North America - Oil Transport By Rail

ExCon90 wrote: according to the Constitution, 60 votes are required to override a presidential veto, and under Senate rules 60 votes are required to shut off a filibuster.

US Constitution; Article I, Section 7: -2/3rds votes from both Houses (290;67) to override a presidential veto, vice 60%.

"Mighty high threshold" dare I say.

http://en.wikipedia.org/wiki/List_of_Un ... ial_vetoes" onclick="window.open(this.href);return false;

I was out to lunch when I posted that.

Interesting article appearing Front Page in today's Journal:

http://online.wsj.com/articles/oil-trai ... 1417663983" onclick="window.open(this.href);return false;

Brief passage:

NEWARK, Del.—Early last year, a new kind of pipeline full of volatile oil appeared in this college town, halfway between Philadelphia and Baltimore.

If it had been a traditional pipeline, there would have been government hearings and environmental reviews. There would be markers or signs along the line’s route and instructions for nearby residents on how to react in an emergency. A detailed plan for responding to a spill would be on file with the federal government.

None of that happened here in Newark. In fact, nobody initially notified the city’s fire chief about the new line, which can carry more than a hundred thousand barrels of oil a day along Amtrak’s busiest passenger-rail corridor.

This was possible because the oil here is transported by a virtual pipeline: mile-long strings of railroad tanker cars that travel from North Dakota to a refinery in Delaware. In Newark, the cars are especially easy to spot as they often sit for hours on tracks 10 feet away from passing passenger trains, waiting for an opening at the nearby PBF Energy Inc. plant.

While the existence of this virtual pipeline is obvious to its neighbors—trains are visible from homes, the local commuter rail station, a park and a popular jogging trail—it is officially secret. Delaware Safety and Homeland Security officials contend that publicizing any information about the oil trains parked there would “reveal the State’s vulnerability to terrorist attacks,” according to a letter to The Wall Street Journal.

The lading and routing of a car/trainload has always been considered proprietary information and I would like to think so for more cogent reasons than for what follows.

Years ago Amtrak operated a "mixto diario" Janesville WI-Chicago. This was during their initiative to handle freight (they called it Express) on their trains. This particular train's "raison d'etre" was freight. Not surprising, some "kid railfan" asked the train's Conductor "what's in the boxcars". Rather than replying with a tactful "none of your business', he said to the kid "pet food". Regardless whether factually correct or contrary to stated policy, the kid posted that to a railroad site and instantly this train, officially the "Lake Country Limited", became known on the internet as the "Friskies Flyer".

Sorry for the "humoresque" at a Forum at which we discuss issues of consequence to the railroad industry.

Gilbert B Norman wrote:As I've noted in past discussion, I first learned of shale oil taking Geology 101 during 1962, but of course learned, back when crude was $3bbl, it was simply too costly to extract. Even though the article reports that there is "still room to go" in a crude price drop before North American sources become uneconomical, there is also inference that some Sheik of Araby could drop the price so low as to eliminate North America production. I respect the thoughts that Messrs. O'Keefe and Stolberg have shared that they believe such action is unlikely, that one or the other of the above, even if in defiance of OPEC, could do such.

Also ominous is the article notes that many a small independent driller is "high" on "Opium" - OPM - other people's money. Need we have anything resembling a rerun of Sep 15 '08?

Otherwise "We report, you decide".

Based on some recent reading...I'll take my thoughts a step further. It would quite simply be pure insanity for the Saudis to try and drive the price down far enough in an attempt to bankrupt U.S. shale producers, the small and heavily leveraged ones in particular. The broader effects on the rest of the OPEC cartel would be nothing short of disastrous. While Saudi geopolitical interests run counter to Iran, Venezuela and non-OPEC member Russia they are very much in alignment with the Iraqi government (the new one) and many of their fellow Arab and North African oil producing states throughout the region. Everyone in that part of the world needs oil prices that are stable and as high as reasonably possible.

So as much as the Iraqis non-participation in the OPEC quota system bugs the Saudis (and bug them it does), and as much as they want to push U.S. shale producers out of the market (which they won't) there simply is no good reason to try and over supply the market to the point where the producers would have to stop drilling. If this really is an attempt by the Saudis to shake out the U.S. shale market I think it is terribly short sighted and would represent near desperation on their part against a loss of market share which they could easily weather over a period of decades.

On the other hand if this is in fact an attempt by the Saudis to force the rest of OPEC to join them in making cuts then I think that is the more logical possibility. Iran and Venezuela in particular will be bankrupt before the end of 2015 if this trend does not reverse itself. Venezuela might not make it to June and would likely default on their sovereign debt.

In terms of U.S. rail traffic I think we can all rest assured that CBR is here to stay. There is simply too much product at a reasonable price coming from both North Dakota (and elsewhere by rail) to be ignored by the refineries.

