Category Archives: Railways

How Crude Clogged US Railways, And Why That Won’t Change Soon

Producers across the country are well aware of the bottlenecks plaguing railways. They are delaying delivery of everything from grain to fertilizer to ethanol and are causing an uproar all the way to Washington. A majority of blame for this is falling on the lap of BNSF railroad, who itself is somewhat a victim of circumstance that led to some unforeseen consequences in which America’s oil “boom” is at the heart of. First, it’s important to understand exactly what is meant by “boom”. The industry really did explode – production between early 2010 and 2013, in just three years, increased by 40% from 5.47 million barrels per day to 7.44 million. That production increase has all occurred in the country’s midsection, most notably North Dakota’s Bakken Shale play and the Eagle Ford Shale in Texas. Keep in mind, before 2010, less than half of US oil production came from this part of the country. The country’s oil infrastructure, however, is far from these new production plays. Most pipelines and refineries are strategically located near the long-established fields in Oklahoma, Louisiana and Texas as well as population centers on both coasts. As production ramped up in the newer fields, stockpiles at US storage facilities increased by 10%. The majority of this glut ended up in Cushing, OK, the meeting point for central US oil pipelines and where the price for West Texas Intermediate (WTI) crude is set. This led to the first significant spread between WTI and Brent in 2011, and to this day, WTI trades at an average $15 per barrel discount. This has obviously created price arbitrage opportunities, but crude prices can vary greatly between different parts of the country. That is one of the reasons rail has been such a popular mode of transportation. If crude is going for a substantial premium on the East Coast, that’s where shippers are going to send it. That sort of flexibility is not something they would have with a pipeline. Not that there aren’t any pipeline plans in the works, there just isn’t a great sense of urgency to get them built. Several, like the Keystone XL pipeline, face indefinite bureaucratic delays, while others have been abandoned over profitability concerns. Consequently, rail cars continue to stack up in North Dakota and the whole rail system, particularly eastward through Chicago, is continuously logjammed. Over the last year, safety concerns over oil-by-rail transport have come into the spotlight, which could have some major implications. In early 2014, new safety standards were issued for oil cars and even more are expected by the end of 2014. This may result in more of the older cars being taken out of commission altogether, or at least temporarily out of service as they are retrofitted to meet new standards. While that could temporarily ease rail traffic, it would also likely result in a rise in gas prices. Other rule changes the industry is waiting on are those that restrict ocean shipments. US crude exports have been banned since the 1970’s, and details of that restriction prevent US refiners from easily transporting oil via ship. While everyone recognizes this is a real problem, and the added transportation capacity is needed, no one is expecting to see any changes within the next year. (Sources: Kansas City FedUS Energy Information Administration)Oil