Category Archives: Oil prices

Heinberg – Our Fossil Fuel Economy – times they are a’changin’

Repost from Pacific Standard, PS Magazine
[Editor: this is a serious primer on our fossil-fuel-driven economy and the global climate crisis by Richard Heinberg of the Post Carbon Institute.  It’s well worth your time to study, and a keeper for reference.  Significant quote: “While America’s current gross oil production numbers appear rosy, from an energy accounting perspective the figures are frightening: Energy profit margins are declining fast.”  – RS]

The Gross Society: We’re Entering an Age of Energy Impoverishment

By Richard Heinberg   •    April 18, 2014
gross-society-1

Tar sands development in Northern Alberta, Canada. (Photo: Christopher Kolaczan/Shutterstock)
It’s hard to overstate just how serious a threat our energy crisis is to every aspect of our current way of life. But the problem is hidden from view by oil and natural gas production numbers that look and feel just fine.

In his most recent State of the Union address, President Obama touted “more oil produced at home than we buy from the rest of the world—the first time that’s happened in nearly 20 years.” It’s true: U.S. crude oil production has increased from about five million barrels per day to nearly 7.75 mb/d over the past five years (we still import over 7.5 mb/d).  And American natural gas production is at an all-time high.

But there’s a problem. We’re focusing too much on gross numbers. (The definition of gross I have in mind is “exclusive of deductions,” as in gross profits versus net profits., though other definitions apply here, too.) While these gross numbers appear splendid, when you look at net, things go pear-shaped, as the British say.

Our economy is 100 percent dependent on energy: With more and cheaper energy, the economy booms; With less and costlier energy, the economy wilts. When the electricity grid goes down or the gasoline pumps run dry, the economy simply stops in its tracks.

But the situation is actually a bit more complicated, because it takes energy to get energy. It takes diesel fuel to drill oil wells; It takes electricity to build solar panels. The energy that’s left over—once we’ve fueled the production of energy—makes possible all the things people want and need to do. It’s net energy, not gross energy, that does society’s work.

Before the advent of fossil fuels, agriculture was our main energy source, and the average net gain from the work of energy production was minimal. Farmers grew food for people—who did a lot of manual work in those days—and also for horses and oxen, whose muscles provided motive power for farm machinery and for land transport via carts and carriages. Because margins were small, most people had to toil in the fields in order to produce enough surplus to enable a small minority to live in towns and specialize in arts and crafts (including statecraft and soldiery).

In contrast, the early years of the fossil fuel era saw astounding energy profits. Wildcat oil drillers could invest a few thousand dollars in equipment and drilling leases and, if they struck black gold, become millionaires almost overnight. (For a taste of what that was like, watch the classic 1940 film Boom Town, with Clark Gable and Claudette Colbert.)

Huge energy returns on both energy and financial investments in drilling made the fossil fuel revolution the biggest event in economic history. Suddenly society was awash with surplus energy. Cheap energy plus a little invention yielded mechanization. Farming became an increasingly mechanized (i.e., fossil-fueled) occupation, which meant fewer field laborers were needed. People left farms and moved to cities, where they got jobs on powered assembly lines manufacturing an explosively expanding array of consumer goods, including labor-saving (i.e., energy-consuming) home machinery like electric vacuum cleaners and clothes washers. Household machines helped free women to participate in the work force. The middle class mushroomed. Little Henry and Henrietta, whose grandparents spent their lives plowing, harvesting, cooking, and cleaning, could now contemplate careers as biologists, sculptors, heart specialists, bankers, concert violinists, professors of medieval French literature—whatever! Human ambition and aspiration appeared to know no bounds.

