California: Here Come the Oil Trains

Phillips 66, formerly a division of energy giant ConocoPhillips, recently filed a project proposal to bring mile-long crude oil trains from Canada and North Dakota to its refinery in California’s San Luis Obispo County. If approved, the project would mean up to 250 trains a year would each haul two million gallons of crude oil into California, and travel on the same tracks used for Amtrak commuter rail trains in the San Francisco Bay Area.  

With oil fracking increasing America’s domestic production by 60% in the last three years, political delays in building the Keystone XL Pipeline have resulted in California having the only refining capacity available in America. But with oil trains’ horrible safety record, a political battle will heat up in California.

America’s oil production since 2008 is up by about 60%, to 2.7 billion barrels a year. In 2013, total U.S. crude oil production grew by 15%, to 7.4 million barrels per day, as fracking of underground shale formations in the Eagle Ford field of Texas and Bakken in North Dakota allowed both of those states to grow production by 29% for the year. In three years, output grew in North Dakota’s by 177% and in Texas’s by 119%. 

Railroads have been making fortunes carrying North Dakota crude oil from the Bakken field, at an average of $17 per barrel of crude oil, to Texas refineries–versus an estimated $10 per barrel if the Keystone XL Pipeline had been built. 

The key beneficiary of this bonanza has been Warren Buffet’s Berkshire Hathaway Corporation, which purchased the Burlington Northern Railway (BNI) in 2009. It had been assumed that by 2012 most of that crude oil would be shipped through the Keystone XL Pipeline. But since Burlington’s purchase, BNI’s profits have grown by 30% a year to a record $2.37 billion in 2013. Goldman Sachs recently reported that with existing oil pipelines fully congested, 200,000 more barrels will be shipped by rail–and now oil trains are headed to California. 

About ten trains a day, with up to one hundred tank-cars carrying 3.35 million gallons of “advantaged” raw crude oil from fracking activities, leave North Dakota to journey over a thousand miles to refineries in Texas and Nova Scotia. Railroads now carry 75% of North Dakota and Montana oil, and are the prime reason oil hauled by tank cars in the U.S. rose over the last three years by 2,000%, to a total of 6.5 billion gallons a year. 

But railroads were designed to transport freight where people are, whereas pipelines carry toxic products and go to refineries that are specifically located at safe distances away from populated areas. Some media stories have repeated public relations statements from the oil industry that they prefer a mix of pipeline and rail transport of crude oil. The railroads, led by Burlington, claim their “pipeline on wheels” averaged only thirteen spills per year for the last ten years. 

But 60% of oil shipments by rail were in the last two years. And there have been many serious oil train derailments in the last year. 

Examples of accidents in 2013 included: 

• March: 14 cars in a mile-long train derailed, spilling 14,000 gallons near Minneapolis.
• April: 22 Canadian Pacific (CP) rail cars jumped the tracks near White River, Ontario and leaked 17,000 gallons of crude.
• May: five tankers containing oil on another CP train derailed in rural Saskatchewan, spilling 575 barrels of crude oil.
• June: four Canadian Pacific (CP) rail cars carrying flammable petrochemicals used to dilute oil derailed on a flood-damaged bridge spanning Calgary’s Bow River.
• August: a one hundred-car oil train crashed and blew up in a horrific disaster in a populated area that took 47 lives in Lac-Megantic, Quebec.
• October: thirteen railroad tanker cars carrying propane and crude oil near Alberta, Canada exploded after derailing and “the fireball was so big, it shot across both lanes of the Yellowhead” Highway.

I am not opposed to Phillips 66′s project, which will include a huge investment in expanding their Santa Maria Refinery and lots of high-paying technical jobs going forward. But the sad truth is that political opposition has resulted in a decline in California’s crude oil production that would have been transported by existing pipelines.  

I also fully agree with a Phillip 66 publication titled: “Delivering On Advantaged Crude Strategy” that states: “Running more advantaged crude oil in our refineries allows us to run less of the more expensive globally priced crude oils.” 

The good news is that Phillip 66 estimates they will need to increase their refining of “advantaged” oil from 1 million barrels a day to 1.5 million barrels a day by 2017. 

They complain, logically: “While vast resources of advantaged crude oil are being produced in Canada and in the United States, there is not enough pipeline capacity in the right locations to carry the oil to where it’s needed.”  

The answer is to build new safe and efficient pipelines. But until the politics changes to support building pipelines, expect to see mile long trains, pulling 80 tank cars of crude oil, rumbling across California.  

Chriss Street teaches microeconomics at University of California, Irvine. The author welcomes feedback at chriss@chrissstreetandcompany.com