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Will New Fuel-Economy Rules Reduce the Need for Oil Sands Imports?

It depends on how energy preferences change, price pressures, and the degree to which the nation becomes a gateway to global markets, experts say.

Sep 11, 2012
Shell Albian Sands strip mine outside Fort McMurray, Alberta

The Obama administration's latest efficiency standards for new cars and trucks are expected to dramatically curb America's oil consumption over the next decade. So does that mean the United States won't need to import so much oil from Canada's tar sands region?

Oil experts with two environmental groups say the answer to that question is yes.

"The federal [efficiency] standards are one more nail in the tar sands coffin," said Michael Marx, who directs the Sierra Club's Beyond Oil campaign. He said other "nails" include increased production of U.S. shale oil, accelerated development of electric-vehicle batteries, and existing and proposed rules in California, Oregon and Washington that would slash global warming emissions in transportation fuels.

Luke Tonachel, senior vehicles analyst for the Natural Resources Defense Council (NRDC), said the new rules "show that America can avoid the costly impacts of importing high-carbon oil derived from Canadian tar sands."

But other energy experts interviewed by InsideClimate News say that despite our reduced oil needs, Canadian imports will continue rising and the Canada-to-Texas Keystone XL pipeline will still be needed.

Kenneth Medlock, a fellow in energy and resource economics at Rice University's Baker Institute in Houston, said that even as Americans make fewer stops at the gas pump, "there's still going to be upward pressure" on the global price of oil, making tar sands oil profitable for producers.

All of that crude will likely end up in the United States, Medlock said, due largely to the nation's proximity to Canada and to U.S. ambitions to use only North American energy sources.

The new rules, known as the Corporate Average Fuel Economy (CAFE) standards, are expected to reduce U.S. oil consumption by more than 2 million barrels a day by 2025. That's about the same amount of crude oil the U.S. imports from all Canadian suppliers today. By 2030, those savings could ratchet up to 3.1 million barrels a day, or roughly one-third of the nation's current total imports.

The rules require automakers to get an average fleet efficiency of 54.5 miles per gallon within 13 years, or nearly double the efficiency of today's cars.

Despite the savings the rules will create, Medlock said the United States will still need to import oil to meet its transportation needs. But the new standards could enable the country to reduce its imports from Middle Eastern and African nations and get a larger percentage from Canada and other North American suppliers. "It just shifts our focus" in terms of where our imports come from, he said of the CAFE rules.

Currently, more than one million barrels of crude from Canada's oil sands region flow to U.S. refineries each day, up from just a trickle in the early 2000s. Producers hope to quadruple that amount in the next decade.

Tom Kloza, chief oil analyst at Oil Price Information Service in New Jersey, predicted that, due to rising Canadian and U.S. oil production and the fuel standards, "in the second half of this decade, we're going to be North America and Venezuela sufficient."

According to federal energy projections, which don't take into account the latest CAFE standards, while Canadian crude oil imports are rising, imports from nearly every other part of the world are expected to decline, with total imports falling from just under 9 million barrels a day this year to 7.27 million barrels a day by 2025.

Tar Sands Imports Rise, But Face Hurdles

For decades, crude from Canada's oil sands region was considered too expensive to exploit. But as lighter, sweeter crude oil has become more scarce and more expensive—and as extraction methods have improved—major oil companies are finding it increasingly worthwhile to extract the bitumen.

Tar sands production consumes more energy than pumping conventional oil up from a well, adding significantly to operating expenses. It requires extracting a thick mixture of sand, clay and bitumen—the oil's core ingredient—from deep beneath Alberta's boreal forests, usually by strip-mining or boiling it loose underground. The bitumen, which has the consistency of peanut butter, is then mixed with liquid chemicals so it can flow through pipelines.

Greenhouse gas emissions from Canadian tar sands production are about 82 percent higher than the average crude refined in the United States, according to estimates by the U.S. Environmental Protection Agency.

Despite the explosive growth of the tar sands industry, producers still face two major challenges, both of which are already depressing prices—and profits—for their products.

