The keys to the Keystone project

One of the arguments against building the Keystone pipeline to the U.S. Gulf Coast is that the construction jobs will only last a matter of months, insinuating that the economic benefits of building the pipeline are being oversold. Coming from pipeline opponents, it’s not a surprising argument to hear, but it’s a false insinuation nonetheless.

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One of the arguments against building the Keystone pipeline to the U.S. Gulf Coast is that the construction jobs will only last a matter of months, insinuating that the economic benefits of building the pipeline are being oversold. Coming from pipeline opponents, it’s not a surprising argument to hear, but it’s a false insinuation nonetheless.

The true scale of the economic benefits that come from large capital projects is derived from the economic multiplier that the spending creates.

For any industry to meet a jump in demand it 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 go out and increase spending themselves, sparking off new round of spending.

A big determinant of how large the multiplier effect will be is where the firms who produce what the expanding firm requires are located.

So in this case, if most of the parts to build Keystone are made in North America, the multiplier is large, if they are imported from Europe or Asia, it’s small. This is why we see things like ‘buy America’ provisions on U.S. government stimulus money — the U.S. government wants to maximize multiplier effects.

Engineered construction projects, such as pipelines, tend to have very large economic multipliers. The initial planning and regulatory approval stages might be done at head office, but once the approval is given and boots hit the ground the vast majority of spending takes place locally: securing right of ways, crews and heavy equipment hired and steel pipe suppliers sourced.

Much of the spending is on wages, which are often spent locally.

The gross domestic product of each state through which the pipeline passes will receive a boost which should help temporarily with budget woes.

Tax revenues increase as economic activity picks up, while at the same time expenditures tend to decline, as fewer individuals find themselves in need of social services like unemployment payments. This is particularly important in the United States 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 U.S. 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 crude price higher. This is largely 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 fraction of the U.S. trade deficit is a result of crude oil and when the price of crude jumps, due to supply concerns, it results in an avoidable transfer of wealth. The volatility also tends to impact important industries, along with households, that make purchases of capital equipment that is sensitive to oil prices, which means those companies will produce less equipment. Any reduction in volatility helps reduce the economic costs associated with helping to match supply and demand in the car industry, for instance.

Stimulating the development of Alberta’s oilsands also results in less net wealth being transferred out of the United States. Not only are many American companies actively supplying the oil sands, but as Canadians are also more likely than many other oil exporters to use the higher incomes that the oil and gas industry generates to consume American products.

Environmental impacts aside, the proposed pipeline’s economic benefits to the United States are, to borrow from Prime Minister Stephen Harper, a “no-brainer.”

Will Van’t Veld is an economist with ATB Financial and can be reached at WVan’tVeld@atb.com. This column was distributed by Troy Media (www.troymedia.com).