America’s Economic ‘Bad Luck’ Began with Keystone

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MENLO PARK, CALIFORNIA – MAY 25: Gas prices over $7.00 a gallon is displayed at a Chevron gas station on May 25, 2022, in Menlo Park, California. As gas prices surge to record highs across the United States, the San Francisco Bay Area has the highest prices in the country where the average price of a gallon of regular gasoline is $6.06. The average national price is $4.59 per gallon. (Photo by Justin Sullivan/Getty Images)

By Steven F. Hayward

President Joe Biden’s inauguration day decision to shut down and cancel construction of the Keystone XL pipeline from Canada is even more shocking when it is recognized that environmentalism has moved on to an ominous new phase. For the last two generations at least, the political battle over energy in the U.S. has revolved around the left’s attempts to strangle the oil, gas, and coal energy that generates 80 percent of America’s total energy supply. The typical move was challenging every drilling permit application, and having Democratic presidents seal off more federal land from exploration and production through the executive fiat of designating more “wilderness areas.”

Environmentalists wrapped their intransigence against domestic oil and gas with the lie that America’s oil and gas supplies were so limited that we couldn’t “drill our way out” of our dependence on foreign supplies, mixed with happy talk about the fantastic “renewable energy revolution.” While windmills and solar panels are spreading like kudzu grass throughout the land (thanks to lavish subsidies), strangling oil and gas production hasn’t worked fully worked out.

A funny thing happened on our way to the new green utopia—we did drill our way out of foreign oil and gas dependence, much to the fury of the left. Dramatic improvements in technology, especially precise directional drilling and hydraulic fracturing (“fracking”) unleashed a revolution in domestic oil and gas production. Much of this revolution occurred by stealth, and on private or state land, largely during the anti-oil Obama Administration. If the political class in Washington had known this revolution was under way, they would have moved aggressively to stop it.

By degrees environmentalists have become open and explicit about their goal, with the more honest slogan, “Leave it in the ground.” Environmentalists have long enjoyed considerable success in blocking or delaying oil and gas exploration and production even in the region of Alaska quaintly called the “National Petroleum Reserve,” let alone the oil-rich Alaska Natural Wildlife Refuge (ANWR) and many offshore areas. The offensive has broadened, with success in getting Wall Street and several federal bureaucracies such as the Federal Reserve, the Securities and Exchange Commission, and others to make life more difficult for domestic oil and gas production.

But while the environmental crusaders may hamper, they cannot entirely strangle, domestic oil and gas production. We can see this dynamic in action in real time right now. Between the typical epicycle of oil prices and the disruptions in the global market the Ukraine war has caused, suddenly we desperately need increased supply from our domestic producers. Credible predictions of $8 a gallon gasoline and rolling electricity blackouts this summer have had a sobering effect. While Wall Street may look down its nose at oil and gas companies in their public pronouncements, their capital allocation tells a different story. The oil and gas sector’s value has soared over the last year as capital seeks the best return, while the rest of the stock market is in bear territory.

Our domestic hydrocarbons are not going to stay in the ground in these circumstances. But there is another way for environmentalists to achieve their objective of strangling it—one that is a lot simpler and more effective than opposing every drilling permit application. In a variation of the old gangster approach to a protection racket, environmentalists have settled upon a new tactic: “Nice little oil well you have there; good luck getting any of it to a refinery.”

This is preface for understanding the deeper meaning of Biden’s decision to cancel Keystone. The decision made no sense on the merits, and seemed heedless of basic politics. The Obama Administration had concluded that Keystone would have no effect on “climate change” (because that Canadian oil is going to go somewhere regardless), and canceling it angered our largest trading partner and leading foreign oil supplier—this from a person who said he’d repair relations with foreign nations that President Trump supposedly trashed. It was also an unprecedented abuse of presidential power: no president has ever shut down a private-sector construction project—unionized, no less—already under way absent clear malfeasance or illegality.

Keystone should be seen therefore as a capstone to the strategy environmentalists have embraced by degrees in recent years of seeking to block pipelines and other infrastructure necessary for a flourishing hydrocarbon sector. The Dakota Access Pipeline, proposed in 2014 and under construction in 2016 after clearing the usual concerns from state governments and native American groups, suddenly faced a late vigorous protest movement that went national, supplementing spurious environmental claims with a heady mix of identity politics. The Obama administration intervened late to halt Dakota Access, but Trump swiftly gave it the green light upon taking office in 2017.

Meanwhile, the successive governors of New York (David Paterson, Andrew Cuomo, and now Kathy Hochul) have not only refused to allow production of ample supplies of natural gas in economically sluggish upstate, but refuse permission for a pipeline to send natural gas from Pennsylvania and Ohio to northeastern states that otherwise now have to import it from, among other places, Russia. (Massachusetts generates two-thirds of its electricity with natural gas.) Michigan governor Gretchen Whitmer wants to tear up an existing pipeline from Canada, and while the effort is temporarily in abeyance, no doubt the idea will come back if Whitmer is re-elected.

The point should now be obvious: Biden’s Keystone decision was a political rather than a serious policy decision. Message: Don’t even think about proposing any new pipelines in the U.S. Keystone isn’t just one pipeline; it is all pipelines. And even if a future Republican administration approves construction of a new pipeline, we’ll tear up the permit and expropriate your project the next time we’re back in office. Who is going to risk billions on new pipelines with this kind of political uncertainty? (Little noticed in the media is that international rating firms now place the United States as one of the highest risk countries for oil and gas investment.)

They hate you. They really hate you.

Blocking hydrocarbon infrastructure is only one part of the strangulation strategy of environmentalists. We haven’t built a new major oil refinery (with capacity over 100,000 barrels a day) in the U.S. since 1977. Modernization and expansion of existing refineries have been able to keep up with market needs, but the strain is starting to show and the limits of this patchwork adaptation are being reached. Refining constraints explain a lot of the reason gasoline in California now costs $2 more than the national average, but good luck proposing to build a new or expand an existing refinery in California.

The point is clear: blocking the infrastructure to transport and process hydrocarbon energy reduces the need to block production at the well. It’s like saying automakers can make all the cars they want, but taking away the roads. (Actually environmentalists want to do that, too.) The long-running argument about whether to drill more at home has become a classic misdirection. It represents a revival of the mid-20th century socialist strategy that sought to control the “commanding heights” of the economy (steel, autos, rail, etc.) so as to control everything else, and it is fitting that the pipeline that makes this keystone strategy vivid is called Keystone.

This problem won’t get fixed until there is fundamental reform of basic laws and regulations that allow this kind of obstruction to gain traction. GOP 2024 candidates take note.

Steven F. Hayward is a resident scholar at the Institute of Governmental Studies at UC Berkeley, and lecturer at Berkeley Law. His most recent book is “M. Stanton Evans: Conservative Wit, Apostle of Freedom.” He writes daily at Powerlineblog.com.

via The Pipeline

May 27, 2022