Unfortunately, there are a couple of problems with fossil fuels: They are finite in quantity and of variable quality. We have extracted them using the low-hanging fruit principle, going after the highest quality, cheapest-to-produce oil, coal, and natural gas first, and leaving the lower quality, more expensive, and harder-to-extract fuels for later. Now, it’s later.

oil-graphic

It’s helpful to visualize this best-first principle by way of a diagram of what geologists call the resource pyramid. Extractive industries typically start at the top of the pyramid and work their way down. This was the case historically when coal miners at the beginning of the industrial revolution exploited only the very best coal seams, and it’s also true today as tight oil drillers in places like North Dakota concentrate their efforts in core areas where per-well production rates are highest.

We’ll never run out of any fossil fuel, in the sense of extracting every last molecule of coal, oil, or gas. Long before we get to that point, we will confront the dreaded double line in the diagram, labeled “energy in equals energy out.” At that stage, it will cost as much energy to find, pump, transport, and process a barrel of oil as the oil’s refined products will yield when burned in even the most perfectly efficient engine.

As we approach the energy break-even point, we can expect the requirement for ever-higher levels of investment in exploration and production on the part of the petroleum industry; We can therefore anticipate higher prices for finished fuels. Incidentally, we can also expect more environmental risk and damage from the process of fuel “production” (i.e., extraction and processing), because we will be drilling deeper and going to the ends of the Earth to find the last remaining deposits, and we will be burning ever-dirtier fuels.

That’s exactly what is happening right now.

WHILE AMERICA’S CURRENT GROSS oil production numbers appear rosy, from an energy accounting perspective the figures are frightening: Energy profit margins are declining fast.

Each year, a greater percentage of U.S. oil production comes from unconventional sources—primarily tight oil and deepwater oil.Compared to conventional oil from most onshore, vertical wells, these sources demand much higher capital investment per barrel produced. Tight oil wells typically require directional drilling and fracking, which take lots of money and energy (not to mention water); Initial production rates per well are modest, and production from each tends to decline quickly. Therefore, more wells have to be drilled just to maintain a constant rate of flow. This has been called the “Red Queen” syndrome, after a passage in Lewis Carroll’s Through the Looking Glass.

In Carroll’s story, the fictional Red Queen runs at top speed but never gets anywhere. “It takes all the running you can do, to keep in the same place,” she explains to Alice. Similarly, it will soon take all the drilling the industry can do just to keep production in the fracking fields steady. But the plateau won’t last; As the best drilling areas become saturated with wells and companies are forced toward the periphery of fuel-bearing geological formations, costs will rise and production will fall. When, exactly, will the decline begin? Probably before the end of this decade.

Deepwater production is expensive, too. It involves operating in miles of ocean water on giant drilling and production rigs. Deepwater drilling is also both environmentally and financially risky, as BP—and the rest of us—discovered in the Gulf of Mexico in 2010.

America is turning increasingly to unconventional oil because conventional sources of petroleum are drying up—fast. The United States is where the oil business started and, in the past century-and-a-half, more oil wells have been drilled here than in the rest of the world’s countries put together. In terms of our resource pyramid diagram, the U.S. has drilled through the top “conventional resources” triangle and down to the thick dotted line labeled “price/technology limit.” At this point, new technology is required to extract more oil, and this comes at a higher financial cost not just to the industry, but ultimately to society as a whole. Yet society cannot afford oil that’s arbitrarily expensive: The “price/technology limit” is moveable up to a point, but we may be reaching the frontiers of affordability.

gross-society-2Trans-Alaska Oil Pipeline. (Photo: Alberto Loyo/Shutterstock)

Lower energy profits from unconventional oil inevitably show up in the financials of oil companies. Between 1998 and 2005, the industry invested $1.5 trillion in exploration and production, and this investment yielded 8.6 million barrels per day in additional world oil production. But between 2005 and 2013, the industry spent $4 trillion on exploration and production, yet this more-than-doubled investment produced only 4 mb/d in added production.

It gets worse: All net new production during the 2005-13 period came from unconventional sources; of the $4 trillion spent, it took $350 billion to achieve a bump in production. Subtracting unconventionals from the total, world oil production actually fell by about a million barrels a day during these years. That means the oil industry spent over $3.5 trillion to achieve a decline in overall conventional production.

