The Bursting of the Bakken Bubble?

It's time for a federal Emergency Order.
This post is 37 in the series: The Northwest's Pipeline on Rails
“Should an incident occur within or near a densely populated area … an incident … has the potential to be truly catastrophic and result in billions of dollars in personal injury and property damage claims. The damages potentially resulting from an exposure could risk the financial soundness and viability of the rail transportation network in North America.” The Association of American Railroads (AAR), Submission to Transport Canada, January 2014.

Bakken crude oil production has many of the classic characteristics of an economic bubble. It looks likely that, as with every bubble before, it will end. Whether it ends catastrophically or just badly depends on how regulators act.

Some of the primary features of a bubble include a very rapid market expansion based on an unrealistic assessment of underlying risk, lax regulation, and an overly optimistic belief in continued rapid growth. In hindsight, it should have been obvious that hundreds of billions of dollars of poorly hedged sub-prime loans that depended on ever-rising housing prices were a huge risk. When the sub-prime mortgage bubble burst, the entire financial system was so distressed that a government bailout was required to save it. On a smaller scale, the same might be said for shipping huge amounts of explosive shale oil in unsafe, poorly insured tank cars through hundreds of populated areas: the risks are obvious but poorly hedged, and the enterprise can result in tremendous negative consequences for communities. In a realistic worst-case scenario, the Bakken oil train bubble bursting catastrophically could jeopardize the viability of the North American rail transportation network.

The mechanism most likely to pop the Bakken bubble is an Emergency Order issued by the US Department of Transportation (USDOT) that immediately removes unsafe legacy DOT-111 tank cars from use in oil trains. An executive order like that—already thoroughly justified and well within USODT’s authority—would severely curtail oil production in the Bakken region because there is no alternative method for shipping the volumes of oil currently being produced.

The real question may be “when,” not “if,” USDOT will issue the order. Deborah Hersman, the recent chair of the National Transportation Safety Board urged regulators not to wait for “a higher body count before they move forward.”

Regulatory authority and an imminent hazard

The US federal government regulates railroad safety via agencies under the USDOT umbrella. (Local and state government laws are preempted from regulating railroads.) The Secretary of USDOT has the authority to impose Emergency Orders on railroads upon determination that “…an unsafe condition or practice, constitutes or is causing an imminent hazard.” In other words, USDOT Secretary Anthony Foxx has the authority to skip an extended “rulemaking” process and simply issue an Emergency Order banning the use of legacy unsafe DOT-111 tanks cars for transporting crude oil.

Hersman’s former agency, the National Transportation Safety Board (NTSB), conducts independent crash investigations, but lacks regulatory authority. And since the 1990s, the NTSB has investigated and documented accidents involving legacy DOT-111 tanks cars. According to the NTSB, legacy DOT-111s can ”…almost always be expected to breach in derailments that involve pileups or multiple car-to-car impacts.”

So why are these older unsafe cars still on the rails? In part because a provision in federal law making railroads operate under a “common carrier obligation.” Railroads are, in fact, actually prohibited by law from refusing to haul any legal load, even if would be inconvenient or unprofitable. Or dangerous. So oil companies load unstable crude into legal (but unsafe) tank cars and the railroads must haul them, and they will continue to until federal regulators determine these tank cars are no longer okay to use.

Railroad workers generally do an excellent job of moving cargo through cities without incident. Yet accidents do occasionally happen. And oil trains will derail just as freight trains derail, except the consequences can be much more severe. In May, Grays Harbor County in Washington, the location for a proposed oil-by-rail train terminal, experienced three freight train derailments within a two week period.  Sightline mapped every derailment in the Northwest from June 2011 to December 2013 and found that on average one freight train derailment occurs every three-and-a-half days.

And derailments and releases of crude oil have increased dramatically as oil-by-rail traffic has increased.

tank car accidents 1. Image by NTSB, used with permission.

Tank car accidents 1 by US National Transportation Safety Board (Used with permission.)

tank car accidents 2 by NTSB

Tank car accidents 2 by US National Transportation Safety Board (Used with permission.)

There is a well-documented risk of imminent hazard from oil train derailments. And to a certain degree the USDOT recognizes this. On May 7, on the heels of yet another oil train explosion-–-this one in Lynchburg, Virginia—it issued a voluntary safety advisory urging that Bakken crude not be shipped in legacy DOT-111 tank cars. Transport Canada, the Canadian railroad regulator, has moved somewhat more assertively. It recently issued its version of an emergency order to immediately prohibit the use of 5,000 of the least crash-resistant legacy DOT-111 tank cars for the shipping of hazardous material including crude oil. Though prohibited in Canada, these tank cars are still perfectly legal for shipping hazardous materials and crude oil in the US. In addition, Transport Canada will require that all legacy tank cars used for the transportation of crude oil and ethanol be phased out of service or retrofitted within three years.

It doesn’t take much imagination to believe that USDOT’s passivity so far results from push back by the oil industry that fears losing shipping capacity.

