The Bathtub of Global Commerce and the Keystone Pipeline.

I'm tired of hearing people talk about how we need a new pipeline to bring oil from Canada to Texas for processing. They say we need to do this for the US to have "energy independence". This is bullshit. Anyone who claims this has no idea how global commerce works. Oil is a fungible commodity so whether Canada sells their oil to the US, China, Brazil, or Switzerland makes no difference. Let me explain.

Global commerce is a like a bathtub. Imagine a bathtub filled halfway with water. The US is a one end, China at the other. Other countries are at other spots. Now imagine what will happen if you pour a gallon of water in at the US end: it will be higher for a split second and then the water level will even out through the entire bathtub. If you pour the gallon in at the China end the same thing will happen. Because the water can freely flow throughout the bathtub, and because all water is the same, the bathtub will have the same level regardless of where you add more water.

Global commerce is like the bathtub. When we are talking about products that are uniform, such as natural commodities like rice or oil, and there are no barriers to trade, then the product will flow uniformly throughout the world. Adding more oil to the world's supply will lower the price for everyone. Removing from the supply, or increasing demand, will increase the price for everyone. All oil is the same and can be shipped anywhere so it is called a fungible commodity. It doesn't matter who Canada sells their oil to. It goes in to the global pool and raises or lowers the price for everyone.

So now we come back to energy independence. Energy independence sounds like a nice goal, but what does it really mean? This is about an oil pipeline, not all possibly energy supplies, so we are really talking about oil independence. So what does that mean? Does it mean that we have energy in case China decides to keep their oil?

As we just discussed, oil is a fungible commodity. If China 'keeps their oil' it means they are telling chinese oil manufacturers to sell oil only within the country instead of on the open market. By definition suppliers want to sell wherever they can get the best price, which is why the global market evens out for fungible commodities. If China imposes such a domestic rule then they are telling their own people not to sell for the best possible price. Thus China is hurting it's own industry. Chinese oil manufacturers are making less profit than they could otherwise.

If China 'keeps their oil' just means they increase their consumption, well that is no different than any other country increasing their demand. The price will rise globally. It won't help us anymore than if we got the oil directly from Canada. If somehow processing Canadian oil closer to home saved 5% on costs then that oil would be sold on the open market to get the best price, not just in the US. It's a global commodity, remember. The price will rise or fall for *everyone*. Building a pipeline provides no advantage to the area the pipeline is built through. You can't be independent from a global commodity without hurting yourself.

But what about jobs?

I have also heard the claim that this will bring more jobs to the US. That is true. Even if the price is global it would be better to have the work done in the US instead of other countries, right? According to this article at CBS News

analysis suggests that Keystone's job-creating potential is more modest. The U.S. State Department calculated last year that the underground pipeline would add5,000 to 6,000 U.S. jobs. One independent review of Keystone puts that number even lower, with the Cornell University Global Labor Institute finding that the pipeline would add only 500 to 1,400 temporary construction jobs. The authors of the September report also said that much of the new employment stemming from Keystone would be outside the U.S.

Transcanada itself cast doubt on its employment forecast when a vice president for the company told CNN last fall that the 20,000 jobs Keystone would create were temporary and that the project would likely yield only "hundreds" of permanent positions.

So, only a few hundred new permanent jobs. It seems like there are far better ways of creating jobs than digging a 1700 mile trench.

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Posted February 6th, 2012

Tagged: rant