The US Environmental Protection Agency (EPA) has challenged the US Department of State’s (DOS) paramount role in the conduct of American foreign policy, taking a single-minded position against the proposed Keystone XL crude oil pipeline that, if accepted by the Obama administration, would constitute a serious violation of America’s international trade obligations and provocative intervention in Canadian sovereign affairs.

Presidential authority has been delegated by executive order to the DOS to determine whether it is in the American national interest to permit the construction of new cross-border facilities (pipelines, bridges etc.). In February of 2008, DOS determined it was in the US national interest to permit the construction of TransCanada Pipeline’s Keystone pipeline to transmit about 500,000 barrels of Western Canadian crude oil per day to the US Midwest. The DOS is currently reviewing a proposed expansion/extension of the Keystone Pipeline - the so-called Keystone XL project - that would carry approximately the same amount of extra-heavy Canadian crude oil to the large complex of refineries found in the Texas Gulf Coast region.

When determining whether a new cross-border facility with Canada (or Mexico) is in the national interest , DOS takes into account the impact of the project on US relations with the neighbouring country. DOS must also take into account the environmental impact of the project as prescribed in such statutes as the Clean Water Act, Endangered Species Act and National Historic Preservation Act. In doing so, DOS has traditionally limited itself to examining the environmental impact of constructing and operating the pipeline (or bridge) itself,. taking the position that issues like the global warming potential of the “pre-transmission” production and “post-transmission” consumption of the oil being transported by a pipeline should properly be dealt with in international negotiations.

It is clear that the construction of the Keystone XL project is in the US national interest, based on traditional economic and energy security criteria. In the short run, construction of the pipeline (with private capital) will provide substantial and timely economic stimulus to the hard-pressed American heartland. In the longer run, the availability each month of an additional 15 million barrels of Canadian crude will fill some of the eventual void in the Texas Gulf Coast market caused by the rapidly depleting oil reserves of Mexico, currently the number one supplier to the region.

In addition, increased Canadian crude imports via the Keystone XL pipeline will increase the amount of oil that the US can count on in any future period of short supply (pursuant to Canada’s NAFTA Article 605 obligation). A decision to deny a Presidential permit and restrict the importation of Canadian crude oil on national security grounds, or without imposing similar measures on all crudes of comparable, or greater carbon intensity, would likely violate a number of American NAFTA obligations, including articles 603, 606, 607, 1102 and 2101. Finally, DOS officials will be aware that limiting American access to Canadian oil in the face of declining Mexican supply would likely increase the political leverage of the second largest heavy oil supplier to the region – Venezuela, a country governed by an anti-American regime that has not only led the opposition against the Copenhagen Climate Change Accord, but is openly threatening to use oil exports as a political weapon against the US.

Notwithstanding, or unaware of such considerations, the EPA wrote a letter to the DOS recommending that no presidential permit should be issued for the Keystone XL pipeline prior to the completion of a more expansive environmental analysis that should include, inter alia , (i) the impact of increased reliance by America on Canadian synthetic crude oil relative to other clean energy alternatives (such as electric cars, advanced biofuels etc); (ii) an assessment of the increased upstream GHG emissions in Canada “caused” by a new American pipeline; as well as (iii) the impact of expanded oil sands production on Canadian wetlands, boreal forests and water tables – the latter an assessment extending beyond global warming concerns that would represent an unprecedented American intrusion into Canadian sovereign affairs.

In seeking another lengthy environmental assessment, (causing the death of the project through delay) the EPA has chosen to overlook existing studies that show the replacement of Mexican heavy sour crude with unconventional Canadian product will have a negligible impact on overall GHG emissions and global temperatures. In fact, studies have determined that the “well-to-wheel” GHG emissions of motive fuel refined from mined oil sands bitumen or “dilbit” (bitumen mixed with diluent that facilitates transport) are just 3% higher than fuel made from conventional Mexican Maya crude, and are actually lower than the emissions from other potential replacement sources, such as Nigerian crudes and upgraded Venezuelan bitumen (as well as California’s “dirty” Kern County heavy oil). As well, the EPA’s own estimate of the increased upstream oil sands emissions “caused” by the construction of Keyston e XL (even when exaggerated by counting the oil carried by the already-permitted Keystone pipeline to the Midwest) is still too small to have an impact on global temperatures, representing about 1/1600th of total annual man-made GHG emissions. And yet another study projects the cancellation of the Keystone XL pipeline would actually cause a net increase in global GHG emissions, due to the resulting distortion in global oil trade patterns that would raise emissions from transport.

The DOS has now decided to lengthen the consultation period by 90 days to allow more time for further environmental analysis, thereby delaying the Keystone XL decision until after the mid-term elections in early November. Departments and executive agencies (such as the EPA) that disagree with the DOS determination can appeal the decision (first to the Council on Environmental Quality, and ultimately, to President Obama himself).

Hopefully, this extended process will result in an appreciation that (i) reducing US demand for oil should precede restricting supply; and (ii) from both an economic and environmental perspective, the intelligent way to reduce the carbon intensity of (North) American transportation fuel (as one also reduces oil demand) lies through bilateral cooperation with Canada, not mindless and injurious confrontation. Hopefully too, and regardless of the outcome, the strident opposition to Keystone XL will remind Canada of the dangers of monopsomy, and bolster the case for oil market diversification through pipeline expansion and reversal within Canada on an east-west basis.