Canceling Keystone XL Heralds the End of Fossil Fuels, Not Jobs

(Bloomberg Opinion) -- The demise of the Keystone XL pipeline heralds the beginning of the end for the oil age in the U.S. and Canada. This is a necessary evolution, but it raises many challenges. Workers displaced by the shift away from oil will need new jobs, and energy industry clusters like Houston and Alberta will need new activities to sustain their economies.

It would be easy to see the cancellation of the Keystone XL as merely a flamboyant political gesture by a new president intent on demonstrating loyalty to the environmental and Native American rights movements that have passionately opposed it. But as my colleague Liam Denning writes, the pipeline project simply didn't make economic sense in the modern world. Though Canadians have gotten better at extracting oil from the tar sands of Alberta, those projects still require oil prices of well over $40 a barrel to be profitable. Oil prices are now just over $50, having fallen by about half since the early 2010s. That's a slim margin.

But the real death knell is society's determination to shift away from fossil fuels. Even Americans finally take climate change seriously. Biden is converting the U.S. government vehicle fleet to electrics, and General Motors has announced plans to sell only zero-emission models by 2035. Tesla Motors is the most valuable car company on the planet, while Exxon Mobil has been kicked off the Dow Jones Industrial Average. The Keystone XL is far from the only oil pipeline project to be cancelled recently.

The world is changing fast. Petroleum will still be used as a chemical feedstock, but the end of its role in transportation means the industry will shrink substantially.

And that raises the question of what to do with the people and places who will be left behind when oil becomes obsolete as a fuel. The cancellation of Keystone XL is already beginning to cost jobs, and many more losses could be on the way. Oil and gas extraction itself employs an estimated 145,000 Americans. A 2015 study by PricewaterhouseCoopers calculated that the entire oil and gas industry “supports” over 10 million jobs. So the actual number of Americans forced to find new employment due to the end of fossil fuels is anybody's guess, but it's bound to be large.

Workers in oil and gas-related industries are naturally going to be asking what jobs they can get next. The usual answer is that they can get jobs in renewable energy industries. Indeed, jobs in solar alone have now reached 245,000, far more than oil and gas extraction, even though solar was only about 2% of U.S. electricity in 2019. Wind employs over 100,000, and some estimates claim the renewables sector as a whole supports over 800,000 jobs. As renewables climb from their current modest share of U.S. energy production, this number will undoubtedly be even higher.

Solar and wind, it turns out, are very labor-intensive to set up. And building wind turbines and solar plants is basically construction work -- roughly the same kind of thing that employs lots of people in the fossil fuel industry.

Of course, it's not as easy as just taking oil workers and slotting them directly into solar jobs. Many will do other things, and many solar workers will come from non-oil jobs. The labor market is a highly complex machine with millions of moving parts.

The question is how government policy can grease the gears of that machine. Solar and wind jobs -- and other new jobs -- are mostly not going to be in the same places as oil jobs, so lots of workers will have to move around the country for work. That's OK; moving around the country in search of opportunity is a great American tradition, and Americans could stand to move more anyway.

But moving is expensive and disruptive, and it's a big ask to demand that people uproot. The government can help by giving those workers some cash. When people lose jobs in sectors such as oil that the government is intentionally trying to sunset, anyone who gets laid off should get some kind of cash payment that they can use for relocation, retraining, or to tide them over during job search.

What will be harder is saving the economies of places in Texas and Canada's Alberta that have become economic centers for the fossil fuel industry. Already, the cancellation of Keystone XL threatens to devastate at least one small Canadian town, and surely many more are to come as tar sands projects dry up. Meanwhile, the Texas economy is no longer nearly as dependent on oil as it was in the 1970s, but the sector is still huge, and Houston owes much of its wealth to a cluster of energy companies.

Houston will be OK as long as it finds new industries for its white-collar workers. Many of the skilled jobs in the oil and gas industry now are just some form of writing code, and those people can be put to work writing code for other kinds of businesses. The city will have to focus on using that talent base to attract more companies in the non-energy industries where it already has strength: health care, biotechnology, chemical engineering, aerospace and advanced manufacturing, as well as software and finance companies to support these industries. Calgary, in Canada, can probably do something similar.

But rural areas that depend on the actual work of fossil fuel extraction, like that small town in Alberta -- or maybe even Midland-Odessa in West Texas -- are likely doomed as population centers. Governments have no choice but to give people cash to help them move out of these areas.

So while the end of fossil fuels will be economically disruptive, the government has the tools to make it less painful -- as long as politics don't get in the way.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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