PO BLOG

Let’s Build Lots of Pipelines

Published in May, 2019

But don’t let government bail out big pipeline projects for the sake of ‘jobs’

  “So if not jobs, what is the proper economic justification for building pipelines?”

By C. Kenneth Reeder

The pipeline battle rages on. On the pro-pipeline side, the argument revolves mainly around economics. And a big part of that argument is: pipelines create jobs.

It’s true that it takes a lot of workers to build, operate and maintain a major pipeline.

And it’s understandable why politicians and industry make their case in terms of job creation. Voters like jobs, after all.

But this is bad economics. All too often our public discourse treats employment as an end in itself.

This is a big mistake.

If we say the merit of building pipelines comes from the jobs created, then we have stepped into a trap. This trap opens the door for the government to throw taxpayer money at a project even when it no longer serves the interest of the marketplace.

All for the sake of protecting “jobs.”

And indeed, this is what is happening. The Notley and Trudeau governments in Alberta and Ottawa have declared that they will provide a tax-funded safety net for investors in the highly controversial Trans Mountain pipeline expansion project.

We see this argument come up whenever governments need to justify a bailout of some kind.

Harper’s government bailed out the auto industry for the sake of jobs. Trudeau’s government bailed out Bombardier for the sake of jobs. And so on.

So if not jobs, what is the proper economic justification for building pipelines?

We need to keep in mind the goal of all economic activity: satisfying the wants and needs of consumers.

(And remember: we’re all consumers, and even the most radical anti-oil environmentalists find it impossible to forsake the bounties of petroleum in their day-to-day lives).

Pipelines provide an efficient way to move goods to where they are more valuable and thus more effectively satisfy consumers than otherwise.

Deep discount

We frequently hear about the discount applied to Canadian crude due to strained transportation capacity and limited market access. Canadian heavy crude—which can be refined into a multitude of useful products—typically trades at a 25- to 30-per-cent discount off the West Texas Intermediate benchmark.

The severity of this discount reflects the fact that Canadian producers cannot get the most capable and urgent buyers for their product. New pipelines help address this problem.

That is the real key to the case for pipelines—increasing the capability to move energy products to where they are most needed.

Even if a major pipeline project only created a single job, it would still be worthwhile because of the service it provides in ultimately getting goods to consumers more efficiently.

Only jobs that arise to serve the needs of consumers are desirable and can increase our standard of living. When the government throws money at something to “create” or “save” jobs, it ultimately makes everybody poorer.

Many jobs actually make society poorer. There is an old nerdy economist joke that mocks the idea of jobs for the sake of jobs, by absurdly proposing that the government hire folks to dig holes and refill them over and over.

Most people recognize that this would be pointless and keep people from finding useful jobs. But that is the logical path we walk if we think of jobs as an end in themselves.

Now consider the Trans Mountain situation.

If Kinder Morgan abandons the Trans Mountain project, that is a strong indication that it would not represent an effective way to serve consumers, due to political and regulatory interference. It might be better that they allocate capital to other projects without such opposition.

If they did this, it would be a strong indication that throwing taxpayer money at the problem for the sake of “jobs” would be a huge mistake. If people don’t want to put their own capital into a project—put their own skin in the game, so to speak—then it makes little sense for the government to step in and throw other people’s money at it.

Limited resources 

Resources are limited. We cannot have our cake and eat it too. We have to remember that some jobs must be destroyed for the government to subsidize other jobs. We want jobs that the market deems valuable for the sake of helping consumers, not jobs for the sake of jobs, regardless of the lack of value created.

Let’s build pipelines. Lots of pipelines. But let’s not do so because of jobs. Let’s do it to benefit consumers who need affordable energy to have a good life.

C. Kenneth Reeder is a Calgary financial analyst providing mergers and acquisitions advisory services for mid-sized, privately held companies in  Western Canada. He works with many clients in the oilfield services sector.  He is also the editor of CanadianMarketReview.com.

Published in PIPELINE OBSERVER SUMMER 2018