Last year was one of the worst ever for new discoveries, and companies are cutting exploration budgets. “It is becoming increasingly difficult to find new oil and gas, and in particular new oil,” Tim Dodson, the exploration chief of Statoil, the world’s top conventional explorer, recently told Reuters. “The discoveries tend to be somewhat smaller, more complex, more remote, so it is very difficult to see a reversal of that trend…. The industry at large will probably struggle going forward with reserve replacement.”

The costs of oil exploration and production are currently rising at about 10.9 percent per year, according to Steve Kopits of the energy analytics firm Douglas-Westwood. This is squeezing the industry’s profit margins, since it’s getting ever harder to pass these costs on to consumers.

In 2010, The Economist magazine discussed rising costs of energy production, musing that “the direction of change seems clear. If the world were a giant company, its return on capital would be falling.”

Tim Morgan, formerly of the London-based brokerage Tullett Prebon (whose customers consist primarily of investment banks), explored the average Energy Return on Energy Investment (EROEI) of global energy sources in one of his company’s Strategy Insights reports, noting: “For 2020, our projected EROEI (of 11.5:1) [would] mean that the share of GDP absorbed by energy costs would have escalated to about 9.6 percent from around 6.7 percent today. Our projections further suggest that energy costs could absorb almost 15 percent of GDP (at an EROEI of 7.7:1) by 2030…. [T]he critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.”

From an energy accounting perspective, the situation is in one respect actually worst in North America—which is deeply ironic: It’s here that production has grown most in the past five years, and it’s here that the industry is most boastful of its achievements. Yet the average energy profit ratio for U.S. oil production has fallen from 100:1 to 10:1, and the downward trend is accelerating as more and more oil comes from unconventional sources.

These profit ratios might be spectacular in the financial world, but in energy terms this is alarming. Everything we do in industrial societies—education, health care, research, manufacturing, transportation—requires energy. Unless our investment of energy in producing more energy yields an average profit ratio of roughly 10:1 or more, it may not be possible to maintain an industrial (as opposed to an agrarian) mode of societal organization over the long run.

gross-society-3A barrier stops oil coming ashore on June 5, 2010, in Grand Isle, Louisiana, after the Deepwater Horizon oil spill. (Photo: Katherine Welles/Shutterstock)

NONE OF THE UNCONVENTIONAL sources that the petroleum industry is turning toward (tight oil, tar sands, deepwater) would have been developed absent the context of high oil prices, which deliver more revenue to oil companies; it’s those revenues that fund ever-bigger investments in technology. But older industrial economies like the U.S. and European Union tend to stall out if oil costs too much, and that reduces energy demand; This “demand destruction” safety valve has (so far) set a limit on global petroleum prices. Yet for the major oil companies, prices are currently not high enough to pay for the development of new projects in the Arctic or in ultra-deepwater; this is another reason the majors are cutting back on exploration investments.

For everyone else, though, oil prices are plenty high. Soaring fuel prices wallop airlines, the tourism industry, and farmers. Even real estate prices can be impacted: As gasoline gets more expensive, the lure of distant suburbs for prospective homebuyers wanes. It’s more than mere coincidence that the U.S. housing bubble burst in 2008 just as oil prices hit their all-time high.

Rising gasoline prices (since 2005) have led to a reduction in the average number of miles traveled by U.S. vehicles annually, a trend toward less driving by young people, and efforts on the part of the auto industry to produce more fuel-efficient vehicles.Altogether, American oil consumption is today roughly 20 percent below what it would have been if growth trends in the previous decades had continued.

To people concerned about climate change, much of this sounds like good news. Oil companies’ spending is up but profits are down. Gasoline is more expensive and consumption has declined.

There’s just one catch: None of this is happening as a result of long-range, comprehensive planning. And it will take a lot of effort to minimize the human impact of a societal shift from relative energy abundance to relative energy scarcity. In fact, there is virtually no discussion occurring among officials about the larger economic implications of declining energy returns on investment. Indeed, rather than soberly assessing the situation and its imminent economic challenges, our policymakers are stuck in a state of public relations-induced euphoria, high on temporarily spiking gross U.S. oil and gas production numbers.