To you point re SA vs Iran and Russia, I've read articles that state these rivalries are the very reason SA is promoting production at current levels. As they have deeper pockets, low crude hurts Russia and Iran much more immediately. Tweaking their rivals is probably more a priority than crushing N American producers.

PS: One other factor seems to be all but completely overlooked. The US dollar has strengthened significantly in the last six months. As oil is a dollar-denominated commodity, this has a depressing effect on prices.

From the US rail perspective, we need to break out shale into two categories: Production and development. Once a well is drilled, it's not practical to turn off the spigot and wait for higher prices. As such, CBR ain't going away anytime soon. However, consider the production of a well over its lifespan; output falls as much as 80% by a well's third birthday. You need development akin to a Ponzi scheme to maintain shale play production - more and more wells to offset the depleting production of the existing wells. Which is all well-and-good when oil prices support it. But that's getting to be questionable: US drilling permit applications in November were reported to be down 40% on a month-over-month basis.

Cowford wrote:PS: One other factor seems to be all but completely overlooked. The US dollar has strengthened significantly in the last six months. As oil is a dollar-denominated commodity, this has a depressing effect on prices.

I strongly concur and I am under the impression part of this may be related to the end of the Fed's Quantitative Easing program. One other positive effect of this price downturn is that it also flushed out a lot of the speculative money that had been invested in oil for some time now.

Cowford wrote:From the US rail perspective, we need to break out shale into two categories: Production and development. Once a well is drilled, it's not practical to turn off the spigot and wait for higher prices. As such, CBR ain't going away anytime soon. However, consider the production of a well over its lifespan; output falls as much as 80% by a well's third birthday. You need development akin to a Ponzi scheme to maintain shale play production - more and more wells to offset the depleting production of the existing wells. Which is all well-and-good when oil prices support it. But that's getting to be questionable: US drilling permit applications in November were reported to be down 40% on a month-over-month basis.

I think we will all be watching these development very carefully to see if we can get a sense of what the "true" average price for economic extraction of shale oil.

Here is a report from The Weather Channel http://stories.weather.com/boom. It seems to be mainly fear mongering but I wonder how much truth is behind it.

CLamb wrote:Here is a report from The Weather Channel http://stories.weather.com/boom. It seems to be mainly fear mongering but I wonder how much truth is behind it.

Notice that while the story was carried by the Weather Channel, the story was produced by "InsideClimate News" who are opposed to Fossil Fuel use.

Now that crude has dipped below $60bbl, it just seems as if 'the sum of all fears", is being realized. While earlier at this topic, I speculated that some Shiek of Araby would disrupt the world price of crude, I guess I had in mind some actor like Gadhafi or Chavez (think both those guys got popped). I did not foresee that the most stable oil producer 'over there", the Saudis, would initiate this situation. But otherwise, everything I feared is coming into place.

While the major North American producers will weather the storm, the little guys, especially those "High on Opium (OPM Other People's Money)", are going to get hit. I think the oil producing regions such as North Dakota are fast going to learn what the word bust means. On the two roads, BNSF and SOO, that serve the Bakken, there will be layoffs and the capacity expansion projects will be curtailed. The only silver lining will be that the Keystone XL will also be back burnered.

We have yet to see what favorable effect this $60bbl ($2.50ga Regular) will have on "the Consumer", as that demographic includes the all too many living paycheck to paycheck. Likely that will have to wait until the Xmas season is over. At this time the retailers really don't know where they stand; for there have been "tectonic plate shifts" in the pattern of retail sales - no doubt brought on by on-line retailing and the de emphasis by "the bricks" of the "Black Friday" surge.

For myself, with 25% of my equity portfolio in rails and oils, "not exactly" fitting any demographic of "the consumer", and who, away from trips, drives some 25 miles a week (present auto coming up on 3yrs old; has 25K on the clock) , I've taken my lumps and $2.50ga v. $4ga is meaningless.

Finally, and as an addendum, after preparing this post, I went downstairs to my easy chair and started in to today's Wall Street Journal. While rail is not mentioned within such, it certainly echoes my thoughts immediately expressed:

http://www.wsj.com/articles/oil-prices- ... 1418297843" onclick="window.open(this.href);return false;

Mr. Norman,

Please allow me to provide some reassurance in regards to the railroads:

From your above linked article:

Although the U.S. doesn’t export crude, its oil-output boom has helped drive economic growth since the crisis. The prospect of slowing investment into the energy sector helped offset some of the optimism spurred by better-than-expected November retail sales figures, which were released on Thursday.

Energy companies have been the worst-performing sector in the S&P 500 over the past month, down 13% compared with a 0.2% decline for the broader index. And if gasoline prices fall too much, that could slow already-tepid inflation in the U.S. and potentially disrupt any plans by the Federal Reserve to raise interest rates next year, some economists said.

