Study Finds Rail’s Flexibility May Undercut Pipeline Investment Over Time

The availability of flexible rail transport for crude oil may prevent shippers from making long-term commitments to pipelines, but environmental or safety policies that increase the cost of rail could lead to a long-run shift toward pipelines. 

While the struggle for approval of the Keystone and Dakota Access pipelines highlights the challenges pipelines face from environmental activists, they may face another threat: the railroad industry. A new study published by the National Bureau of Economic Research finds that the flexibility offered by rail has dampened investment in pipelines.

“As shipping crude oil by rail boomed with the rise of shale, then sank again, the ebb and flow caused many to think of rail as a temporary fix to pipelines’ long permitting and construction challenges,” says Ryan Kellogg, a professor at the Harris School of Public Policy and a researcher at the Energy Policy Institute at the University of Chicago (EPIC). “Our study finds that fluctuations in crude-by-rail volumes actually underscore rail’s flexibility. The ability to ramp rail shipments up and down is valuable to crude oil shippers, and it reduces incentives to make long-run investments in pipeline capacity.”

Kellogg and his co-author, Thomas Covert, an assistant professor at the University of Chicago Booth School of Business and also a researcher at EPIC, explore the tradeoffs between pipelines and rail. 

Read full coverage from The Energy Policy Institute at The University of Chicago (EPIC)