The obvious solution to declining fossil fuel returns on investment is to transition to alternative energy sources as quickly as possible. We’ll have to do this anyway to address the climate crisis. But from an energy accounting point of view, this may not offer much help. Renewable energy sources like solar and wind have characteristics very different from those of fossil fuels: The former are intermittent, while the latter are available on demand. Solar and wind can’t affordably power airliners or 18-wheel trucks. Moreover, many renewable energy sources have a relatively low energy profit ratio.

One of the indicators of low or declining energy returns on energy investment is a greater requirement for human labor in the production process. In an economy suffering from high unemployment, this may seem like a boon. Indeed, here is an article that touts solar energy as a job creator, employing more people than the coal and oil industries put together (even though it produces far less energy for society).

Yes, jobs are good. But what would happen if we went all the way back to the average energy returns-on-investment of agrarian times? There would certainly be plenty of work to be done. But we would be living in a society very different from the one we are accustomed to, one in which most people are full-time energy producers and society is able to support relatively few specialists in other activities. Granted, that’s probably an exaggeration of our real prospects: At least some renewable energy sources can give us higher returns than were common in the last agrarian era. However, they won’t power a rerun of Dallas. This will be a simpler, slower, and poorer economy.

gross-society-4Transporting crude by rail. (Photo: Steven Frame/Shutterstock)

IF OUR ECONOMY RUNS on energy, and our energy prospects are gloomy, how is it that the economy is recovering?

The simplest answer is that it’s not—except as measured by a few misleading gross statistics. Every month the Bureau of Labor Statistics releases figures for new jobs created, and the numbers look relatively good at first glance (113,000 net new jobs for January 2014). But most of these new jobs pay less than those that were lost in recent years. And unemployment statistics don’t include people who’ve given up looking for work. Labor force participation rates are at their lowest level in 35 years.

All told, according to a recent Gallup poll, more Americans say they are worse off today than they were a year ago (as opposed to those who say their situation has improved).

Claims of economic recovery fixate primarily on one number: Gross Domestic Product, or GDP. That number is going up—albeit at an anemic pace in comparison with rates common in the 20thcentury; hence, the economy is said to be growing. But what does this really mean? When GDP rises, that indicates more money is flowing through the economy. Typically, a higher GDP equates to greater consumption of goods and services, and therefore more jobs. What’s not to like about that?

First, there are ways of making GDP grow that don’t actually improve lives. Economist Herman Daly calls this “uneconomic growth.” For example, if we spend money on rebuilding after a natural disaster, or on prisons or armaments or cancer treatment, GDP rises. But who wants more natural disasters, crime, wars, or cancer? Historically, the burning of ever more fossil fuels was closely tied to GDP expansion, but now we face the prospect of devastating climate change if we continue increasing our burn rate. To the extent GDP growth is based on fossilfuel consumption, when GDP goes up we’re actually worse off because of it. Altogether, Gross Domestic Product does a really bad job of capturing how our economy is doing on a net basis.

Second, a growing money supply (which is implied by GDP growth) depends upon the expansion of credit. Another way to say this is: A rising GDP (in any country with a floating exchange rate) entails increasing levels of outstanding debt. Historical statistics bear this out. But is any society able to expand its debt endlessly?

If there were indeed limits to a country’s ability to perpetually grow GDP by increasing its total debt (government plus private), a warning sign would likely come in the form of a trend toward diminishing GDP returns on each new unit of credit created. That’s exactly what we’ve been seeing in the U.S. in recent years. Back in the 1960s, each dollar of increase in total U.S. debt was reflected in nearly a dollar of rise in GDP. By 2000, each new dollar of debt corresponded with GDP growth of only $0.20. The trend line will reach zero in about 2016.

