Those who oppose building the Keystone pipeline to the US Gulf Coast suggest the benefits to the American economy are being oversold. It’s a false claim.
November 3, 2011
by WILL VAN'T VELD, ECONOMIST
One of the arguments against building the Keystone pipeline to the US Gulf Coast is that the construction jobs will only last a matter of months, which suggests the project’s benefits to the American economy are being oversold. It’s not a surprising claim coming from pipeline opponents, but it’s a false claim nonetheless.
The true scale of the economic benefits that come from large capital projects is derived from the economic multiplier that the spending creates. To meet a jump in demand, an industry needs to ramp up its purchases of goods and services from other firms, as well as make the necessary human and capital investments. This starts a chain of events, as those intermediate firms and households increase spending, sparking more spending.
How large the multiplier effect will be depends on where the suppliers are located. If most of the parts to build Keystone are made in North America, the multiplier will be large; if they’re imported from Europe or Asia, the multiplier will be small. This is why we see ‘Buy American’ provisions attached to US government stimulus money.
Engineered construction projects, such as pipelines, tend to have significant economic multipliers. The initial planning and regulatory approval stages might come from head office, but once the approval is given and boots hit the ground, most of the spending, such as securing right of ways, hiring crews and heavy equipment, and sourcing steel pipe, occurs locally. And let’s not forget the huge amount of money that goes to wages, much of which is spent locally.
The gross domestic product of each state the pipeline passes through will receive a boost, which should help with budget woes. Tax revenues increase as economic activity picks up, while public expenditures tend to decline as fewer individuals find themselves in need of social services such as employment insurance payments. This is particularly important in the US because most state governments have balanced budget legislation, meaning even a temporary reprieve can go a long way in helping some state legislatures make it through a recession.
There are also benefits to the US economy that would be captured in a more indirect way. Demand for crude oil from emerging markets, combined with declining supplies in easy to access regions of the world, is driving the price of crude higher. This is mostly unavoidable, but the spikes in price due to concerns over supply (the risk premium), could certainly be reduced by increasing supplies from Canada.
A large piece of the US trade deficit is a result of crude oil and when the price jumps due to supply concerns, it results in an avoidable transfer of wealth. The volatility also tends to impact important industries that purchase capital equipment sensitive to oil prices, which means manufacturers of that equipment will produce less of it. So, in the automotive industry, for example, any reduction in volatility helps reduce the economic costs associated with helping to match supply and demand.
Stimulating the development of Alberta’s oil sands also results in less net wealth being transferred out of the US. Not only are many American companies actively supplying the oil sands, Canadians are also more likely than many other oil exporters to use the higher incomes that the oil and gas industry generates to consume US products.
Environmental impacts aside, the proposed pipeline’s economic benefits to the US are, to borrow from the Prime Minister, a “no-brainer.”
Will Van’t Veld is an economist with ATB Financial in Edmonton.