FORTUNE — The Obama administration should think strategically when considering whether or not to approve the controversial Keystone pipeline project. There is much more at stake here than just a few lost jobs and some potential bad blood with the environmental lobby. By putting the plan in limbo, the U.S. is forcing Canada, the nation’s largest supplier of crude, to hesitantly consider alternative export routes, including several that would see North American crude exported to Asia for the first time. Such a move would not only threaten U.S. energy security but would also dash hopes of making North America truly independent from foreign sources of oil.
But if the U.S. were to approve the building of Keystone now, it could deliver a fatal blow to those rival projects as it would provide the lift in prices the Canadians are looking for without the extra cost, headache, and environmental damage associated with shipping their sticky oil to the other side of the globe.
At the same time, Canadian interests would actually be best served by building a pipeline eastward to the nation’s refining centers in Ontario and Quebec, instead of westward to the Pacific. Such a move would not only enhance U.S. and North American energy security, as it would maintain the locked energy ecosystem on the continent, but it would also provide a myriad of strong economic bonuses for both nations.
Keystone has become one of those “lightning rod” issues where political ideology manages to trump logical sense. Opposition to the pipeline, which is slated to bring crude from Canada’s western oil sands region down to refineries in Texas, has gained a lot of attention in the media mostly due to a wretched brew of election-year politics, environmental outrage, and conservative indignation along with a dash of international intrigue.
Indeed Keystone at its core is simply just a pipeline, and its construction is no more a threat to the environment than the thousands of pipelines that currently whizz oil, gasoline, and natural gas across the country every day — many of which crisscross through far more sensitive ecosystems than where Keystone plans to cut. The project has jumped through every hoop the government has thrown at it and is being held up at the State Department, which has to approve the plan as it crosses an international border. Energy bankers and policy watchers in Washington thought that Keystone would receive the green light shortly after President Obama won his reelection. But it has been nearly six months, and the project is still in suspension in Secretary of State John Kerry’s office.
The victim in all of this isn’t the American consumer as those on the right would have people believe — at least not yet. There have been enough studies showing that Keystone would have very little, if any, impact on gasoline prices in the short to medium term. The only major victims to date have been North American energy security and the Canadian people.
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Energy security is one of those nebulous concepts, which up until recently, was simply a conservative rallying cry, one that usually went hand-in-hand with a crowd mindlessly chanting “Drill, baby drill!” But the dream of achieving U.S. and North American energy independence is actually in sight, thanks to a mix of increased domestic oil production and a subsequent decrease in consumer demand. The International Energy Agency now estimates that North America could achieve energy independence by 2035, meaning that it would no longer need any “foreign sources” of oil or natural gas. The U.S. will still need to import some 3.4 million barrels of oil a day — most of which, if not all, could be filled by Canada.
“This opportunity presents America with a fundamental choice,” Joe Oliver, Canada’s Natural Resources Minister told a packed house of energy bankers, analysts, and entrepreneurs at the Bloomberg New Energy Finance Summit in New York this week. “To rely on oil from offshore countries, which can be politically unstable, even hostile, with weak environmental standards, or rely on your next door neighbor to the north, a long-time partner and friend — a source that is safe, secure, and reliable.”
Minister Oliver made stops in New York and Washington this week making the case for Keystone. “We are all wondering what is taking so long,” a Canadian government official, who wasn’t authorized to speak for their government, told Fortune. “It’s time for the U.S. to get on with it.”
Canada’s impatience in seeing Keystone go live is due to the fact that 99% of Canadian oil and 100% of its natural gas is exported to the U.S. By 2017, pipelines that bring oil to the U.S. from Canada will reach capacity, meaning that oil will eventually start backing up with nowhere to go. Since Canada’s energy infrastructure goes directly south, there is no way to ship that oil to the coasts for export to other countries. The Keystone delay has highlighted this problem in Canada and there are now at least two proposals to build pipelines from Canada’s oil sands in Alberta next door to British Columbia where it can be potentially shipped to points in Asia.
If those two pipeline projects are built, then Canada would suddenly have the ability to export more than a third of its oil outside North America. Such a move would reset Canadian crude prices, sending them up as much as $2 to $3 a barrel, the same at which they are slated to go up if Keystone is built, except in this case, the U.S. would now have to find an additional 825,000 barrels a day of oil from overseas sources, such as Venezuela or Saudi Arabia, the nation’s other main energy trading partners — neither of which are particularly safe and stable sources.
Shipping a barrel of Canadian crude to Asia isn’t the most efficient way for Canada to export its product, but the U.S. is forcing the Canadians to consider it. The cost to ship oil via pipeline to the Pacific from Alberta (Edmonton) is estimated to cost $3 a barrel, according to a report by TD Economics. The subsequent trip over the water by supertanker to Asia would vary based on destination and tanker prices (currently no supertankers go between North America and Asia), but shipbrokers tell Fortune it could cost anywhere from $5 to $10 a barrel and up, for a total cost of $8 to $13 a barrel. To ship oil via Keystone to the refineries of the Gulf coast is estimated to cost around $7 a barrel. That is only a dollar shy of the low estimate of shipping to Asia, but the environmental costs are higher as it is much cleaner to ship via pipeline than via boat. Furthermore, Canada would need to basically build a brand new port to handle all the shipping traffic, something that the people of British Columbia aren’t too thrilled about.
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But there is another option that could solve Canada’s oil glut without the headache of shipping its oil to China. Canada could ship oil to itself. Sounds bizarre but there is currently no way to ship oil from Canada’s oil fields in the west to its refineries in the east. Currently, Canada imports around 800,000 barrels a day of crude, which is roughly the same amount of oil slated to be shipped to Asia. It makes no sense for Canada to ship to Asia when it is importing so much expensive foreign oil. Shipping from Alberta to the refineries near Montreal would cost around $5 a barrel. Shipping all the way to refineries around Saint John, New Brunswick would cost around $8 a barrel, TD Economics estimates.
Building Keystone and a new eastward pipeline to Canada’s Maritimes is a win/win for both countries. Canada isn’t losing anything by not shipping to Asia — it is gaining both energy independence, something it should have achieved a decade ago, while also gaining the jobs and economic stimulus that would come by building one of the world’s longest pipelines. Building the estimated C$4 billion pipeline would create some 3,500 construction jobs and add as much as C$3 billion to Canadian GDP, TD Economics estimates. These are no small numbers. Refiners would win as they would no longer need to import expensive foreign oil, and the savings could then be passed down to consumers. And Canada’s trade deficit, which reached a high of around C$12 billion last year, would disappear as the nation reduces its dependence on foreign oil.
With the election long over, the Obama administration has little to lose in giving the green light to Keystone. Doing so would vastly diminish the need for Canada to pursue a much dirtier Asian exit strategy. Pursuing a North-American-first strategy won’t hurt Canada as many believe; rather, it will provide an array of economic benefits that are only possible by staying local. But the clock is ticking. If the Canadians start building their pipe to Asia then all bets will be off, and North America will have to wait for a very long time before it can say that it doesn’t need any foreign oil to stay afloat.