Still, the impact of the decline in crude in the U.S. economy is limited. Energy investment accounts for 1% of U.S. growth, while consumer spending makes up 70%, according to UBS.

The key points that I see are a) the continued importance of the consumer to the U.S. economy and b) the likely delay in an interest rate increase by the Federal Reserve.

These two points coupled with the potential for increased intermodal traffic and yes, steady continuning output from North Dakota, should largely support the railroads quite well over the next few years. All of the above does not even touch on problems related to the recent bumper crop of Canadian wheat which completely overwhelmed the railroads in the Northern Plains this past year.

I see very little downside at all for railroads. Their primary fuel is becoming cheaper and there is as of yet little if any deflationary pressure on their tariff schedules due in large part to such heavy demand for freight rail services. What we are seeing is a shift of economic prosperity back to places that have "real" economies that are not solely based on natural resources. This shift happenned first in North Dakota with the drilling and fracking boom, undertaken on behalf of our much larger national economic interests, now it is going to spread out across the broader U.S. economy as lower oil prices leave more of our capital inside the United States.

Either way this tailspin of oil prices is going to be subsumed in what I would dare say is a "perfect storm" of positive economic conditions to include improved hiring, moderately rising wages and moderated energy prices with little future upside potential. The railroads have got every reason to push forward with their infrastructure improvements. They are going to need every single inch of track they can get laid down between now and next year's harvest season and the intermodal holiday rush beginning in August.

Mr. O'Keefe, obviously it has become evident that the Markets' "sell off" this week has gone far beyond the rail and oil sectors. No doubt factors such as the economy is now showing signs of real improvement which means that there will be worldwide pressure upon central banks to raise interest rates, and that of course negatively affects markets.

We also must recognize that the Markets are "overdue" for a correction.

But I'm still not certain what the Saudi's, who have to be considered "the brightest lightbulb in the room" over in that neck of the woods, have in mind. Possibly they are trying to show the oil producers, especially "the whippersnapper" North American varietal, that they still can make the worldwide markets for crude. Hopefully, as time moves forth, their game plan will become more evident.

Gilbert B Norman wrote:Mr. O'Keefe, obviously it has become evident that the Markets' "sell off" this week has gone far beyond the rail and oil sectors. No doubt factors such as the economy is now showing signs of real improvement which means that there will be worldwide pressure upon central banks to raise interest rates, and that of course negatively affects markets.

I agree that economic improvement may eventually cause some inflation. Which could in turn lead to the U.S. Federal Reserve tightening interest rates. On the other hand I don't think the scenario is anywhere near global at this point. The rest of the developed world is stagnating and that doesn't appear likely to change anytime soon. An additional factor in favor of continued loose money policies is Chairman Yellen's practice is using a very wide series of markers in her analysis of the labor markets (the so called "dashboard"). Under this analysis the labor market and the economy in general still have a long way to go before we will see any pressure on the U.S. Federal Reserve to increase interest rates.

Gilbert B Norman wrote:We also must recognize that the Markets are "overdue" for a correction.

I think the above is only true if we assume corporate earnings are not about to catch up to their stock valuations and bring the corresponding Price to Earnings ratios back down to earth. For energy stocks this of course isn't realistic, for everyone else, including railroads I don't think it is such a far fetched scenario.

Gilbert B Norman wrote:But I'm still not certain what the Saudi's, who have to be considered "the brightest lightbulb in the room" over in that neck of the woods, have in mind. Possibly they are trying to show the oil producers, especially "the whippersnapper" North American varietal, that they still can make the worldwide markets for crude. Hopefully, as time moves forth, their game plan will become more evident.

I think the Saudis are well aware that knocking off a couple of wildcat speculators is going to have little if any effect on long term North American production or the major and mid major oil producers who are investing in shale oil. I do think that they consider a nuclear armed Iran to be an existential threat. I also think that they are very unhappy with the non-participation of Iraq in the OPEC quota system and may be looking to generate a commitment by Iraq to re-enter the quota system at some point in the near future.

The Iraqis right now are producing about 3M bbl/day from their southern oil fields with the lion's share of production increases to come in the next 4-5 years. Meanwhile the Libyans are slowly getting organized and have begun the process of reopening their vast holdings to exploration by foreign oil companies for the first time in over 40 years. The production increases that are going to come out of these places will far outpace any new oil being produced in the United States by at least a factor of 2:1 if not more.

So for the moment I think the Saudis are trying to force the hand of their neighbor states in the Middle East. They know the Iranians need to start pumping oil again and that the Iraqis need a stable oil price, preferably over $80. I think they feel whatever happens in the U.S. is a sideshow compared to the importance of forcing the Iranians to the table and the Iraqis back into the OPEC quota system.

