The Politics of Fungibility

The Obama Administration is soon to decide on whether or not to approve the building of a new pipeline from Canada's oil sands to US refineries. Even though the proposed pipeline cuts through a bunch of Red (Republican) states, my prediction is that the Obama Administration will approve the pipeline, regardless of the opposition. The simple reason for this expectation is that the recovered petroleum will either go to the US or, if not the US, to China. The last thing that the President will want during an election campaign is to eschew close and secure Canadian oil while gasoline prices are a national concern.

According to the FT today:

The Canadian province of Alberta could be one of the seven largest oil producers in the world by the end of the decade, its energy minister has said, as he urged the US to back a pipeline project that is vital for the industry’s expansion plans.

Ron Liepert, Alberta’s minister of energy, said that the US “has to make a decision” about whether it wanted the province’s oil, and that he was “proceeding all-out to find alternative markets for our product”, particularly in China. . .

Mr Liepert said Chinese companies, which are already active in the oil sands, “will take every drop we are able to produce, in a heartbeat.”

The fungibility of global oil supply means that reducing use of a particular source of oil in one place simply means that it will be consumed in another, and oil from elsewhere will have to fill that gap. Here is a nice explanation:

While Kenneth Medlock III, energy expert at Rice University, understands the environmentalists’ hope of reducing carbon emissions, he insists that if the US does not import the oil sands, someone else will, noting there is a project underway to export it to the Pacific Basin. Canada would then provide more fuel to China, which would require less fuel from the Middle East. That Middle East fuel would go to Europe and the US would get more of its fuel from Africa:

The protests are not going to stop oil sands development. You have to think of the world as one big bathtub. It doesn’t matter which end of the tub you fill from, as long as you are adding supply. The oil is going to flow.

He is right. The oil is going to be produced, and somebody is going to buy it. If the environmentalists truly want to make a difference, perhaps their focus should switch to pressuring the oil industry to work harder to reduce the carbon footprint of oil sands’ development. Surely nobody can object to that?

Efforts to develop alternatives to oil consumption via technological innovation would be even better yet.

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