Meanwhile, it seems that Americans have taken on about as much household debt as they can manage, as rates of consumer borrowing have been stuck in neutral since the start of the Great Recession. To keep debt growing (and the economy expanding, if only statistically), the Federal Reserve has artificially kept interest rates low by creating up to $85 billion per month through a mere adjustment of its ledgers (yes, it can do that); it uses the money to buy Treasury bills (U.S. government debt) from Wall Street banks. When interest rates are low, people find it easier to buy houses and cars (hence the recent rise in house prices and the auto industry’s rebound); it also makes it cheaper for the government to borrow—and, in case you haven’t noticed, the federal government has borrowed a lot lately.

The Fed’s Quantitative Easing (QE) program props up the banks, the auto companies, the housing market, and the Treasury. But, with overall consumer spending still anemic, the trillions of dollars the Fed has created have generally not been loaned out to households and small businesses; they’ve simply pooled up in the big banks.Fed policy has thus generated a stock market bubble, as well as a bubble of investments in emerging markets, and these can only continue to inflate for as long as QE persists.

gross-society-5Oil drilling derrick. (Photo: James Jones Jr/Shutterstock)

The obvious way to keep these bubbles from growing and eventually bursting (with attendant financial toxicity spilling over into the rest of the economy) is to stop QE. But doing that will undermine the “recovery,” such as it is, and might even send the economy careening into depression. The Fed’s solution to this “damned if you do, damned if you don’t” quandary is to taper QE, reducing it gradually over time. This doesn’t really solve anything; it’s just a way to delay and pretend.

With money as with energy, we are doing extremely well at keeping up appearances by characterizing our situation with a few cherry-picked numbers. But behind the jolly statistics lurks a menacing reality.  Collectively, we’re like a dietician who has adopted the attitude of the more you weigh, the healthier you are! How gross would that be?

THE WORLD IS CHANGING. Cheap, high-EROEI energy and genuine economic growth are disappearing. Rather than recognizing that fact, we hide it from ourselves with misleading figures. All that this accomplishes is to make it harder to adapt to our new reality.

The irony is, if we recognized the trends and did a little planning, there could be an upside to all of this. We’ve become over-specialized anyway. We teach our kids to operate machines so sophisticated that almost no one can build one from scratch, but not how to cook, sew, repair broken tools, or grow food. We seem to grow increasingly less happy every year. We’re overcrowded, and continuing population growth is only making matters worse. Why not encourage family planning instead? Studies suggest we could dial back on consumption and be more satisfied with our lives.

What would the world look and feel like if we deliberately and intelligently nudged the brakes on material consumption, reduced our energy throughput, and relearned some general skills? Quite a few people have already done the relevant experiment.

Take a virtual tour of Dancing Rabbit ecovillage in northeast Missouri. or Lakabe in northern Spain. But you don’t have to move to an ecovillage to join in the fun; there are thousands of transition initiatives worldwide running essentially the same experiment in ordinary towns and cities, just not so intensively.

All of these efforts have a couple of things in common: First, they entail a lot of hard work and (according to what I hear) yield considerable satisfaction. Second, they are self-organized and self-directed, not funded or overseen by government.

The latter point is crucial—not because government is inherently wicked, but because it’s just not likely to be of much help in present circumstances. That’s because our political system is currently too broken to grasp the nature of the problems facing us.

Quite simply, we must learn to be successfully and happily poorer. For people in wealthy industrialized countries, this requires a major adjustment in thinking. When it comes to energy, we have deluded ourselves into believing that gross is the same as net. That’s because in the early days of fossil fuels, it very nearly was. But now we have to go back to thinking the way people did when energy profit margins were smaller. We must learn to operate within budgets and limits.

This means decentralization, simplification, and localization. Becoming less reliant on long-term debt, paying as we go. It means living closer to the ground, learning general skills, and keeping a hand in basic productive activities like growing food.

Think of our future as the Lean Society.

