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What the Keystone Pipeline’s Death Really Means

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Canadian Prime Minister Justin TrudeauPhotograph by Geoff Robins—AFP/Getty Images

The Obama Administration’s decision on Friday to kill the Keystone XL Pipeline project after seven grueling years of back-and-forth with the government of Canada was a “no brainer” for the United States, particularly now that Justin Trudeau’s Liberal Party has taken control in Ottawa.

Killing the multi-billion dollar oil pipeline would have been too risky for the U.S. when Canada’s Conservative party was in power, as the group threatened to build an alternative pipeline that would have taken Canadian crude west to Asia instead of south to the U.S. Gulf coast. But with the ruling Liberal Party firmly against the construction of a pipeline to the Pacific Ocean, Canada essentially lost all its leverage with the U.S. This not only doomed Keystone, but has also put an end to Canada’s dream of exporting crude out of North America.

The fight for and against Keystone has often been described as a battle that pitted environmentalists on the left against Big Oil on the right. But Keystone was never about the environment, nor was it really about Big Oil and its desire for profits. The fight was actually between free market access and energy security.

It has been seven years since TransCanada first proposed building the Keystone XL Pipeline. It was designed to deliver crude from Canada’s western oil fields down to U.S. refineries in the Gulf Coast. While the project was important for Canada and its oil industry-at the time, it was hardly noticed in the U.S. Opposition from environmentalists was almost nil, as pipelines, even big ones like Keystone, were ubiquitous, safe, and heavily regulated.

But somehow, Keystone XL became a proxy battle between Democrats and Republicans. Suddenly, lawmakers from states nowhere near the construction zone, such as California, Massachusetts, Alabama, and Louisiana, were holding up the pipeline like it was either some sort of environmental catastrophe in the making or a critical job-creating juggernaut that would lower gasoline prices for all Americans.

There was also fighting at the international level between the left-leaning Obama Administration and the right-leaning Harper Administration of Canada. Prime Minister Stephen Harper was baffled by the level of political infighting over the pipeline—he famously said that the decision was a “no brainer” for the Obama White House, which wasn’t the greatest choice of words.

Harper’s impatience in seeing Keystone go live was understandable though, as 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 start backing up with nowhere to go. Since Canada’s energy infrastructure only goes south, there is no way to ship that oil to the coasts for export to other countries. It was hoped that, in addition to feeding U.S. refineries, Canadian oil could also be transported from the Texas Gulf Coast to points beyond the United States, namely Latin America and Europe.

This presented a problem to the Obama Administration. If it approved Keystone and Canada started exporting 800,000 barrels of oil a day out of the United States, then it would be accused of endangering America’s energy security. Canadian oil traded at a discount to the global price of oil because it was trapped in North America. Opening the spigots to the rest of the world could have caused oil prices to rise in the U.S., and no president wants to be accused of doing anything that would make oil prices go up, no matter how much it helps an ally, even one as close as Canada.

Harper then threatened the unthinkable, approving a pipeline within Canada that would send oil west to Canada’s Pacific Coast for export to Asia. The so-called “Northern Gateway Pipeline” would have sent 500,000 barrels a day of oil out of North America.

The Obama Administration played a tactical game with Harper. They knew that it would be difficult for the Conservatives in Canada to get a pipeline approved that would terminate in the environmentally sensitive province of British Columbia.

That’s where we had been for the past two years or so on this issue. Both sides holding out—waiting for the other to call their bluff.

But in October, Canada’s Conservative government, which had led the nation for 10 years, was thrown out of power by the opposition Liberal Party, led by the charismatic Justin Trudeau. In the race to get votes, the Liberal Party promised the people of British Columbia that not only would they oppose the construction of the Northern Gateway pipeline, but it would also ban crude oil tankers from even sailing near Canada’s Pacific coast.

It seemed like a great way for the Liberal party to attract many of the far-left voters they had lost to the National Democratic Party in the previous election. At the end of the day, Canada’s environment took precedence over its economy. With the threat of the Northern Gateway pipeline annulled, it was just a matter of days before the Obama Administration decided to put the Keystone pipeline out of its misery.

President Obama, in his announcement on Friday morning, said he phoned Prime Minister Trudeau about his decision. Trudeau, who expressed his “disappointment” with the move, said on the campaign trail that he was the best candidate to work out a fair deal on Keystone. He clearly misjudged the situation. By giving up his only bit of leverage, the newly elected Trudeau delivered a nasty blow to Canada and its oil industry.