The first is the unexpected increase in U.S. oil production from the North Dakota and Texas shale formations, due largely to the use of a controversial drilling technique called hydraulic fracturing. Fracking, as it's known, involves pumping millions of gallons of water, sand and chemicals at high pressure into horizontal wells to open shale rock and free oil and natural gas.

North Dakota's oil production has more than tripled in the last three years, with output rising to 660,000 barrels a day in June, the highest since at least 1981, according to federal statistics. Texas hit 1.9 million barrels a day that month, its highest level in more than two decades.

The second threat is lack of pipeline capacity. Today most of Canada's heavy crude is piped to refineries in the U.S. Midwest, creating a glut of oil. To alleviate that build-up—and to fetch higher per-barrel prices—producers and pipeline companies are trying to find another route out of Alberta.

Enbridge Inc., Canada's largest transporter of crude oil, wants to build a twin pipeline system, known as the Northern Gateway, that would pump oil across British Columbia to the Pacific Coast. But the $6 billion project's prospects are considered slim, an InsideClimate News report revealed. Many First Nations in British Columbia, where more than half the pipeline would pass, are refusing to give Enbridge the right of way it needs, setting up a legal clash that could end up in Canada's Supreme Court. A single holdout by landowners could delay the pipeline for many years, if not indefinitely.

Another Enbridge plan would reverse the flow along part of an existing east-to-west pipeline in Canada, Line 9, so the company could pump a variety of western Canadian crude oils to refineries in southern Ontario. Canada's National Energy Board conditionally approved the project in July, and Enbridge hopes to reverse the remaining Montreal-to-Ontario portion of the line as well.

A third solution has been offered by TransCanada, Canada's largest pipeline company. It hopes to build the Keystone XL pipeline, which would run from Alberta to the Texas coast and would pump far more oil than Line 9—830,000 barrels per day, compared to up to 200,000 barrels for Line 9.

But the Keystone is so controversial in the United States that TransCanada was forced to divide it into two segments. The southern leg of the project, which will run from Oklahoma to Texas, should be up and running by mid- to late-2013, according to TransCanada. But concerns about the pipeline's impact on the nation's largest drinking water aquifer and on sensitive ecosystems in Nebraska, prompted President Obama to delay his decision on the northern leg, from Alberta to Oklahoma, until after the November election.

The environmental groups agree with the analysts that fuel savings from the CAFE standards won't stop construction of the Keystone XL, though they differ as to reasons why.

Medlock said "there's still going to be…a viable economic case to be made for the Keystone XL pipeline" because of the increased U.S. demand for tar sands byproducts like gasoline and diesel, as imports from other foreign suppliers ramp down.

"The tar sands industry would be pushing for the Keystone XL even if the U.S. didn't consume any oil," Tonachel, of the NRDC, said in email.

The Keystone XL "has never been about addressing U.S. energy demand," he said. "Its purpose has always been to get tar sands to the international market."

Kloza, of the Oil Price Information Service, said the federal fuel standards might indirectly bolster refinery jobs. Since demand would be dropping and prices would likely be lower at home, it might become more profitable to export products derived from Canadian and domestic crude, especially diesel.

"We're going to use less fuel and manufacture more for exports," particularly to Central and South America, he said.

Any job gains in the domestic oil industry would likely pale in comparison to jobs created by the CAFE standards, however. The fuel rules could spur 570,000 new full-time positions by 2030, including about 50,000 in light-duty manufacturing alone, according to a recent study by the BlueGreen Alliance, a group of labor unions and environmental organizations. The remaining jobs would be created by consumers who would spend the money they save at the gas pump in their local economies.

Marx of the Sierra Club said that even if the CAFE standards do curb U.S. imports of Canadian tar sands crude, as he believes they will, the new fuel economy rules could actually accelerate construction of new pipelines and infrastructure in the short term.

"The tar sands companies are pushing hard to try and get this done now," he said. "They know that in the next five years, the demand for tar sands oil is going to start to decline, and they need to recoup their capital investments as soon as possible."

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