The current debate in Congress over whether or not to compel President Obama’s approval of the Keystone XL pipeline (which needs a permit to cross the border with Canada) has generated more heat than light on the relationship between Keystone XL, energy prices, and climate change. Meanwhile, the precipitous drop in world oil prices over the past six months (from a high of nearly $115 per barrel to a low of under $50 per barrel) has made some question the value of renewable energy sources in light of lower costs for fossil fuels. It is therefore worth discussing how both the Keystone XL pipeline and lower global oil prices affect California’s ambitious goals—announced by Governor Brown in his state of the state speech at his inauguration earlier this month—to expand renewable energy generation, reduce oil use in transportation, and improve end-use energy efficiency. All of California’s goals are ultimately in the service of addressing climate change.
First, the Keystone XL pipeline: although the State Department’s Supplemental Environmental Impact Statement (SEIS) found last year that approval of Keystone XL would not increase greenhouse gas emissions significantly, it is simply wrong. Why? Because the analysis was based on global oil prices over $100 per barrel and the cost of tar sands oil (in either Alberta, Canada or the Bakken Shale in the US) runs around $70-80 per barrel. The Keystone XL pipeline would lower the cost of getting that oil to Gulf ports in Texas for global export by around $8-12 per barrel compared to oil-by-rail. Even without pipeline, then, the high price of oil meant that the tar sands oil would still be economical to extract and ship into global commerce.
That’s where the global oil price comes in: if global energy prices drop below roughly $80-90 per barrel, the cost of extracting tar sands oil and shipping it by rail exceeds the value of the oil on the global market. The result is that at least some of the tar sands oil would be uneconomical to extract and ship in the absence of Keystone XL—so it would stay in the ground and never contribute to climate change. Keystone XL will therefore increase global greenhouse gas emissions.
This is basic business economics: higher marginal-cost supplies won’t be developed if the marginal production cost exceeds the price they can command; it could even be true at higher global oil prices, but it is a lot more relevant at the margin ($80-90 per barrel) than when prices are well in excess of production cost ($100-115 per barrel). It is even more true when prices are down in the $50-60 per barrel range. In fact, lower oil prices (which I don’t think will persist) may make the economics of Keystone XL impossible: even with approvals, it may not make sense to build it now.
How does all of this relate to California’s climate policy goals? For one thing, renewable energy companies are taking a hammering in the stock market as the cost of their competition (especially natural gas-fired power plants) get cheaper. Consumers are also responding to lower gasoline prices by driving more and increasing their purchases of gas-guzzling vehicles. Those two things mean that expanding renewables generation, reducing transportation oil use, and improving end-use energy efficiency are going to be more difficult to achieve and more costly in the short run. However, state and federal policies can still take a long-term view by structuring the market for renewables so that it continues to grow throughout the western USA. That is what the California legislature and the key state energy and climate regulators (the California Air Resources Board, California Public Utilities Commission, and California Energy Commission) now need to do: pass strong legislation to achieve the Governor’s goals by 2030 and then adopt the regulations to achieve them. Fortunately, there is strong political support for this in the state and these agencies have the technical expertise to implement these policies.
The devil will be in the details, though, so parties affected by these policies need to ensure that the final regulations and market structure address the value that they bring to the table. The next four years will be an exciting time in California to forge and implement an ambitious agenda for greening the grid, the transportation system, and building efficiency—no matter what happens in the higher-profile battle between Congress and the President over the Keystone XL pipeline. The real action over climate and energy policy will be before California regulatory agencies.