Term Paper: Keystone Pipeline Has Some Critics

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¶ … Keystone Pipeline has some critics saying it could hurt the American economy be limiting potential job growths. Supporters of the Keystone Pipeline say it could help the economy by bringing down oil prices and promoting job growth. Research leans more towards the Keystone Pipeline doing more harm than good. Regardless of whether or not the Pipeline is supported for building, it will impact the U.S. economy, positively and negatively.

In an article by Parformak, Pirog, Vann, & Luther (2011), the authors state the purpose for the pipeline. "TransCanada's proposed Keystone XL Pipeline would transport oil sands crude from Canada and shale oil produced in North Dakota and Montana to a market hub in Nebraska for further delivery to Gulf Coast refineries. The pipeline would consist of 875 miles of 36-inch pipe with the capacity to transport 830,000 barrels per day (Parformak, Pirog, Vann, & Luther, 2011, p. 1) As most Americans know, the price of gas has risen and maintained itself at a high price throughout the last decade. If the pipeline I built, not only will the U.S. receive a large increase in oil supplies, it will also mark down the price of oil related products like gasoline. Gasoline plays a major role in the cost of living.

Going back to the economic perspective, the pipeline is seen positively because of its potential job growth of a few thousand to over twenty thousand jobs, along with its increased capacity to transport almost three quarters of a million barrels of oil a day (Canada, 2007, p. 24). With demand for oil set to increase in the next five years, the Keystone Pipeline could help in more ways than one. Earlier mentioned, the Gulf Coast refineries would be the areas where the oil gets transported from the pipeline. States along the path of the pipeline are also projected to see $3 billion increase in gross domestic product and up to $5.9 billion in business sales. (Canada, 2007, p. 30)

The corporation responsible for the possible construction of the pipeline would then send the oil to Gulf Coast refineries in the U.S. "In 2008, TransCanada Corp. applied for a presidential permit from the State Department to construct and operate an oil pipeline across the U.S.-Canada border in a project known as Keystone XL. The Keystone XL pipeline would transport oil produced from oil sands in Alberta, Canada, to Gulf Coast refineries" (Vann, Alexander, Burrows, & Thomas, 2011, p. 1). This delivery system will allow the Gulf Coast refineries to refine oil domestically instead of importing it from other countries. Some of the biggest accidents out in sea came from oil spills from ships delivering oil to other countries. In June 2012, ExxonMobil had an oil spill near their refinery. If the U.S. attempts to alleviate the trouble with transporting oil sing a pipeline, oil spills such as that in the Gulf Coast refineries and out in the open water will greatly reduce.

These results however fail to show any long-term benefits. The short-term benefits applied to job growth are only for a couple of years after the pipeline is built. Of the thousands of projected jobs from the building of the pipeline, only less than 800 will be sustainable in the years ahead. Along with the limited long-term benefits, people who live along the areas that have the pipeline in construction such as Oklahoma and Texas, are being unfairly condemned with the government using eminent domain to seize the property.

Eminent domain is the government's ability to seize property without the consent of the owner as long as it is greater good of the public and the owner is paid adequately (North Dakota Public Service Commission, 2007, p. 112). Owners are unhappy with the use of eminent domain and feel powerless to stop the construction of the pipeline. They feel that the pipeline might decrease the value of their homes as well as prevent them from having an option to sell or not. The biggest negative for construction of the Keystone Pipeline is how it could negatively impact the environment. This is the most common researched potential negative impact of the Keystone XL Pipeline.

Construction and maintenance of the Keystone pipeline and the process it takes to open up the Tar Sands will negatively impact local and national economies through several ways. The first of which is the increase of earth's temperature. Burning the recoverable tar sands oil will generate an increase of 2 degree Celsius, this could have significant and long lasting effect on U.S. GDP. The earth's turbulent climate has created several storms in the U.S. In the last two decades that have left America with billions of dollars in damages. Building the pipeline might exacerbate the issue potentially leading to more damage and more cost.

