When Reality Hits Home

If there’s a single idea that the oil industry has peddled to persuade the Obama administration to approve the controversial Keystone XL tar-sands pipeline, it’s this: Tar-sands oil might be more polluting than even dirty old regular oil, but it’s better to get our energy from our ally Canada than from unstable oil suppliers in the Middle East or elsewhere.

In practice, the opposite is true: Drilling in North America is the single greatest threat to our nation’s energy security.

Here’s the reality: Protecting the United States’ energy security means keeping our continent’s oil in the ground for when we need it in an emergency. The United States and Canada combined hold less than 5 percent of the world’s proven oil reserves. Thanks in part to expanded domestic drilling during the Obama administration, we’re depleting those reserves at a high rate. That means we have far less oil to fall back on in the event of true emergency, like an oil embargo or a major war when access to foreign oil supplies becomes difficult or even impossible.

It’s important to contrast this depletion reality with the old canard that the oil industry and its backers continue to push: that drilling domestically somehow reduces the flow of money to the Middle East and other unstable oil suppliers. In practice, basic oil-industry economics show the opposite. Because Middle Eastern and Venezuelan oil is so much cheaper to produce and more plentiful than remaining domestic oil reserves, those countries can almost always outcompete domestic U.S. competitors and still maintain their enormous profit margins and high levels of production. Saudi and Iraqi oil, for instance, costs just $4-$6 per barrel to produce with another $2-$3 tacked on for transportation costs (costs are similar for Iranian oil). Production costs for tar-sands oil clock in at a minimum of $30 per barrel; costs for other domestic sources are similar.

What we need to do instead is move as rapidly as possible to get off oil entirely by fully implementing and further tightening the Obama administration’s strong fuel-efficiency standards, putting a price on carbon pollution, ending oil subsidies, electrifying our vehicle fleet with clean energy, boosting mass transit, and using the full force of our diplomacy to get other major consuming countries like China to do the same.

This is terribly cynical politics, as surely Secretary Chu — a Nobel-winning physicist and truly one of the world’s premier energy experts — knows the folly of this “energy security” argument.

A report released earlier this week by Oil Change International highlights just how wrong the claim is. In “Exporting Energy Security: Keystone XL Exposed” (pdf), the authors look at Energy Information Administration data, corporate disclosures from TransCanada and Valero Energy, and oil market analyst reports, and conclude that “the idea that Keystone XL will decrease America’s dependence on foreign oil is demonstrably false .”

The report, which is worth reading in full, draws three stark conclusions:
• The Keystone XL pipeline is an export pipeline. The Gulf Coast refiners at the end of the pipeline’s route are focused on expanding exports, and the nature of the tar sands crude Keystone XL delivers enhances their capacity to do so.
• Valero, the top beneficiary of the Keystone XL pipeline, has recently explicitly detailed an export strategy to its investors. The nation’s top refiner has locked in at least 20 percent of the pipeline’s capacity, and, because its refinery in Port Arthur is within a Foreign Trade Zone, the company will accomplish its export strategy tax free.
• The oil market has changed markedly in the last several years, with U.S. demand decreasing, and U.S. production increasing for the first time in 40 years. Higher fuel economy standards and slow economic growth have led to a decline in U.S. gasoline demand, while technological advances have opened up new sources in the U.S. Increasingly, U.S. refiners are turning to export.

For some background, check out this post on how the State Department’s Environmental Impact Statement was woefully incomplete , this post on the many problems with tar sands pipelines , and this great infographic on how TransCanada’s Keystone pipelines are “built to spill.” Also, this Keystone XL Tar Sands Pipeline Action page has links to just about every resource you could ever possibly hope to find .

Ironically, oil may become dramatically scarcer for Americans--not as a result of manipulations by the OPEC oil cartel, but due the fragile economics of Canadian oil. However, many observers feel that petroleum from Canadian oil sands is not economically feasible when the price of a barrel sinks below $80.

Canadian oil supply is further complicated by a little-known reality. While Canada is a net oil exporter, pumping millions of barrels per week into the United States, it is also an importer in its eastern provinces of some 850,000 barrels per day from such countries as Iraq, Saudi Arabia, Algeria, Egypt and Venezuela as well as the United Kingdom, Norway and other countries, Canadians have begun to ask why the nation sends the vast majority of its western oil product into the United States while Eastern Canada must import from overseas.

If Canadian oil flows are reduced by virtue of dollar dynamics, it may dramatically decrease the American availability and force ever more reliance on a Persian Gulf supply that is now ramping down. Indeed, in response to the dip in global demand, the cratering world economic structure and the rise in the American dollar, OPEC nations have decreased production by some 1.5 million barrels per day and are now discussing further cuts. At the same time, America’s number two source of oil, Mexico, is beginning to cap its wells and wind down its oil export business, which is likely to run dry within a decade. All these intertwined dynamics of global oil supply only serve to emphasize the volatility, unpredictability and tenuousness of the fuel that currently propels some 98 percent of all transportation in the United States of America.

The average production cost of one barrel of syncrude from the oil sand resources in Canada was approximately 32 USD in the year 2006. The mining process costs about 16 USD2006/barrel of oil equivalent (boe). The InSitu SAGD extraction costs about 14 USD2006/boe, and the upgrading process to syncrude costs about 16.5 USD2006/boe. Figure 2 shows the break down of the total costs that were incorporated in the EROI calculations above (Herweyer 2007). Mining costs appear to be decreasing according to some reports in early 2008.

Syncrude has approximately the same quality as conventional crude oil, and is therefore competitive. So long as the conventional crude oil price stays above 31.5 USD2006/boe (excluding profits) it is profitable to extract oil sands.

CONCLUSION
In conclusion, tar sands are an economically and energetically viable, although hardly ideal, approach to maintaining liquid fuel supplies. The most severe problem is probably their local and global environmental impact, and they are already impacting Canadian CO2 releases significantly. But the tar sands are unlikely to make a large impact on overall supply of liquid fuels because their supply is likely to be rate, rather than total resource limited. If the maximum rate were to grow to about 2 billion barrels a year this would approximately meet Canada’s demand and could leave relatively little for export if Canada’s production of conventional oil continues to decline. Achieving even this rate of production from tar sands is uncertain because of growing concerns about environmental impacts downstream and insufficient hydrogen and water.