We can make this transition successfully, if not happily, if enough of us embrace Lean Society thinking and habits. But things likely won’t go well at all if we continue to hide reality from ourselves with gross numbers that delay our adaptation to accelerating, inevitable trends.

Richard Heinberg
Richard is a senior fellow of the Post Carbon Institute and is widely regarded as one of the world’s foremost Peak Oil educators. He is the author of 11 books, including Snake Oil: How Fracking’s False Promise of Plenty Imperils Our Future and The End of Growth: Adapting to Our New Economic Reality.
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    Crude trains: risky bridge conditions

    Repost from The Sacramento Bee
    [Editor: This is an excellent analysis of refinery benefits and risks, including commentary on the aging bridges used by oil tanker trains.  – RS]

    Crude oil trains revive Philadelphia refineries but deliver new risks

    By Curtis Tate
    McClatchy Washington Bureau
    Monday, Apr. 7, 2014

    Chunks of concrete are falling off Philadelphia’s 25th Street Viaduct, which stretches for several city blocks in South Philadelphia. Two or three loaded crude oil trains pass over the 86-year-old structure every day, bound for Philadelphia Energy Solutions, a sprawling refinery complex that’s now the largest single consumer of Bakken crude oil from North Dakota.

    PHILADELPHIA — Just a few years ago, the region’s refineries were on life support, hurt by high prices of oil imported from foreign countries. Now, they’re humming again with the daily deliveries of domestic crude in mile-long trains.

    As one of the country’s largest destinations for crude oil from North Dakota’s Bakken region, Philadelphia illustrates both the benefits, and risks, of a massive volume of oil moving by rail.

    “It’s a good marriage,” said Charles Drevna, president of the American Fuel & Petrochemical Manufacturers, an industry group. “Ultimately, it will be good for the consumer.”

    Bakken_and_bridges_McClatchy2014-04-07_325But even as the oil and the trains that bring it may have saved refineries and jobs, they’re testing the limits of the city’s infrastructure and emergency response capabilities.

    In January, seven loaded tank cars derailed on the 128-year-old Schuylkill Arsenal Railroad Bridge over the Schuylkill River. Though no crude was spilled, one car dangled precariously over the river and Interstate 76. Investigators blamed it on faulty track maintenance.

    “We always hear that things will never happen,” testified former Rep. Curt Weldon, R-Pa., a former firefighter and mayor of nearby Marcus Hook, Pa., at a hearing last month, “but things always happen.”

    The city grew up around its rail network, so the only way to the refineries for trains is through town. Some rumble over a steel viaduct through the campuses of Drexel University and the University of Pennsylvania. Others snake through a tunnel under the iconic Philadelphia Museum of Art and the steps made famous by Rocky Balboa.

    One of the main routes to the sprawling refinery complex in South Philadelphia crosses a crumbling viaduct for several blocks through a residential neighborhood. Railroad officials say the 86-year-old viaduct is structurally sound, but residents are concerned about the chunks of concrete that regularly fall into the street.

    “It may be perfectly safe, but the impression it gives just by looking at it is something else,” said Roy Blanchard, a longtime South Philadelphia resident knowledgeable about the railroads.

    Robert Sullivan, a spokesman for CSX, which owns the structure and operates trains over it, said the viaduct was designed to accommodate heavy commodities, such as iron ore and coal, and the railroad is planning to improve it. It already has hired a contractor to begin removing loose sections of concrete.

    While other major endpoints for oil trains, including Albany, N.Y., and towns in the San Francisco Bay Area and the Pacific Northwest, have attempted to slow or stop the shipments because of environmental and safety concerns, Philadelphia largely has welcomed the boom.

    State and local officials hailed the opening in October of a rail yard that now unloads two 120-car trains carrying 80,000 barrels of oil every day to feed the largest refinery complex on the East Coast. A partnership between Sunoco and the Carlyle Group, a private equity firm, created Philadelphia Energy Solutions, which employs 1,000 workers.

    Without Bakken oil to replace expensive imports, the refinery would have closed.