That being the case I would say $40/barrel oil is not at all unrealistic. The Saudis will do "whatever it takes" to get a nuclear deal out of the Iranians and if that means pricing oil down into the single digits they'll do it. It's a small price to pay for ensuring they are not subject to nuclear blackmail for the next 50 years.

Here is another reason to be optimistic about the prospects for U.S. railroads in 2015:

From Railway Age

But while coal usage was entering its downturn in the U.S., exports of U.S. coal made noticeable gains, rising from a mere 40 million tons in 2002 to an all-time record 126 million tons exported in 2012. The majority of that export growth, says the EIA, was in thermal coal. China is still the world's leading coal consumer. Europe is also increasing its demand, as a hedge against uncertainty with natural gas supplied by Russia, and as a means to phase out some of its nuclear power plants.

That strong global market, plus a more stabilized domestic market, became more apparent on U.S. railroads during 2014, with monthly coal carloads increasing by as much as 6% over the previous year. Several international trends are helping to drive that business. In 2009, China went from being the number three coal exporter to being a net importer, taking in 126 million metric tons that year, and more than 320 in 2013. So far, the U.S. has played a minor role in China's coal imports compared to Australia and Indonesia. However, Asia is where most of the world's new demand for coal has appeared in recent years, and with coal now producing only 38% of the electricity in the U.S. but 81% in China, it's no wonder mining companies and railroads in the U.S. are working to make their supply lines more competitive in the Pacific Rim.

George, you are nothing if not an optimist!

While a bump in economic activity should prove to be a tailwind for freight demand, consider that if higher fuel prices inordinately favor rail, the opposite must be true in a declining price environment. Couple with that the expected rollback of some truck hours of service regs... (thanks to ME's Sen. Collins) the truckers appear to be catching some big breaks going into 2015.

I'm probably somewhere between you and Mr Norman... I don't see layoffs and curtailment of capx (except possibly in discrete locations), but there's probably as much if not more cause for concern vs. celebration in many rail - centric markets.

Cowford wrote:George, you are nothing if not an optimist!

Thank you very much for that!

I would answer your first proposition that the opposite is only true if circumstances from the previous low price environment have remained unchanged. I think on balance the macro picture, which is what would affect railroads on the level that we are talking about, has in fact changed. Although some of the hours of service regulations are going to be rolled back, I think there are other changes that will continue to support rail. One of these is the labor market. The cost of wages in the trucking industry has increased considerably in the past 5+ years. I attribute some of this to lower labor force participation rates, retirement and wage competition from the manufacturing sector and other industries which provide higher quality of life to individuals who might otherwise be a candidate to be employed as a commercial driver. In short, even if the loads returning to the trucks I don't think that the industry could meet the demand. Rail is similarly challenged right now but I think they have a more stable regulatory outlook, fewer quality of life concerns, better benefits and more control over their ability to improve capacity and reduce congestion.

All of the above combined with an apparently strong coal export market would make me a relative optimist when it comes to the railroads over the next few years. Take another look at the Chinese equation using what I would call the "East German" analysis. In effect the Chinese have reached the point of diminishing returns when it comes to environmental degredation. The East Germans had much the same thing happen in the 1980s and it really killed their economy. It didn't matter that they could process virtually limitless amounts of lignite from their mines in Lusatia and Saxony. Likewise the Chinese, who may have taken this situation to an excess unseen even in East Germany, are now going to force the use of lower sulfur coal which primarily will come from the Powder River Basin of Wyoming. Doing so is a matter of economic survival for them and the consequent stabilizing effect on U.S. railroad coal traffic will be significant.

All of this gives U.S. railroads a problem that is challenging but solvable with steady capital investment, new hires and acquisition of motive power. All three of these things require hard work but they are by no means impossible and their organizations are well structured to accomplish all three in fairly short order over the course of the next few years. The outcome is likely to be some very profitable years for the U.S. railroads as they continue to serve a healthy and growing U.S. economy.

I will close with the following...

Over the past year there has been a lot of discussion regarding the disappearance of the U.S. middle class to include reasons for its cause. None of these articles discussed the effects of free trade and its consequences for the American worker and as such I really didn't take them very seriously. The fact of the matter is that the era of plentiful cheap labor in China is coming to a close and rather quickly at that. This will leave the U.S. as one of the only places in the world with sufficient infrastructure, stability and labor markets to manufacture the world's goods. There simply isn't anywhere else that has what it will take to make the world's goods. India has infrastructure problems and terrible bureaucracy and Indonesia isn't much better. Brazil might be a viable alternative but I am unconvinced for now and the location is out of the way for the primary world trade routes through the Suez.

Regardless, this return of manufacturing to the United States, a trend that I expect to accelerate sharply over the next few years, bodes well for U.S. railroads and their highly developed networks of transcontinental main lines and regional feeders. We are better positioned now to deliver the world's goods than we have ever been and U.S. rail will be ready when the time comes.