Well, it’s finally happened.
On Friday, U.S. and Canadian regulators announced a wave of new rules and requirements for tank cars that carry crude oil and other flammable liquids by rail.
Since these rules were just announced, it will be a while before we know anything about the efficacy of newly improved tank cars. But rather than offering a solution to an ever-mounting problem, the regulations instead may just be a band-aid on a broken leg.
The new rules include a phase-out of older, more dangerous tanker cars that have caused many fires and explosions over the last few years and pose a quiet but deadly threat to the cities and towns they travel through.
Earlier this year, a flurry of new explosions hit towns throughout North America — most prominently one in West Virginia that destroyed homes and property and forced a small town to evacuate.
Added to the destruction was an oil leak into a nearby river that supplies fresh drinking water to communities in the area.
So the question remains: Will this new set of regulations on tank cars fix the problem?
Beating a Dead Horse
Although I applaud the effort from regulators to make railways safer when transporting oil, it looks like the “fix” is too little and much too late.
In 2013, a train overloaded with crude oil derailed and crashed into a small town in Canada, leveling several buildings and killing 47 people.
According to the rules, a phase-out will take place for the old DOT-111 tank cars but is scheduled to take up to 10 years.
Now, I’m no fool — I know these things take time. But 10 years leaves a long time for another derailment and explosion to happen that could result in more destruction and loss of life.
And the tough part of all of this is that the rules still may not go far enough to solve the systemic problems of the oil-by-rail industry.
With oil and gas production at new heights, potentially higher oil prices at the end of this year, and the discovery of more oil-producing rock, it seems that rail traffic is only going to get even more congested.
And when the rails are congested and train operators are overworked, it creates a recipe for disaster like we saw in West Virginia earlier this year and in Canada in 2013.
The rules themselves add tougher 9/16-inch-thick shells to tankers and require new electronically controlled braking systems for large trains, as well as improved valve equipment and a 30-mile-per-hour speed limit for trains that don’t have electronically controlled brakes.
But these improvements are merely minor increases from similar rules enacted by the rail industry a few years ago — and those certainly didn’t work.
It almost feels like the U.S. DOT wants to chance public safety and use ever-escalating rules to test how thick the steel on a tanker car can be to prevent an explosion and how slow tank cars can move without flying off the rails. I’m all for trial and error, but not when human life could be in jeopardy.
And as far as oil drillers are concerned, experts expect the new rules to boost shipping prices for oil by up to $0.60 per barrel.
This may seem like a minute difference in price, but when coupled with all the other costs involved in drilling, harvesting, refining, and shipping oil to market, these costs become prohibitive — especially in our current low price environment.
It seems no regulatory body has the gumption to solve the problem via its simple solution…
The end to this crisis in the oil-by-rail industry lies not with the tanks, brakes, or speed of the trains, but with an overhaul of the midstream oil industry.
As my colleagues and I at Energy and Capital have written many times, the best course of action is new pipelines.
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New Pipelines Will Displace Rail Traffic
As the United States and Canada try to beat a dead horse and regulate the oil-by-rail industry, North America’s energy companies are clamoring for pipeline capacity.
As of right now, especially in the Bakken in North Dakota, pipeline capacity is sparse. There are a few big lines that connect to the major networks in the Midwest, but to get this oil from well to pipe is a different story.
The industry still lacks the smaller pipeline systems that better connect rigs in shale fields to larger systems with access to refineries.
This bottleneck in the production and shipment of oil is a big reason why producers have relied on dangerous tanker trains to ship crude instead of pipelines.
However, pipeline capacity in the United States is about to double over the next few years as the industry is buoyed by better oil prices and a desire to grow production safely.
The U.S. already has 2.5 million miles of pipeline, so a doubling of the capacity will be enough to offset major traffic on railways.
It’s also beneficial to producers because pipeline shipments are more efficient than crude-by-rail in terms of cost.
As you can see below, the major lines are already in place for the most part…
So this doubling of pipeline capacity will mostly come from the expansion of existing lines and a growth in small, piecemeal pipeline capacity within oil formations — most notably the Bakken, Permian, and Niobrara.
The best way for investors to make a profit off of these smaller pipeline builds is through an unlikely source: government regulations.
You see, the government has codes and requirements for pipelines, so as new lines are built, there will need to be independent reviews of the equipment to ensure environmental and public safety.
What’s great about this is that midstream companies hire private inspection companies to do this work, and said inspection companies are publicly traded.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