    Republican Pennsylvania Gov. Tom Corbett, flanked by Philadelphia Mayor Michael Nutter and Rep. Robert Brady, both Democrats, called the revived operation “a symbol of the connection that exists between Pennsylvania’s expanding energy industry and the potential we have to achieve energy independence in North America.”

    But it’s also created new challenges for emergency response agencies.

    A series of fiery derailments involving Bakken crude oil since last summer has raised questions about whether government and industry fully accounted for the risks before railroads began hauling it. The worst killed 47 people in Lac-Megantic, Quebec. Others in Alabama and North Dakota, while not fatal, drove home the need for new precautions.

    “This crude is not the crude of old,” said Robert Full, chief deputy director of the Pennsylvania Emergency Management Agency.

    Full was testifying before a state House of Representatives oversight hearing last month in nearby Eddystone, Pa., the site of a rail-to-barge facility set to open this month. It will unload two trainloads of crude oil a day by the end of the year.

    Bob Andrews, a Texas entrepreneur and fire protection engineer, testified that Pennsylvania should consider developing a specific crude-by-rail response plan to protect communities and the investment they have in keeping the oil moving.

    “The Philadelphia area is a good place to start,” he said.

    Clifford Gilliam, a spokesman for the Philadelphia Fire Department, said the oil shipments don’t change emergency response procedures, but the department is preparing for the possibility of an event larger in size and scope than what it’s planned for in the past.

    He said the department has a good working relationship with the railroads and refineries and “has the training and capability to handle hazmat incidents and, if warranted, join forces with other agencies.”

    The rail operations, and risks, cross into Delaware and New Jersey. Norfolk Southern delivers a train every other day to a Sunoco terminal across the Delaware River in Westville, N.J., with plans to double the shipments later this year.

    Getting the cars into the Westville facility requires repeat backup moves that block two four-lane highways on a track only feet from several homes.

    The drawbridge the trains cross was completed in 1896. An $18.5 million grant from the U.S. Department of Transportation helped pay for repairs to the aging span in 2011, before the oil trains began rolling across it.

    At Eddystone, south of Philadelphia International Airport, workers are putting the finishing touches on new tracks that will transfer 160,000 barrels of oil daily from trains to barges by the end of the year. The companies involved in the operations say they’ve accounted for the risks.

    CSX reached an agreement with the Pennsylvania Emergency Management Agency last month to give first responders access to the railroad’s shipment tracking system. Norfolk Southern, which plans to supply the Eddystone facility, intends to offer safety training.

    Jack Galloway, president of Canopy Prospecting, one of the companies developing the Eddystone facility, assured lawmakers last month that it would be “top of the line,” equipped with containment units under the trains and floating barriers around the barges.

    “We don’t think there’s any possibility of this oil getting away,” he said.

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      Five myths about crude oil by rail

      Repost from TRAINS The Magazine of Railroading

      A lot of what you’ve been hearing is not true. It’s time to set the record straight

      COASTAL REFINERIES ARE FLOCKING TO OIL BY RAIL LIKE DROWNING MEN TO LIFE PRESERVERS.

      Fred W. Frailey, Trains Magazine, Feb2014, Vol. 74 Issue 2, p17

      Three years have passed since the village was rocked by the scandal, namely the remarriage, after half a century of divorce, of Mr. Big Rail and Ms. Crude Oil. People are still aghast. Who would have imagined these two would find each other attractive again? Yet a lot of loose tongues are still spreading gossip, and frankly, much of it is simply not true. To promote harmony in the village, your scribe this month wishes to set the record straight. Here are five commonly articulated myths that have no basis in fact.

      1. It’s just a fling and won’t last. The way oil is priced worldwide virtually guarantees this marriage will endure. The world oil price (Brent) in recent years has usually been $10 to $25 a barrel higher than the West Texas Intermediate (WTI) price for oil from the U.S. interior, and oil from new discoveries in North Dakota and Canada is further discounted from the WTI price. Follow me so far? Refineries on the west and east coasts are not reached by pipelines from the country’s oil-producing midsection, and had to pay the Brent price (or something close to it) to buy oil from overseas or Alaska’s North Slope. It was difficult for these refiners to compete and stay in business.

