Is there a Future Shipping Oil by Rail?

By Noel T. Braymer

In the last 3 years there has been a dramatic increase in the amount of oil shipped by rail in this country. This new market has been eagerly embraced by the rail industry which naturally is looking for more business. But this has come at a price. The combination of last year’s harsh winter and the growth in oil train traffic created major congestion on parts of the rail network. This caused delays for many shippers as well as for passenger trains.

Things got so bad that shippers turned to the trucking industry to replace rail service even though it cost more. The trucking industry was eager to take over this business. But the reality of road congestion plus shortages of equipment and drivers made it impossible for the truckers to make much of a dent in the congestion on the rails.

Adding to the problems since last year have been a series of derailments which resulted in explosions and fires of trains carrying shale oil fracked in North Dakota. In the past oil companies preferred to use pipelines to move oil to refineries. Back then refineries were built for oil from specific regions and types of oil. Oil from different locations require different ways of refining. This works fine if your oil field is producing for a long period of time. In the past a conventional oil well could be expected to produce for up to 30 years.

The shift from pipelines to rail reflects the changes from shale oil production. Shale oil wells rarely produce more than 5 years and production drops rapidly after one or two years. The result is the need to constantly drill new wells to keep oil production going. Under these conditions it is easier to move oil from the field by rail to existing refineries than to build new pipelines to new refineries every few years.

For the railroads the question is how long will the good times last carrying oil? The answer is not very long. Most of the production of shale oil is in 2 places: North Dakota and Texas. Between them they both have about 3.5 billion barrels of shale oil or about 7 billion barrels total. That is about how much oil the United States burns in a year. Despite massive exploration no new major shale oil fields have been found in this Country.

Until recently the Energy Department had assumed that the country had reserves of 24 billion barrel of shale oil. Shale oil right now is helping to fill the gap from the depletion of existing wells to keep up with domestic demand for oil. Considering that current demand for oil in this country runs over 7 billion barrels a year, 24 billion barrels is just over a 3 years supply.

But it gets worse for oil. The Energy Department just admitted it goofed about reserves. It had assumed that California had 15 billion barrels of the 24 billion barrels in reserve. This was almost 2/3’s of the Nation’s shale oil reserve. The Energy Department had to admit that while there is15 billion potential barrels of shale oil in California, only 600 million barrels can be pumped economically. Despite the best efforts of the oil producers, it will take oil in today’s dollar, prices of about $200 dollars a barrel before it will be economical to pump shale oil in California.

The oil companies have a problem which is oil is running out and they are having trouble keeping up with demand. Oil production peaked worldwide in 2005 despite the best efforts of the industry to expand production. Since the recession of 2007, demand for oil still hasn’t reach the levels which peaked in 2007. There has been some growth in demand since 2008, but what is putting off a true oil supply crisis is the reduced demand since 2007 and the current pumping of shale oil. Oil production is subject to the law of diminishing returns. As the years go on there will be fewer new producing wells to replace old spent ones. While there are alternative such as shale, tar sands and heavy oils: the cost of these to¬†pump, refine and sell are much more expensive than conventional oil. On the other hand the cost of many alternative energies is going down, not up.

When there is an oil shortage, 2 things happen. The price of oil shoots up and demand for oil goes down. This is because the economy slows down and people have less money to buy oil products and they also start looking for alternatives. The oil industry knows that if oil prices go too high they will lose money by losing customers. They are trying to put off this day as long as possible when they will be unable to meet demand with supply.

We are near the end of the era of the dominance of oil. For this transition we need the railroads more than ever to economically move freight and people in the future. The short term revenues of this current oil boom should be weighed against the costs of congestion on the railroads affecting other users. Also the danger and disruptions from explosions and fires from oil trains should be considered as an expensive liability.We should be upgrading and improving the railroads for the future instead of exploiting them for a short term boom while leaving the railroads unprepared for the future energy shock to come.

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