk about “peak oil.”  The alarms grew particularly grave around the turn of the century when the prognosticators said we were just about there.  Colin Campbell, the dean of peak oil jeremiahs, even named the exact day as Thanksgiving 2005.  

Well the truth is, they were right.  Sometime around 2005 the production of conventional oil around the world peaked.  That’s the kind where you just stick a drill in the ground and watch it gush out.  But there were always other sources of hydrocarbons around that economists said would step in once the “easy oil” started to slow.  And that’s what’s happened.  

Around 2005 the Canadians started developing their Athabasca Tar Sands, long known to be a monstrous reserve of hydrocarbons.  It certainly isn’t the traditional gusher.  The oil has to be boiled out of the ground, then liquefied on order to get it in a pipeline.  They’ve been using coal and gas for the task but there’s always talk of putting a nuclear reactor up there to make the process cleaner.  The whole process creates tremendous residues of waste.  There are huge slag ponds so toxic that they have to fire off cannons every five minutes to keep wildlife from landing on them.  Environmentalists wring their hands at all this but the Canadians have gone ahead and done it anyway, collecting sizable profits by selling it locally.  The real bonanza won’t come, however, until they can market it abroad.  

That’s why Keystone is so crucial.  Ultimately it would transport half a million barrels a day to Texas for refining.  As it happens, Texas refineries have spent a lot of money to gear up to handle very heavy crude.  Right now they’re limited because the oil coming in from the Gulf of Mexico is much sweeter.  So the Canadian tar sands and Texas are a perfect match.  And if the match isn't made, some people in Texas are going to be awfully unhappy about all that wasted investment.

It should be mentioned that Canadians have grown very prosperous developing all these energy resources.  They just passed us in per capita income and real estate markets in Arizona and other southern regions are starting to recover only because of Canadians coming down to buy second homes and investment properties.  The opening of the Athabasca has vaulted Canada into second place in the world’s oil reserves just behind Saudi Arabia.  The idea that after all this effort they won’t be able to market the oil to the US is a huge insult.  

Nonetheless, passions are running so high on this issue that a new breed of whacko economists is emerging that is ready to argue we shouldn’t even be engaging in world trade.  Matthew Hulbert, a Dutch consultant writing in the current issue of Forbes, puts forth a convoluted argument that developing US energy unconventional oil will actually hurt us because soon the world will be “swimming in oil” and that will only make China a more powerful industrial manufacturer – as if the US couldn’t do a little manufacturing as well.  Then there are the environmental economists who argue that supply-and-demand has no bearing and that Keystone will actually make gasoline more expensive in the US. The argument here goes that Texas will just export all that oil and may even siphon off some more from US customers.  All those foreigners will get the oil and the US will be left holding the bag.  

Well, that’s a little hard to take.  True, Keystone may not lower US gas prices by much but it will stabilize them and add a little foreign exchange to help reduce our trade deficit.  It would also insulate us from disruptions abroad. Just this weekend, Yemen closed its oil pipeline because of a terrorist bombing and Shell closed its pipeline in Nigerian because of chronic theft.  A pipeline running through Nebraska isn’t likely to run into the same problems.  

Lurking beneath these anti-pipeline arguments, of course, is the general principle that we shouldn’t be engaging in world trade at all.  Already many Democrats and environmentalists are campaigning to forbid natural gas exports on the idea that we should hoard it all for ourselves.  Then we can squander it on electricity instead of pushing for better long-range alternatives such as nuclear energy.  You may think that the benefits of international trade were settled in the 19th century with the adoption of the British Corn Laws.  But there’s always a new generation coming along that has to be convinced once again. 

So it’s going to be interesting.  The Keystone decision will be a weathervane as to whether we are going to continue participating in the development of world resources or try to construct some kind of energy autarchy built around visions of solar and windmill installations in the desert. 

Stay tuned.  A decision could come within a month.