Crude by Rail, Option Value, and Pipeline Investment

Summary:

• The use of rail instead of pipelines to transport crude oil has ebbed and flowed over time. While some believe this is because rail is a temporary option to be used as pipelines are being permitted and built, the study explores an alternative view: Crude-by-rail’s inherent flexibility generates value and, in spite of rail’s high price tag, reduces the incentive to invest in pipelines.
• The authors build a model that evaluates how much larger the recently-constructed Dakota Access Pipeline would have been had crude-by-rail been more costly and less flexible.
• The study finds that if rail were to be more expensive, more shippers would commit to pipeline contracts and pipelines would increase capacity.
• Further, if rail were to be less flexible such that it was not able to reach multiple destinations, more shippers would commit to pipeline contracts and pipelines would increase capacity.
• Policies that increase the cost of rail transport—such as regulations that target environmental and safety concerns—could lead to a long-run shift away from railroad.

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