Railroads Increase Revenue from the US Oil Boom

Oil was first discovered at Spindletop near Beaumont, Texas in 1901. Through the next several decades Texas became the biggest oil producer in the US. Then in 1968 oil was discovered at Prudhoe Bay in Alaska. The completion of the Alaska Pipeline in 1977 placed Alaska in the number two spot for oil production. As early as 1951, oil was found at the Bakken Oil Shelf, however extraction proved too costly. A large portion of The Bakken Field is in North Dakota. In 2000, a revolutionary process for extracting oil called “ Hydraulic Fracturing” was developed that changed the oil industry. By 2010, 458,000 barrels of oil were recovered from the Bakken Shelf, placing North Dakota number three in US oil production.

This year marked the first year since 1995 that the US has produced more oil than it imported. Imports were reduced from 65% to 40%. US crude oil production is estimated to increase from 5.74 million barrels per day to 7.47 million barrels per day by 2020. The US imports 1 million barrels per day from Saudi Arabia of the total 7 million barrels per day. Canada and Venezuela account for 60% of US imports.

One of the growing problems has been moving this oil from discovery point to refineries, many of which are located on the East Coast. Pipelines carry a large portion, but not enough pipelines exist to handle all this oil, especially for moving it from East to West. In addition, pipelines are costly and take years to obtain approval and construct. There is no pipeline from Bakken to the Delaware City refinery. Nor is there a pipeline from Tesoro Refinery to Anacortes Washington.

Enter the US railroads. Railroads are flexible and can move oil to any part of the country. What we’ve seen in the past few years is a virtual explosion in the use of rail cars to transport oil and oil products to refineries on the East Coast. North Dakota moves 71% of its oil by rail car and only 20% by pipeline. This June Kinder Morgan canceled plans for a pipeline from Texas to California. Just to emphasize the growth of oil transport by rail car here are some numbers. In 2008, US railroads transported 9,500 carloads of crude.
In 2012, this jumped to a whopping 233,000 rail cars, of which were 300 million gallons of gasoline. It is not unusual to see a train with 100 cars, carrying 3 million gallons of crude oil. Rail transport of oil has increased 25 times from 9,500 cars in 2008 to 234,000 cars in 2012. The first six months of this year saw an increase of 166%,

For investors it may be time to take a fresh look at railroads. The big players in oil transport are Kansas City Southern, Norfolk Southern, Canadian Pacific, Burlington Northern, Santa Fe and Union Pacific. Norfolk Southern delivers crude to Delaware City. In 2012, Kansas City Southern moved 7,600 car loads of crude to refineries on the Gulf Coast.

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