Moving crude oil by rail story could be more than a chapter or two

The Association of American Railroads (AAR) reported in February that U.S. Class I railroads originated a record 233,811 carloads of crude oil in 2012, representing a 256 percent gain (not a typo) from the 65,751 carloads of crude oil originated in 2011.

By ·

No coal, no problem.

That could very well be the new mantra of Class I railroads, given the ongoing emergence of moving crude oil by rail these days.

That much is clear in the numbers, too. The Association of American Railroads (AAR) reported in February that U.S. Class I railroads originated a record 233,811 carloads of crude oil in 2012, representing a 256 percent gain (not a typo) from the 65,751 carloads of crude oil originated in 2011.

While this was happening, 2012 coal loadings were down 726,257 carloads or 10.8 percent.

“We believe crude shipments on the railroads will continue to grow robustly over the next two years before pipeline capacity expansion potentially kicks into higher gear in 2015, an event that is looking less likely to occur, with the Keystone XL pipeline prospects worsening in our opinion,” wrote Dahlman Rose analyst Jason Seidl in a research note. “However, if Keystone and other pipeline projects are indeed constructed, crude-by-rail growth could then begin a gradual moderation. A sudden precipitous drop in crude shipments on rail, reminiscent of ethanol, is improbable in our opinion, as crude is a much more essential commodity, and market dynamics favor continued growth in geographies that could benefit from rail transportation.”

Seidl’s promising outlook was supported by a glowing article which mentioned future prospects for moving crude by rail in yesterday’s Wall Street Journal.

The WSJ article noted that “oil nearly always travels below ground—by pipeline. Unlike pipelines, which travel between two fixed points, trains can transport the oil in many more directions. They also let producers go where the demand is—taking advantage of spreads of as much as $25 a barrel in markets pipelines can’t reach.”

And with abundant oil in North Dakota and Montana as well as in the Northeast in upstate New York and other regions, the railroads have firmly taken notice and are acting on the opportunity.

What’s more, a Bloomberg report published earlier this week highlighted the fact that the crude by rail “opportunity” may be around for more than a while.

The story cited a report by ITG Investment Research, which stated that more oil will need to be transported by rail over the next ten years are pipeline capacity from Western Canada, the U.S Bakken shale deposit, and the Rockies lags rising production. It added that even if all planned projects such as Keystone XL and pipelines to Canada’s coast are built, about 600,000 more barrels a day must move by rail in those areas by mid-2014.

If you are still not sold on the potential gains of moving crude by rail, the Bloomberg report also said that oil by rail will have to increase even more rapidly from its current level of about 1 million barrels if no new pipelines to Canada’s coast are built, and if three proposed pipelines aren’t completed, rail will have to carry more than 2 million barrels a day by 2018 and more than 3.5 million barrels by 2023.

And rather than making massive capital investments for more pipeline capacity, moving crude by rail makes more economic sense as the domestic rail network is already intact and well-established.

Class I railroads are clearly taking advantage of the moving crude by rail story. Why shouldn’t it? LM Contributing Editor John D. Schulz recently reported that the fracking boom is expected to continue as the United States is on pace to pass Saudi Arabia as the world’s largest oil producer by 2020, according to the International Energy Agency. Fuel is currently the largest U.S. export item.

Schulz cited Richard McClure whom spent 25 years in the rail industry and formerly was chief executive and chief operating officer of American Railroads Corp. and currently is CEO of ARC Strategic Advisors Group, a buy-side advisory firm that specializes in railroad infrastructure assets and rail car leasing, as saying that “until the Obama administration approves the Keystone Pipeline the rail industry will continue to be the second-most efficient way to bring product to market ensuring rails profits for several more years.”

Moving crude by rail is a story that clearly is not going away anytime soon.

About the Author

Jeff Berman, Group News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman

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