Systemic risk and a catastrophic oil train accident

“Systemic risk” is a term for the risk of a collapse of an entire market caused by the failure of one big institution. After the searing experience of the 2008 financial meltdown, the federal government put into place regulations ensuring that financial institutions had the capitalization they would need to handle their own potential losses in a worst case scenario event, instead of depending on the government for a bailout.

Yet today’s railroad industry is every bit as exposed to systemic risk as the finance sector was then due to a combination of their common carrier obligation and a liability regime that imposes all costs from a worst-case oil train derailment on the railroad. The billions of dollars in personal injury and property damage claims from a catastrophic derailment in a populated area could, according to the American Association of Railroads, “risk the financial soundness and viability of the rail transportation network in North America.”

At most, a Class 1 railroad has $1 to $1.5 billion in liability insurance — far less than what is needed for a worst-case accident. “Insurance should be recognized for what it is; an inadequate secondary layer of protection,” the Canadian Pacific railroad told Transport Canada in its investigation of systemic risk in the railroad industry. Right now, the primary layer of protection is the taxpayer.

The oil companies profiting from the Bakken boom are creating this systemic risk by shifting all risk and costs from a crude oil train derailment onto under-insured railroads and the public. When questioned about this, oil companies like Valero blithely respond that a railroad “bears this responsibility and has the duty to ensure carrying a sufficient insurance coverage. Should insurance premiums increase, the market will adjust and the ‘user pays’ principle will continue to apply.”

But the oil companies well know that even if a railroad wanted to buy insurance for a truly catastrophic accident—a 300 foot-tall fireball in downtown Spokane, say—no one would sell it to them.

“There is not currently enough available coverage in the commercial insurance market anywhere in the world to cover the worst-case [train derailment] scenario,” according to an industry expert quoted in the Wall Street Journal.

Taxpayers will inevitably be forced to pick up the billions in uninsured costs from a catastrophic oil train accident to prevent the bankruptcy of a Class 1 railroad and maintain the viability of rail transportation in North American.

The systemic risk produced by each and every trip a crude oil train makes through a populated area certainly should be a reason to prohibit the use of legacy DOT-111s.

The Bakken Bust

The rapid increase in oil-by-rail has largely been to serve shale oil production out of the Bakken region where there is a lack of pipeline infrastructure.

According to the oil industry, there are about 26,000 legacy DOT-111s in crude oil service now, making up 70 percent of the current fleet. Based on oil industry statements, shippers are not planning to pull even a single one of these from service by the end of 2015. To the contrary, the oil industry expects that legacy DOT-111 tank cars “could be needed for the next decade if the industry is going to meet the challenge of moving booming crude production to markets.”

If legacy DOT-111 tank cars are eventually prohibited by Emergency Order – whether before or after the next disaster—it will inevitably reduce crude oil shipping capacity. In fact, industry representatives have warned “that the railway supply industry will have a hard time meeting the rising demand for new cars while retrofitting existing ones.” Shippers looking to buy rail cars are already facing a two-year backlog in some markets.

Without the nearly 26,000 older, unsafe legacy tank cars, Bakken production will be forced to decline dramatically simply because there will be no way to move the crude to refineries in sufficient volume. So right now, the oil industry is doing everything it can to prevent an Emergency Order including, ordering up a study alleging that, despite all the online videos of oil train derailments and resulting fireballs, Bakken oil is actually no more flammable than other commonly shipped hazardous materials, and it is perfectly fine to ship in legacy DOT-111s.

It’s very likely that an Emergency Order on legacy DOT-111s is coming—whether proactively issued by USDOT out of regard for public safety, or after the next big oil train accident. And if it requires an immediate phase-out of all the legacy tanks cars, the Bakken bubble will burst.


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  1. Cass Martinez says:

    There is another way the oil transport investors have hedged their risky bet, by offloading it to our public employees’ retirement hopes and to Oregon itself.

    1. Blackstone/GSO provides $ to Global Partners to buy Port Westward plant and North Dakota transload for Bakken oil:

    2. Oregon Investment Council (using the Public Employees Retirement Fund etc.)invests in GSO:

    3. “OPERF” has $100m in GSO Fund I and $100m in GSO Fund II. page 10 and 11 of the pdf.,%20Agendas%20and%20Mintes/OIC.PUBLIC%20BOOK-SECURE12.01.10.pdf

    The risk of the project is known, but not acknowledged outside of
    the investment world:

    1. Global Partners has “razor-thin profit margins”.

    2. GSO likes risky investments with lots of side-bet action; the imprimatur of Blackstone lets GSO move the risk to institutional investors like the State of Oregon.

  2. Sandy Wood says:

    Vancouver, Washington had an “incident” on Wednesday morning (6\11\14)
    Individual was standing on tracks, forcing lengthy Bakken crude oil train to come to stop, fortunately without derailing!
    After an hour and a half of inspection, etc, the train continued; our at-grade crossings were of course blocked the entire time.
    That danger was far exceeded by the potential of a derailment and explosion, involving large numbers of people at ground level and the I-205 bridge! This happened where the RR tracks run along the highly populated area along the Columbia River, crossing under the bridge.
    BNSF told the Columbian newspaper that it was a “freight” train!
    How blind do they think the public is?

