There's nothing new in moving oil by rail. In the late 1860s, John D. Rockefeller began investing in railroad tanker cars, a move that saved him the cost of building barrels to hold his product. The oil baron's control over the Cleveland-area refining market allowed him to negotiate favorable shipping rates with the railroads.
U.S. and Canadian oil producers aren't waiting for the Keystone XL or other pipelines; they are building rail-car terminals so they can ship their product to market. In North Dakota alone, oil producers have built rail terminals capable of handling nearly 1 million barrels of oil per day.
Refineries are also building rail terminals. Last month, Delek U.S. Holdings, a subsidiary of the Israeli energy company Delek Group, announced that it will begin refining 15,000 barrels of Canadian crude at its El Dorado, Ark., refinery. All of that oil is being shipped in by rail. A refinery in Delaware, owned by PBF Energy, recently completed a rail terminal that will allow it to take up to 110,000 barrels of crude oil per day. The Sunoco refinery in South Philadelphia as well as a Phillips 66 refinery in Bayway, N.J., are also ramping up their ability to accept more crude by rail.
Earlier this month, Sandy Fielden, an analyst for energy consulting firm RBN Energy, reported that about 1 million barrels per day of new rail-unloading capacity is being built or planned in the United States. Fielden says that "the crude-by-rail express came from nowhere on the radar screen" to become one of the biggest energy stories of 2012. And Fielden says that railroads have shown themselves to be "faster and more flexible than traditional pipeline development."
Rusty Braziel, RBN's president, told me that the surge in moving oil by rail will continue because railroads give oil producers advantages that aren't available when shipping their oil by pipeline. The most important one, says Braziel, is "optionality." With a pipeline, producers can ship their oil only from Point A to Point B. By putting oil on rail cars, if prices at Point B are too low, the producer can ship to other buyers by simply rerouting the train. Furthermore, says Braziel, with pipelines, oil producers often have to make a commitment to ship their product on a given pipe for 10 or even 20 years. "The railroads will build a terminal for an 18- to 36-month commitment," says Braziel. "The pipeline guys have got to be scared."