The Best Way to Prevent Exploding Trains? Higher Oil Prices

Bloomberg Business | March 3, 2015 | Column by Matthew Philips

Wreckage from the latest oil train explosion hadn't been cleared from the crash site in West Virginia last week when President Obama vetoed legislation that would have approved construction of the Keystone XL pipeline. The timing of the two events crystallizes one of the puzzles at the heart of the U.S. oil boom: How do we move all this new crude around the country?

As production in the U.S. has soared to more than 9 million barrels a day—up from just 5 million back in 2008—the pipeline industry has scrambled to reorient itself around new oilfields in North Dakota and Texas. But railroads have proven more nimble and in many cases, beat pipelines to the punch. The amount of crude being moved by trains has jumped by almost 5,000 percent since 2009, even though trains are less efficient and typically more expensive than pipelines. Trains offer traders and energy companies something that pipelines don't: flexibility. 

With about 80 percent of the oil trains in the U.S. originating from North Dakota, that flexibility has helped freely distribute Bakken crude across the country. Energy companies can choose whether to send a crude train to a refinery in Philadelphia or to one in Port Arthur Tex., depending on which location offers higher prices. That's great for markets—and it's terrible for public safety. Oil trains often travel through densely populated urban areas on tracks designed to move grain or machinery, not super-volatile crude oil. Pipelines leak and spill, too, but they are widely seen as safer and more reliable than trains. 

This brings us to one of the more common and unfortunate reactions to the increasing number of oil train explosions: the incorrect argument that these mishaps wouldn't be happening with such frequency, if only Obama would approve Keystone XL. But Keystone, whatever its merits, is primarily intended to move crude from Canada. At most, Keystone would move about 65,000 barrels a day out of the Bakken in North Dakota; the additional 765,000 barrels of the pipeline's capacity would be filled with thick Canadian crude coming down from Alberta. 

Sixty-five thousand barrels sound like a lot. But North Dakota pumps more than 1 million barrels a day—and about 60 percent of it leaves by train. Energy companies are free to propose and build any number of new pipelines up to North Dakota so that crude could flow south more safely. As long as the pipelines don't cross the Canadian border—and there would be no reason for new pipelines to do so—there's not much the White House could do to stop them.

The only thing standing in the way of a new pipeline boom is the free market. Right now, with oil prices down more than 50 percent from highs reached last summer, companies are understandably wary about investing in big pipeline projects to the Bakken. In December, for example, Enterprise Products Partners canceled a proposed pipeline to move oil from North Dakota to Oklahoma. A similar line was canceled by the Tulsa-based energy company Oneok back in 2012, when oil prices were about $40 per barrel higher than they are today.

Not only are investors hesitant to build pipelines to the Bakken, oil companies aren't using all the pipeline capacity that exists. Only about 45 percent of total pipeline capacity is being used right now, according to David Vernon, a transportation analyst at Sanford C. Bernstein. "Basically, the reason is that those pipelines don't go anywhere people want to go," says Vernon.

The amount of pipeline capacity available to the Bakken has increased, from 230,000 barrels per day in 2007 to about 723,000 today. Most of those pipes end in Oklahoma or Illinois. At the moment, however, traders are most eager to send crude to the coasts, where refiners are keen to get their hands on cheaper domestic oil so they can cut back on more expensive imports from West Africa and the Middle East. And the best way to get American crude to the coasts remains rail. It's amazing how well the market has responded to that demand: The amount of oil that can be loaded onto trains heading out of North Dakota has jumped from roughly zero in 2007 to more than 1.3 million barrels a day.    

Texas, the only state that produces more oil than North Dakota, had a century to build its oil infrastructure before the shale boom hit. The Bakken, by contrast, basically went from nothing to a gusher. That left a whole lot of oil without pipes to move it. Since no one was quite sure how long it would last, no one wanted to take the risk of building a big pipeline system to service the area. 

Cheap oil weakens the incentives to build pipelines into North Dakota. At current prices, a lot of wells in North Dakota are no longer profitable. Drilling activity has already declined. Production is likely to follow in the next 12 months. That's hardly a recipe for building a big, expensive capital project. New rules governing the safety of oil trains, proposed by federal transportation regulators, will probably make crude-by-rail more expensive, once they take effect in the next couple of years. Until then, however, the best way to keep trains from exploding is to put that oil into pipelines. That isn't likely to happen without higher oil prices.

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The Best Way to Prevent Exploding Trains? Higher Oil Prices
PAUSE, People of Albany United for Safe Energy
PAUSE is a grassroots group of individuals who have come together to promote safe, sustainable energy and fight for environmental justice. We engage the greater public to stop the fossil fuel industry’s assault on the people of Albany and our environment.