08/06/2013 07:17 pm ET Updated Oct 06, 2013

The Next High-Priced Energy Plan

You wouldn't know it, but the market landscape surrounding the proposed Keystone XL export pipeline has shifted dramatically in the last month. Step one was the temporary evaporation of the lower oil prices produced for the U.S. by competition between Canadian tar sands crude and domestic Bakken and Texas oil. Averaging almost twenty dollars through 2012, on August 19 the differential vanished -- WTI oil prices reached $109 a barrel, matching those OPEC gets in Europe.

What drained the healthy competition out of the U.S. oil market? The reversal of two small pipelines which previously took oil into the huge trading hub in Cushing, Oklahoma. They now suck U.S. and Canadian oil out of Cushing to export terminals on the Gulf where they can flow into overseas, higher priced markets.

But TransCanada, the pipeline company, is already building the southern leg of its XL pipeline, the segment designed to carry bitumen from Cushing to Texas refineries. But if there is no surplus oil left in Cushing, what's the function of this leg in the event that President Obama turns down the permit for the northern half? So the argument that approving the northern leg will not increased tar sands consumption just went up in smoke -- yes, some tar sands oil may find other routes to market. But XL itself is needed to provide an increased supply of oil in Cushing to fill the pipeline segments its owner is already constructing. Without that leg, LESS tar sands oil reaches market -- violating the terms President Obama has set for approval of the Northern leg. It's a hurdle TransCanada now can't honestly jump.

But just as President Obama is signaling that his approval of Keystone should not be taken for granted, with his comments downplaying its economic benefits to the U.S., TransCanada opens a new front, signaling that it has some other plans in the works to ship tar sands oil and raise fuel prices in North America. It announced a proposed new route for Canadian oil to export markets - through Canada this time, by converting an existing natural gas pipeline to carry oil from Alberta and the Canadian section of the Bakken formation to ports on Canada's east coast. This new project, called Energy East, would carry 1.1 million barrels of oil a day some 2700 miles from Alberta to St. John New Brunswick.

TransCanada presents the new project on its website as pretty plain vanilla, good deal for Canada. And it talks about its corporate values, including honesty and integrity. But Energy East reveals that, just as with XL, things are rarely straightforward when Transcanada gets involved.

XL, you recall, was consistently presented as an effort to provide American consumers with access to more Canadian oil, when it fact its business premise was that American markets already had too much access to Canadian oil, and weren't paying as high a price as Alberta oil producers wanted. Give them less, and they will pay more, was the promise TransCanada made to its tar sands partners -- we can sell the surplus we create in Europe and Asia. We can be sure that Energy East will be presented to Obama as evidence that Keystone XL is no big deal, because if it isn't built, hey,tar sands oil can just get to export markets through Canada.

But that isn't true for two reasons. First, the refineries in Canada which TransCanada mentions in its web site on the Energy East project cannot handle unrefined, heavy tar sands bitumen -- unlike the Saudi and Venezuelan-built refineries on the US Gulf Coast. So oil for the Eastern Canadian market will be either light oil from the Saskatchewan Bakken, or "syn-crude", tar sands oil which has been partly refined in Alberta so conventional refineries can handle it. This expense -- and environmental risk -- is exactly what TransCanada's partners were trying to avoid by shipping tar sands through the XL to specially equipped Texas refineries. So heavy bitumen coming through Energy East will be aimed for export, probably to India.

Those heavy oil refineries on the U.S. Gulf Coast still need cheap Canadian tar sands oil, and the southern half of the XL will still be needed to be filled with tar sands bitumen. Energy East is thus a way to ship additional oil, not a substitute for XL. So far, TransCanada has admitted this -- but watch for the story to change when they argue with Obama that XL won't increase global warming pollution.

Second, once again TransCanada is using new pipeline construction not just to increase supply to foreign markets, but simultaneously to reduce it in domestic markets. With XL the play was to drain the Texas market of Canadian crude which was creating price competition; with Energy East it is access to Western Canadian natural gas which oil and gas producers want to deny Eastern Canada. The first victim of the proposal may be a major new fertilizer factory planned by a Canadian First-Nation partnership in poverty stricken Bécancour, Quebec. Constructing the plant would employ 1500 workers. But like any fertilizer plant, it uses a lot of natural gas, and if TransCanada converts half of its current natural gas pipeline to carry oil for export, it will reduce total gas supply for eastern Canada by 25 percent, leaving an insufficient quantity for new industrial projects like Becancour. So once again the interests of the oil industry are trumping the interests of the rest of Canada -- the normal outcome when a country becomes reliant on fossil fuel exports. Is the U.S. next?

Conversations with U.S. oil insiders suggest that the long term vision behind Energy East is to allow Alberta to export its natural gas as high-priced LNG to Asia, while making Eastern Canada dependent on importing US gas from the Marcellus shale. This would drive up US natural gas prices (even if the Obama Administration scales back efforts to export US LNG). Either way, the opportunity to rebuild U.S. and Canadian manufacturing are to be sacrificed to the price greed of oil and gas producers, with TransCanada and their critical partner in the artificial shortage business.

So yes, Keystone by itself isn't as important as the conversation would suggest; but the conversation is actually more important than anyone in Washington seems to admit. Will Canada allow oil producers to starve its industrial heartland of access to Canadian natural gas? Will Obama recognize the plain arithmetic that XL will increase global reliance on tar sands, and will make permanent the loss of competition in US oil markets? Do the US and Canada want to be valued-added manufacturing economies, or petro-powers like Russia? It's very much up in the air.

A veteran leader in the environmental movement, Carl Pope spent the last 18 years of his career at the Sierra Club as CEO and chairman. He's now the principal advisor at Inside Straight Strategies, looking for the underlying economics that link sustainability and economic development. Mr. Pope is co-author -- along with Paul Rauber --of Strategic Ignorance: Why the Bush Administration Is Recklessly Destroying a Century of Environmental Progress, which the New York Review of Books called "a splendidly fierce book."