Short Keystone Pipeline Thought

I am currently in the middle of a few researched blog posts but I took a break to write a quick piece on the Keystone oil pipeline and drilling Obama is making a decision on. I heard it on NPR while I was driving home tonight. The Keystone XL project has been an ongoing debate. There was a provision in the payroll tax bill requiring a decision on the pipeline soon. The Obama administration and been postponing any ruling on the pipeline since my guess is that they view it as a net detractor on votes or of alienating his base before the election (democrats are more likely to be environmentalists). Imagine he makes a choice that, on the margin, pleases republicans who wouldn’t vote for him anyway, and frustrates democrats who would vote for him, but might now be less likely to campaign, donate, or even vote. It is in his interest to try to wait until after the election. Presumably congress knew this, which is why they are forcing them to decide.  [http://www.nytimes.com/2011/12/24/us/provision-may-halt-keystone-pipeline-but-oil-is-still-likely-to-flow.html]

I was listening to groups arguing about the impact of this pipeline. It is actually easy to model but I theorize the answer is non-economic at its core.

Imagine gas prices are sold at $4.00/gallon to the consumer. Now imagine that each gallon obtained through sand-oil drilling will cost $3.80 making a 20 cent profit for the seller of the gallon. People who want this drilling to go through would want this to happen. Now imagine a person who identifies as an environmentalist. They obtain utility from preserving nature, but most of them realize that we still need oil. They just want to invest less into getting this oil and more into alternative energy. For them they attach an external cost per gallon for nature that is destroyed by drilling that is worth 50 cents to them. This is an extremely simple thought experiment.

Neither group is objectively correct as there is a cost for drilling the oil and for the environmental externalities. And this example doesn’t seem absurd either. Some people value the intangible idea of preserving or improving the environment, and others don’t. It is difficult to find a line that allows both groups to respect each other, since the environment is a public good. The policies that respect environmentalists ‘right’ to a clean nature also can have the ability to destroy thousands of jobs for hard working citizens in a time of high unemployment and high core inflation in gas and other goods that especially hit poor families. It is disingenuous to make it seem as though the trade-off is simply either beautiful rivers or fat-cat CEOs. I’m not taking a side; my point is simply that there are real costs to environmental policies that will hurt real families. They might be worth it, but they must be considered.

Of course this is all moot. Oil is an extremely inelastic good (meaning even as the price rises we barely decrease our usage) . So even if the supply for oil isn’t increased, we will likely just pay more for oil from another source that is more expensive and otherwise wouldn’t have been used. This is just speculation on my part though.

I would like to hear your thoughts on the political matter and what you think a reasonable solution would be.

-Simon

One thought on “Short Keystone Pipeline Thought

  1. You highlight the different stakeholders in this situation very well. Your main point in that “there are real costs to environmental policies that will hurt real families” is one that I don’t know if we can ever reconcile. Someone will always lose. To find out at what point will losing be tolerated in order to benefit the collective is only the starting point. What are the compensations the other stakeholders can make to the group(s) of stakeholders that have to be the ones to “lose” in the meantime?

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