Magazine | March 10, 2014, Issue

Pipelines Don’t Derail

Why aren’t we developing the safest way to transport oil?

Now that the State Department has announced that TransCanada’s proposed Keystone XL oil pipeline would have no major environmental impact, President Obama should approve it and take steps to encourage additional pipelines to bring oil from new sources of production to refineries and consumers. The February 13 rail accident in Vandergrift, Pa., where 21 tank cars derailed, spilling 3,000 to 4,000 gallons of Canadian crude oil, underscores the need for more pipelines.

Building more pipelines would make the transportation of oil faster and safer. Petroleum production in North America is now nearly 18 million barrels a day, and could climb to 27 million barrels a day by 2020. Whether the oil is produced in Canada, Alaska, North Dakota, or the Gulf of Mexico, it will be used all over the continent. So the question of how to transport oil safely and reliably is not a transitory one linked only to Keystone XL or other pipeline controversies of the day.

The delay of Keystone XL and other pipelines is a tribute to the power of environmentalists, an important and destructive Democratic lobby. Yet the alliance of organized labor and environmentalists is fractured when it comes to Keystone. The Laborers’ International Union North America (LIUNA) is in favor of the pipeline, since its members would gain not only from its construction but also from associated projects generated by cheap energy. To cite just two examples, Germany’s BASF has announced plans for expansion in America, and an Egyptian firm is building a $1.8 billion fertilizer plant in Iowa.

LIUNA writes on its website that Keystone XL “will unlock good, family-supporting jobs for America at a time when families are losing their homes and desperately need good jobs. The reasonable thing is to build the pipeline, create jobs here and reduce our dependence on oil from hostile regimes, instead of caving to fringe extremists and seeing that oil go to China.”

Pipelines have been used to transport Canadian natural gas and oil, both across Canada and into the United States, for over a century. The United States is home to about 2.6 million miles of interstate pipeline regulated by the Transportation Department, carrying crude oil, petroleum products, and natural gas.

The Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) publishes data comparing the safety of transportation of oil and gas by pipeline, by road, and by rail. Operators report to PHMSA any incident that crosses a certain safety threshold, as well as injuries and fatalities.

Data on accident, injury, and fatality rates for the period 2005 through 2009, the latest data available, show that road and rail have higher rates of serious accidents, injuries, and fatalities than pipelines, even though more road and rail accidents go unreported.

The State Department’s environmental gold star for the Keystone project follows upon recommendations issued earlier this year by the National Transportation Safety Board (NTSB) regarding crude-oil transportation over railroads. In response to a July 2013 derailment in Quebec that killed 47 people, the NTSB addressed the need for “hazardous materials route analysis and selection, oil spill prevention and response plans, and identification and classification of hazardous materials in railroad freight transportation.” The board stated that railroad transportation has to be made safer.

The NTSB recommendation advises updating regulations put in place in 2008, when the Department of Transportation concluded that the risk posed by flammable liquids did not warrant the same precautions as explosives, poisonous-inhalation hazards, and radioactive materials. Now the NTSB seeks to expand the route-planning and -selection requirements that govern those materials to trains transporting flammable liquids, so they can avoid populous or otherwise risky areas.

Current regulations regarding comprehensive-response plans for oil spills do not apply to most tank cars. The regulations requiring comprehensive plans, as set out by the Transportation Department in enforcing the Clean Water Act, apply only to shipments exceeding 42,000 gallons. Tank cars carrying less than 42,000 gallons are required only to submit a basic response plan.

#page#The 2014 NTSB recommendation states that due to the increase in crude-oil transportation and the widespread use of unit trains carrying multiple tank cars, the potential for accidents resulting in large releases of oil and other hazardous materials is much higher than it was when the regulation was initially developed.

Not long before the accident in Vandergrift, January saw a train derailment in Plaster Rock, New Brunswick, causing spills of crude oil and propane. The year 2013 featured a series of rail accidents involving crude oil, including accidents in Minnesota in March, with 30,000 gallons spilled, and in November in Alabama, where a train carrying 2.7 million gallons derailed, spilling some 750,000 gallons.

It isn’t surprising that pipelines are far safer than road and rail. With pipelines, the shipping container — i.e., the pipe — is static while the oil moves. Plus, that container is usually buried under several feet of earth. With road, rail, and barge, both the container and the commodity are moving over the surface, often in close proximity to people, as well as to other large containers moving in different directions. Then the container must return empty to its point of origin to load more oil, a waste of resources.

Unfortunately, transport of crude oil by rail has been expanding at an accelerating rate, owing to limits on U.S. pipeline capacity and rising oil production. In 2012, U.S. Class I railroads delivered 233,811 carloads of crude, compared with 66,000 in 2011 and 9,500 in 2008. RBC Capital Markets estimates that 115,000 barrels of oil per day were shipped by rail to the United States in 2013, with a trend toward 300,000 barrels per day by 2015. For perspective, the Keystone XL pipeline, if approved, would carry 830,000 barrels per day. Whether oil transport by rail continues to grow depends heavily on whether large pipelines are built.

An October 2013 study by analyst Trisha Curtis of the Energy Policy Research Foundation shows that the lack of pipelines is also causing federal and state governments to lose tax revenue. The reason: If oil cannot be cheaply transported to its destination, its value declines. Oil produced in North Dakota, for example, was $31 a barrel cheaper than Brent crude (whose cost is used as a benchmark price) at the time the report was written. Now North Dakota oil sells at a $20 discount because it is costly to transport. Curtis calculates that a dollar discount reduces North Dakota’s tax revenues by $3 million a month. A $20 discount adds up to $60 million a month in lost revenue.

And that’s just North Dakota. Oil from the Eagle Ford shale formation in Texas, as well as oil from Clearbrook, Minn., sold at a $17 discount below Brent crude last October. All over the country, states are losing tax revenues because there is not enough safe and efficient transportation for oil. Canada is a close U.S. ally and a major trading partner. But instead of using Canadian oil, we are importing oil from Venezuela, a country that not only is unfriendly to the United States but also uses the revenues to bankroll other left-wing governments in Latin America.

As America continues to ramp up production of oil and natural gas, and the administration continues to place constraints on coal use, pipeline infrastructure will become even more important. Not only should Obama approve Keystone XL, but he should call for firms to invest in a new generation of pipelines. Pipelines do not derail.

– Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21.org at the Manhattan Institute.

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