  3. David Moore says:

    The key point made by Eric is that railroads cannot legally refuse to haul legal cargo loads. so to stop it or slow it government or a lawsuit would have to determine the loads, routes, lack of protective safeguards etc. or rail cars to be illegal.

  4. M1-99 says:

    China says Solar will be cheaper then Coal in just 2 years.
    So too, Tar Sands.

    Wall Street isn’t dumb enough to see Solar Prices Plummet, Solar Capacity increase 20% a year and continue to invest in DEAD END Tar Tech.

  5. yt75 says:

    About oil and the petro dollar, if there is a “myth” or false common image that it would be urgent to get out of, it is :

    “first oil shock (73) = Yom Kippur/Arab embargo= geopolitical story= nothing to do with geologic constraints”

    When the real story was much more :

    – end 1970 : US production peak, the energy crisis starts from there, with some heating fuel shortages for instance (some articles can be found on NYT archive on that), or :
    – Nixon name James Akins to go check what is going on.
    – Akins goes around all US producers, saying this won’t be communicated to the media, but needs to be known, national security question
    – The results are bad : no additional capacity at all, production will only go down, the results are also presentede to the OECD
    – The reserves of Alaska, North Sea, Gulf of Mexico, are known at that time, but to be developed the barrel price needs to be higher
    – In parallel this is also the period of “rebalance” between oil majors and countries on each barrel revenus (Ghadaffi being the first to push 55/50 for instance), and creation of national oil companies.
    – there is also the dropping of B Woods in 71 and associated $ devaluation, also putting a “bullish” pressure on oil price.
    – So to be able to start Alaska, GOM, North Sea, and have some “outside OPEC” market share, the barrel price needs to go up (always good for oil majors anyway) and this is also US diplomacy strategy
    – For instance Akins, then US ambassador in Saudi Arabia, is the one talking about $4 or $5 a barrel in an OAPEC meeting in Algiers in 1972
    – Yom Kippur starts during an OPEC meeting in Vienna, which was about barrel revenus percentages, and barrel price rise.
    – The declaration of the embargo pushes the barrel up on the spots markets (that just have been set up)
    – But the embargo remains quite limited (not from Iran, not from Iraq, only towards a few countries)
    – It remains fictive from Saudi Arabia towards the US : tankers kept on going from KSA, through Barhain to make it more discrete, towards the US Army in Vietnam in particular.
    – Akins is very clear about that in below documentary interviews (which unfortunately only exists in French and German to my knowledge, and interviews are voiced over) :
    For instance after 24:10, where he says that two senators were starting having rather “strong voices” about “doing something”, he asked the permission to tell them what was going on, got it, told them, they shat up and there was never any leak. The first oil schock “episode” starts at 18:00
    The “embargo story” was in fact very “pratical”, both for the US to “cover up” US peak towards US public opinion or western one in general, but also for major Arab producers to show “the arab street” that they were doing something for the Palestinians.

    In the end, clearly a wake up call that has been missed.

    Note : About Akins, see for instance :

    And his famous foreign affair article :

    His report to Nixon in 71 or 72 is still classified to my knowledge though, would be interesting to know if it can be declassified now.

    • portrait Rich Feldman says:

      Really interesting history. To think doubling to $5(nominal) per barrel oil was a huge deal. Though I think the issue was the rapidity of the rise. Sudden jumps in commodity prices like oil definitely are a negative for the economy.

      The chart of U.S. crude oil production and imports to current time shows not just the peak in 1970 of US production but also the current drop in imports due to demand destruction and gains in efficiency and increase in U.S. production from the shale oil boom both caused/made possible by $100 per barrel oil.

      Your comment makes me think that it is not necessarily just pressure from oil companies concerned about loss of shipping capacity that may be inhibiting rapid removal of unsafe legacy DOT-111s. The role Bakken crude is perceived to play in maintaining stable oil prices by off-setting global depletion of existing fields is also likely a significant factor.

      • Mark Robinowitz says:

        It’s unlikely that Bakken crude will have much impact on oil prices and availability. A couple billion barrels (at most) will merely impact the shape of the downslope. Meanwhile, the Alaska Pipeline is almost over, which is completely ignored everywhere, especially in the Pacific Northwest where much of the oil comes from this source. If you eat food brought by delivery truck you should pay attention.

        Alaska peaked in 1988 at over two million barrels a day, now it’s just above a half million a day. Bakken is not at Alaska’s peak flow and probably won’t ever get there. Meanwhile, the US Dept of Energy just admitted that fracking for oil in California is an illusion and downsized their estimate of 15 billion barrels by 96% percent. When the fracking bubble subsides (due to geology) the energy crisis will be back and nearly everyone – even environmentalists – are likely to be very surprised, especially after the last few years of propaganda about USA energy independence.

        Kudos to Post Carbon Institute for telling the truth about fracking limits and for being proved correct by US Dept of Energy. Their site is highly recommended for energy literacy.

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