What’s most surprising is that if rail was to lose its competitive advantage to more expensive sources such as Brent, the rail companies would not be the most affected industry out there. Despite the large surge in oil carloads in the past couple of years, it still represents only 5% of total rail traffic in the U.S. year to date. Compare that with producers of Bakken oil, which depend on rail to move 75% of oil away from the region. EOG Resources Inc (NYSE:EOG) and Continental Resources, Inc. (NYSE:CLR) are heavily invested in moving their oil by rail, and they aren’t the only ones. Both Hess Corp. (NYSE:HES) and Oasis Petroleum Inc. (NYSE:OAS) move about 50% and 80% of their oil from the Bakken region by rail, respectively. Without rail, there would be several thousand barrels of oil stranded in the region, and the prices for that oil would be likely to fall. Even with proposed expansions, pipeline capacity simply wouldn’t be enough to move oil.
Source: Whiting Petroleum investor presentation.
Another major region that could be hurt severely by a drastic cut in rail transport is Canadian oil sands. Both the Bakken and oil sands share the burden of inadequate pipeline capacity, but the political pressure against pipelines for this oil has been much stronger than anywhere else. Potentially, tighter regulations on rail transport could also mean a relaxation on the opposition to proposed pipelines such as TransCanada Corporation (USA) (NYSE:TRP)‘s Keystone XL or Kinder Morgan Energy Partners LP (NYSE:KMP)‘ Trans Mountain pipeline.
What a Fool believes
No explanation or investigation into this recent accident will do justice to the tragedy that struck this small town, but this could be a monumental moment for the entire North American oil industry. If we were to see any regulations that alter the viability of oil by rail, it could fundamentally alter the prospects of North American energy production and the profitability of many companies. As investors, we need to be aware of how these events will affect the broader market and the companies we hold in our portfolios, and this event is certainly one we will have on our minds for quite some time.
The article Will the Canadian Train Disaster Kill Oil by Rail? originally appeared on Fool.com and is written by Tyler Crowe.
Fool contributor Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google +, or on Twitter, @TylerCroweFool.The Motley Fool has no position in any of the stocks mentioned.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.