One of the odd circumstances that arises out of extracting, transporting and marketing a commodity in high demand is that overall industry profits can increase as an indirect result of experiencing a scary accident that destroys a portion of a now infamous small town and kills nearly four dozen people. One predictable response to such an accident is for regulatory bodies to impose rules that slow production; when that happens the market often reacts with unit price increases that benefit oil producers.
Here is the sequence. In June 2013, crude oil production in North Dakota was continuing to soar, partially assisted by an increasing number of rail terminals that ease constraints on market access for drilling companies. The increased terminal capacity increased the rate at which cars could be loaded and sent on their way to lucrative market destinations.
In 2013, there were 400,000 tank car loads of crude oil shipped in the United States, up from just 10,000 cars in 2009. Each tank car carries a little more than 700 barrels of oil; the average rate of transportation via rail was almost 800,000 barrels of oil per day.
Partially due to the increasing production rate from North Dakota’s Bakken formation, crude oil prices in the summer of 2013 continue trading for well under $100 per barrel; the Energy Information Agency reports a June 2013 price for West Texas Intermediate (WTI) of $95 per barrel.
In early July 2013, a train carrying crude oil extracted from the Bakken formation in North Dakota suffered a major accident that resulted in an explosion and subsequent conflagration that destroyed significant portions of Lac-Megantic Ontario and killed 47 people. The rail cars carrying the crude oil were the same DOT-111s used to transport the majority of crude oil in the US; approximately 69% of the liquid tanker cars in the US are DOT-111s.
Accident investigators blamed the lower flash point of Bakken light sweet crude oil for increasing the consequences of the rail car derailment. They later discovered that the cargo had been incorrectly categorized as packing group 3, which is the least hazardous category of flammable materials. It should have been classified as packing group 2, which is the same category as gasoline.
At the time of the fiery accident, properly categorizing the material would not have changed the tank car requirements but it would have more correctly informed first responders about the hazards they would be facing in fighting the blaze. Since July 2013, there have been additional accidents involving rail cars carrying crude oil. The ones involving crude from the Bakken, including a November 8 derailment in rural Alabama and a December 30 derailment near Casselton, ND have resulted in explosions and conflagrations but no injuries to people because they happened on open sections of the track where there were no people nearby.
On February 25, the Federal Railroad Administration, which is an agency of the Department of Transportation, issued emergency rules that require shippers to more frequently test and certify the contents inside tanker cars before shipment. On Friday, February 28, Reuters reported that the WTI price for the week closed at $102.59, completing a string of eight weeks of increasing prices. The reporter credited discussions of slowing shipments from the Bakken formation as the reason that traders believed that supplies would fall in relation to demand. There were some rumors that some Bakken rail terminals were closed; the more likely case is that the additional testing requirements slowed the loading processes.
Oil production in the US is approximately 8.5 million barrels of oil per day; each dollar increase in the price increases the revenue in the extraction end of the business by about $3 billion per year.
Yesterday, Warren Buffett, a well diversified investor whose Berkshire Hathaway holding company owns both BNSF, which is a major shipper from the Bakken formation, and a company that produces tanker rail cars, told an interviewer on CNBC that he expected new rules to require additional safety improvements to the tanker car fleet.
In some ways, this series of events brings back memories of the aftermath of the Deepwater Horizon accident that resulted in 11 deaths and a six month period of dumping millions of gallons of crude oil into the Gulf of Mexico. Most parts of the petroleum business, including the owners of the polluting well, benefitted as crude oil prices gradually increased around the world as a result of moderate extraction restrictions. Though there were other pressures, the slowing of exploration and production from the Gulf of Mexico contributed to a rise from a summer 2010 crude oil price of about $75 per barrel to a spring 2011 price of $123 per barrel.
In contrast, the consequences of the disaster at Fukushima, where an epic tsunami wiped out the power supplies for a nuclear power station and created a situation that destroyed four reactors — three of which were loaded with fuel and operating at the time the wave hit — has created a widespread slowdown in the nuclear industry. Market effects of that event include contributing to a dearth of new plant orders in most parts of the world, a loss of nuclear plant output, and a reduction in nuclear fuel consumption that has pushed the price of uranium down to levels last seen in the 1990s.