North America is experiencing a boom in crude oil supply, primarily due to growing production in the Canadian oil sands and the recent expansion of shale oil production from the Bakken fields in North Dakota and Montana as well as the Eagle Ford and Permian Basins in Texas. Taken together, these new supplies are fundamentally changing the U.S. oil supply-demand balance. The United States now meets 66% of its crude oil demand from production in North America, displacing imports from overseas and positioning the United States to have excess oil and refined products supplies in some regions.
The rapid expansion of North American oil production has led to significant challenges in transporting crudes efficiently and safely to domestic markets—principally refineries—using the nation’s legacy pipeline infrastructure. In the face of continued uncertainty about the prospects for additional pipeline capacity, and as a quicker, more flexible alternative to new pipeline projects, North American crude oil producers are increasingly turning to rail as a means of transporting crude supplies to U.S. markets. Railroads are more willing to enter into shorter-term contracts with shippers than pipelines, offering more flexibility in a volatile oil market. According to rail industry officials, U.S. freight railroads delivered 435,560 carloads of crude oil in 2013 (roughly equivalent to 300 million barrels), compared to 9,500 carloads in 2008. In the first half of 2014, 258,541 carloads of crude oil were delivered. Crude imports by rail from Canada have increased more than 20-fold since 2011. The amount of oil transported by rail may also be influenced by a tight market for U.S.-built tankers. However, if recent oil price declines persist and the price falls below the level at which Bakken producers can cover their costs, some production could be shut in, potentially reducing the volume of oil carried by rail.
While oil by rail has demonstrated benefits with respect to the efficient movement of oil from producing regions to market hubs, it has also raised significant concerns about transportation safety and potential impacts to the environment. The most recent data available indicate that railroads consistently spill less crude oil per ton-mile transported than other modes of land transportation. Nonetheless, safety and environmental concerns have been underscored by a series of major accidents across North America involving crude oil transportation by rail—including a catastrophic fire that caused numerous fatalities and destroyed much of Lac Mégantic, Quebec, in 2013. Following that event, the U.S. Department of Transportation issued a safety alert warning that the type of crude oil being transported from the Bakken region may be more flammable than traditional heavy crude oil.
