Critics of the Biden administration’s Ukraine policies have pressed for major changes in the country’s energy policies to impair Russian aggression in Ukraine. Most notably, the critics seek a restart of the Keystone XL pipeline.

To date, the Biden administration has been unwilling to do that. If President Biden wants to help Ukraine by inflicting economic damage on Russia over and above what can be achieved by current sanctions, he should take the critics’ advice, and the sooner the better.

 

The Administration’s Case for Not Reversing Its Keystone Policy

When pressed by a reporter at a March 3, 2022 press conference, White House Press Secretary Jen Psaki staked out the Biden administration’s reason for opposing a policy reversal on the pipeline:

The Keystone pipeline has never been operational. It would take years for that to have any impact. I know a number of members of Congress have suggested that but that is a proposed solution that has no relationship or would have no impact on what the problem is we here all agree is an issue.[i]

Ms. Psaki—and her boss—must have missed some key Econ 101 lessons. An announcement to restart the Keystone pipeline as soon as possible would put immediate downward pressure on current global oil and gasoline prices, which would reduce European countries’ dependence on Russian oil and increase their willingness to impose more damaging sanctions.

Ms. Psaki has clearly failed to understand how current and future oil supplies are interconnected through anticipated future oil supplies, prices, and profits. She understands that pump prices in February were 50 percent higher than when President Biden took office, but she and the President confidently deny the gasoline price hike has anything to do with the administration’s restrictive energy policy. She is also dead wrong on the impact of a Keystone-restart announcement on today’s gasoline prices.

 

The Tie between Current and Future Gas Prices

When the Biden administration took over on January 20, 2021, it immediately began a “war on fossil fuels” under its green agenda, heavily weighted toward substantially reducing U.S. greenhouse gas emissions. One of President Biden’s first acts was to terminate by executive order construction of the Keystone XL pipeline. He wrote, “Leaving the Keystone XL pipeline permit in place would not be consistent with my administration’s economic and climate imperatives.”[ii]

What Ms. Psaki and the President have overlooked is that termination of the pipeline construction reduced the anticipated domestic and global supply of oil in the future and, therefore, increased future oil prices above what they would have been (as economists Dwight Lee and David Henderson argued years ago[iii]). The hike in anticipated future prices likely caused producers in the United States and around the globe to hang on to their current oil reserves in anticipation of higher future profits. They can do this by reducing their current and future drilling, leaving their easily accessible known reserves in the ground, and holding on to a greater fraction of their stored output.

The resulting domestic and global market outcome from the pipeline cancellation? Higher current gasoline prices than Americans (and everyone else) have faced since President Biden first occupied the Oval Office.

If the Biden administration announced a restart of the Keystone pipeline, oil producers would reverse their thinking, because anticipated future oil prices would fall with the greater future supply at lower cost, which can be expected when the Keystone becomes operational. This means they could anticipate that they future profits would fall below levels previously anticipated. Producers could be expected to increase current market supply drawn from reserves, which would put immediate downward pressure on the current price of gasoline at the pump.

To the extent that current and future oil prices fall (or rise by less than otherwise) from the administration’s reversal of its current restrictive policy on oil, Russian President Vladimir Putin’s war machine would be impaired as its oil revenues decline. This means President Biden’s Keystone-policy reversal will add to the expected economic damage from the growing count of sanctions imposed on Russia by nations that span the globe. A Keystone-restart announcement would also dampen the decline in Americans’ real incomes suffered during President Biden’s first year in office, at least partially attributable to the administration’s energy policies.

Of course, the administration must include in its restart announcement guarantees that it will hold to its more lenient energy policies long enough for investors to recover their added current fossil-fuel investment in the Keystone pipeline and other drilling projects. This means that the Biden administration must be willing to postpone progress on its green goals, which it has been reluctant to do. If the administration doesn’t provide the needed guarantees for investors, it might as well not bother with a policy reversal and suffer the political consequences of what now appears to be an ever-rising pump price.

 

Conclusion

Granted, the administration and its green allies are committed to reversing climate change, and a reversal on the administration’s pipeline policy will likely delay the achievement of their emissions goals. However, the administration is now facing both practical and moral dilemmas. The United States and the world are witnessing an enormous and growing humanitarian crisis from Russia’s invasion of Ukraine that seems, at this writing (mid-March 2022), to be growing in its savagery.

Moreover, the Biden administration must now cope with the unfathomable designs of a power-obsessed autocrat who, if successful in Ukraine, could be emboldened to seek annexation of other nations, especially if the United States and NATO continue to be unwilling to risk starting a wider war by pulverizing the Russian army’s conventional war machine. The administration must now include in its green-policy calculus the prospects of growing greenhouse-gas emissions from an expanded war with, perhaps, the advent of World War III with nuclear exchanges.

 

[i] Press Briefing by Press Secretary Jen Psaki, March 3rd, 2022, James S. Brady Press Briefing Room, The White House, Washington, D.C.

[ii] As quoted by Rob Gillies, 2021. “Keystone XL Pipeline Halted As Biden Revokes Permit,” ABC News, January 20.

[iii]See Dwight R. Lee, 1978. “Price Controls, Binding Constraints and Intertemporal Decision Making,” Journal of Political Economy, Vol. 86, No. 2 (April 1978), pp. 293-301; and David R. Henderson, 2018. “Why Bryan Caplan Won His Gasoline Bet,” EconLib, February 14.

Richard McKenzie is an economics professor (emeritus) in the Merage Business School at the University of California, Irvine. His latest book is The Selfish Brain: A Layman’s Guide to a New Way of Economic Thinking (2021).