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The rail-based solution to Canada's oil transportation problems has come off the tracks a bit.
New numbers out of Statistics Canada on Wednesday morning show that shipments of crude and fuel oil by rail tumbled nearly 11 per cent in July, to 11,920 cars from 13,339 in June. It was the lowest count of oil carloads in eight months and the biggest decline in 15 months. The change stands in stark contrast to the longer-term trend of rapid growth in rail transportation of Canadian oil as a means to relieve the pipeline capacity constraints and bottlenecks that were seriously hurting oil selling prices at the beginning of the year.
While the causes of this decline are largely a matter of conjecture, it can't be a coincidence that it came in a month when the rail disaster in Lac-Mégantic, Que., on July 6, both disrupted a major route for shipments and raised serious issues about the safety of using rail to mass-transport oil in this country, and throughout North America. At very least, the loss of service on that route would have reduced oil-by-rail capacity for the month – and may well have caused some producers and railways to slow their shipments while they re-examined their safety standards.
But the pause may not reflect a more permanent shift in thinking. Reuters reported that oil-by-rail shipments, which had fallen by about 15 per cent in the weeks following Lac-Mégantic, by last week had returned to their pre-accident levels.
Industry watchers note that oil shipments by rail had already been slowing before the accident; they plateaued in March, then turned downward in mid-spring. They blame the downturn on pricing. The discount on Canadian heavy crude versus typically pricier U.S. light grades (known in the industry as the "differential") had narrowed to less than half of the gap early in the year, and was well below $20 a barrel. Since it costs north of $20 a barrel to transport crude long-distance by rail, it was no longer economical for U.S. refineries to pay for rail-shipped Canadian oil.
That drop in demand helped push the differential back out to its current level of $30 – a seven-month high. Observers believe this is reigniting demand and restoring the pace of rail shipments.
Still, there are reasons to believe the upward path of oil-by-rail can't continue in a straight line.
For one thing, the rail side is starting to encounter its own capacity constrictions. Makers of oil tank cars are reporting order backlogs of two years or more. Rail terminals are scrambling to keep up with the growing demand; numerous ambitious oil-rail-terminal projects are in the works, with the potential of more than doubling Western Canada's terminal capacity, but many of the those facilities are a year or two away from completion. And in light of the Lac-Mégantic tragedy, there will be increasing pressure on the industry not to rush it.
Meanwhile, there have been more accidents involving oil rail cars since Lac-Mégantic – though, thankfully, they have been relatively minor. On Wednesday, a derailment in rural Saskatchewan caused an oil leak and grass fire. Two weeks ago, a derailment in Calgary triggered a brief evacuation of the surrounding neighbourhood. In late July, there was a minor derailment in Lloydminster, Alta. There have been several incidents reported in the United States.
Political pressure is building for tighter regulation and oversight of the oil-by-rail business; already, U.S. officials have stepped up inspections of facilities. While that might not directly serve to reduce shipments, it may well raise costs; with rail transport already as much as twice the price of shipping by pipeline, that could slow the pace of growth in the rail option.
Slower may well be much healthier. This is a transportation business that has expanded much more rapidly than the industry, or regulators, could keep up with. A pause that provides some time to consider the ramifications, especially in light of Lac-Mégantic, is more than warranted.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe .
David Parkinson