Increase in Crude By Rail shows flexibility in economy – capitalism solves problems

When I started paying attention to the huge changes in energy production about a year and a half ago, one of the possible obstacles in North Dakota was the lack of pipelines to get the oil from fields to refineries in the Gulf Coast. The lack of capacity could constrain production and slow down drilling because there was no way to ship the oil. There wasn’t any way to store it for a couple of years until pipelines could be built.

Has that crippling problem stopped drilling?

No.

What happened?

Capitalism solved the problem.

The rail industry stepped in to develop the capacity to load 100 oil tank cars at a time and get all the oil to a refinery that wanted it, not just ones in the Gulf Coast.

The flexibilities of a free-market economy can solve all sorts of amazing problems. Like not enough capacity to ship that huge amount of oil in North Dakota.

An incredible article from RBN Energy gives a survey of crude by rail in 2012 – Crude Loves Rocking Rail – The Year of the Tank Car.

Here are just a few of the amazing things I noticed in the article. If you’re reading this post, you will certainly enjoy the full article.

Here’s some background on the increased production last year:

In the year to November 2012 U.S. crude oil production increased by 0.9 MMb/d (Energy Information Administration data). The crude basins that experienced the greatest growth were the Bakken (200 Mb/d), Eagle Ford (300 Mb/d) and Permian (270 Mb/d).

Three biggest increases: Bakken, Eagle Ford, Permian. I’ve been talking about all three – Bakken the most and Permian the least.

That is a huge increase. No wonder the pipelines can’t handle the load.

Railroads have picked up the slack. Look at the increase in traffic, tripling in just one year:

The Association of American Railroads (AAR) reports that more than 200M carloads of oil (roughly 350 Mb/d) were moved on U.S. Class I railroads in 2012. That’s a 300 percent increase over 66M carloads last year (117 Mb/d).

As you would expect, with that huge increase in traffic, there is a huge increase in demand for new tank cars. As a result, manufacturers of tankers are producing at capacity. Prices are up as well as the backlog for delivery:

If you buy a rail tank car today the wait for delivery is 18 months. …  The average new tank car purchase price increased from $74M in 2011 to $100M in 2012 and will increase to $133M in 2013.

Rail traffic will continue increasing. Here is one indicator of what people in the industry expect to happen – a huge increase in the ability to offload oil:

About 1 MMb/d of new rail-unloading capacity is being built or planned in the US during 2013. That is three times the current shipping level.

Not enough pipelines to get the oil out of the state? Problem solved.

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