Super storm Sandy, a rare north eastern hurricane that occurred in the fall of 2012, caused an estimated $80 billion in damage. The second is the reality that the oil industry has been cutting not creating jobs, despite profits of $547 billion between 2005 and 2010. ExxonMobil, Chevron, along with several others, cut their U.S. workforce by 11,100 employees over the five-year period (North Dakota Public Service Commission, 2007, p. 56). Also of note is over 40% of U.S. oil-industry jobs utilize minimum-wage work at gas stations.

So it seems both sides of the debate offer legitimate reasons to build or not build the pipeline. The positive aspects of constructing the pipeline offer short-term financial gains and job growth. The negative aspects offer long-term and serious consequences, from increased storm activity to higher job loss. Overall, it still remains uncertain whether or not the pipeline will finish its construction. In conclusion, the U.S. economy has not benefitted from its reliance on oil and it seems it will not continue to benefit in the distant future. Short-term financial relief cannot counteract the possible long-term damages from reliance on oil and oil-based products.

References

Canada (2007). Reasons for decision in the matter of TransCanada Keystone Pipeline GP Ltd.: Section 52 application dated 12 December 2006 for the Keystone Pipeline Project. Calgary, AB: The Board.

Canada (2007). NEB approves Keystone pipeline project. Calgary: National Energy Board.

North Dakota Public Service Commission (2007). [TransCanada Keystone Pipeline, LLC]. Bismarck, N.D.: Public Service Commission.

Parformak, P.W., Pirog, R., Vann, A., & Luther, L. (2011). Keystone XL Pipeline Project: Key Issues (R41668). Retrieved from Congressional Research Service, Library of Congress website: Keystone XL Pipeline Project: Key Issues

Vann, A., Alexander, K., Burrows, V.K., & Thomas, K.R. (2011). Legal issues associated with the proposed Keystone XL Pipeline (R42124). Retrieved from Congressional Research Service, Library of Congress website: http://www.fas.org/sgp/crs/misc/R42124.pdf

Oil companies that are integrated often control the entirety of their supply derived from oil production to retail distribution of refined products, through a natural economic hedge that goes against unfavorable price movements. Unfavorable price movements can often spell potential economic ruin for independent oil refiners who profit from purchasing crude oil and then refining it and selling the products derived from the oil to the wholesale market. Along with loss in profits, comes significant economic risk. So in an attempt to reduce economic risk and possible future economic hardship, independent oil refiners might attempt to protect themselves through purchasing oil futures as stated by Inkpen & Moffett, (2011). "Given a target optimal product mix, an independent oil refiner can attempt to hedge itself against adverse price movements by buying oil futures and selling futures for its primary refined products according to the proportions of its optimal mix" (Inkpen & Moffett, 2011, p. 460). Buying up oil futures and selling futures is known as "crack spread."

For simplicity, most refiners wishing to hedge their price exposures have used a crack ratio usually expressed as X:Y:Z where X represents a number of barrels of crude oil, Y represents a number of barrels of gasoline and Z. represents a number of barrels of distillate fuel oil, subject to the constraint that X=Y+Z. This crack ratio is used for hedging purposes by buying X barrels of crude oil and selling Y barrels of gasoline and Z. barrels of distillate in the futures market. (Online Carbon Finance, 2013, p1)

Numerous financial mediators in the commodity markets have custom-made their products to expedite in the trading of crack spreads. An example comes from NYMX who uses correspondence concerning futures contracts and a crack into a single agreement. Dealing with crack spread futures baskets as a single agreement offers advantages in reduction of margin requirements for a crack spread futures position as well of potential further customization of products in regards to other market participants who deal over the counter.

The profits of refiners are directly connected tied to the spread, or difference, between the prices of refined products along with price of crude oil. With reliable prediction on the part of refiners to predict their costs with the exception of crude oil, the crack spread becomes the primary uncertainty. A great way to ensure a given spread… [END OF PREVIEW]

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