Northern Oil Might Not Be Cheap for Long: Phillips 66 (PSX), Kinder Morgan Energy Partners LP (KMP)

Many others are joining the crude oil by rail bonanza. Among them, Canadian National Railway (USA) (NYSE:CNI) , which didn’t move any crude oil two years ago. This year the company is projected to move 30,000 carloads of oil. What’s really quite amazing is that everyone wins. Refiners access cheaper crude oil, rail company’s enjoy the transportation earnings and producers are able to earn $18 per barrel more than oil shipped by pipe because of all those pipeline bottlenecks. The big question is if these are just temporary profits until those pipeline bottlenecks get sorted out.

Significant pipeline expansions
Rail is hot today, but will it be needed tomorrow. The U.S. imports 15% of its oil from Canada. Of that, more than half of it comes through a pipeline owned by Enbridge Inc (USA) (NYSE:ENB). The company is spending billions to keep it that way. The good thing for producers is that the company is not alone.

Pipeline operators are working feverishly to build additional pipeline capacity to get this crude oil to market. While TransCanada Corporation (USA) (NYSE:TRP)’s Keystone XL gets a lot of the press, it is just one of many projects aimed at moving crude oil. There problem is that these projects aren’t cheap and take years to complete. Take the Trans Mountain expansion by Kinder Morgan Energy Partners LP (NYSE:KMP) which is the only oil sands pipeline serving the West Coast. The $5.4 billion project, which will increase the pipeline’s capacity from 300,000 to 890,000 barrels per day, wouldn’t be operational until 2017. Right now the cost and construction time frame is opening up a massive opportunity for crude oil transportation by rail. However, there’s a lot of planned infrastructure coming on line over the next few years which could change that.

My Foolish take
In the near term, expect crude oil shipments by rail to continue to gain prominence. It’s the quickest way to get oil to market while these pipelines are being built. Longer term, pipelines will offer the cheaper shipping option; however, it is possible that shipping costs will come down enough to make it more practical to continue to ship crude by rail. The big takeaway here is that Canadian crude oil won’t stay cheap for long.

The article Northern Oil Might Not Be Cheap for Long originally appeared on Fool.com and is written by Matthew DiLallo.

Fool contributor Matt DiLallo owns shares of Phillips 66. The Motley Fool recommends Canadian National Railway.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.