      Now these coastal refineries are flocking to oil by rail like drowning men to life preservers. If they can get oil $10 to $25 a barrel cheaper, they’re way ahead even after paying the railroads. Therefore, the east and west coasts, I maintain, will be the ultimate destination for much, if not most, of the oil coming from the Bakken shale formation in North Dakota and Saskatchewan. And the only way to get it there is by rail.

      2. The Keystone XL pipeline will disrupt the marriage. Not at all. TransCanada’s XL, according to the environmental impact statement, is supposed to bring up to 730,000 barrels a day of stuff from Canada (more about “stuff” in a minute) to refineries on the U.S. Gulf Coast, and pick up another 100,000 barrels of North Dakota oil as it passes through that state. But there are problems with the XL. First, it may never be approved by the U.S. government. Second, Gulf Coast refineries are being flooded by light sweet crude oil of the sort North Dakota produces. I concede that pipelines can get North Dakota crude to the Gulf cheaper than railroads, but question whether there will be much appetite for it. Third, the “stuff” from Canada is not well-suited to pipelines.

      3. Railroads cannot compete with pipelines head to head. In theory, that’s largely true. Between Point A and Point B, if there are no complicating hang-ups, pipe will underprice rail. Now, let’s talk about “stuff:’ The oil being extracted in northern Alberta, above Edmonton, is so heavy that you cannot do conventional drilling. Either you mine it and extract the oil from the sand, or you heat it underground and boil it out, so to speak. What you get is an oil called bitumen. Gulf Coast refiners are largely geared for this heavy oil – it’s a natural destination for this oil – but there’s a catch: Bitumen will not flow through a pipeline. Pipelines shippers have to buy condensate. transport it to northern Alberta, and then dilute the bitumen with it so that they end up pumping 72 percent bitumen and 28 percent condensate, or “stuff:’ So what goes through the pipe is 28 percent waste. At the other end, refiners have to remove the diluent. It’s a costly process. At least a couple of oil industry experts who have studied the economics of all this say bitumen can be shipped a lot cheaper by unit train, particularly if you use insulated tank cars with coils for steam injection to permit raw bitumen to be loaded and unloaded. Facilities that will do just that are being built or planned at both ends. The same experts say that even if you dilute the bitumen with 18 percent condensate to make it flow in and out of ordinary tank cars, unit trains are still the low-cost winner, although not by much.

      4. Crude oil doesn’t explode. That was the prevailing wisdom before a runaway, unmanned crude oil train piled up in Lac-Megantic, Quebec, in July, killing dozens. And in November an Alabama & Gulf Coast crude oil train derailed over a wooden trestle near Aliceville, Ala., and press reports state that three cars of crude exploded (while other derailed cars did not). Today, I suppose the popular belief is that crude oil is explosive. The truth is that both myths are untrue (or true, take your pick). The lighter the crude oil, the more likely it will be to contain explosive elements such as butane and benzene that may separate from the heavy components during transport. If released and ignited, an explosion may result, according to published safety data sheets. Both the Lac-Megantic and Aliceville accidents involved light sweet crude that originated in North Dakota. As for tar-like bitumen, you could probably hit it with a flamethrower with no explosive effects.

      5. The backlog of tank car orders is creating a bubble that will burst. That bit of village gossip had validity because after all, booms are followed by busts, and freight car manufacturers aren’t exempt. But after the Association of American Railroads in November got behind the idea of retrofitting (or reassigning or scrapping) 78,000 of the 92,001]. cars hauling flammable liquids such as ethanol and crude oil, it pretty much insured that the car builders will be turning out tank cars at their peak 24,000-a4 year rate for some time to come. That bust appears to be a long way off. ~

      Fred W. Frailey is a TRAINS special correspondent and blogs on www.TrainsMag.com.

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