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U.S. Drilling Boom Brings Growth and Challenges to Trade

By Travis Hoium - Mar 14, 2014 at 3:30PM

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Oil drilling in the U.S. has cut imports dramatically, but it's also causing headaches for those trying to get other commodities to their final destination.

It's not a joyous day on Wall Street, where the least the Dow Jones Industrial Average ( ^DJI 0.10% ) and other stock indices are down but largely treading water. That's still an improvement after the market sold off yesterday on fears that China's economy was slowing too quickly and that conflict may erupt in Crimea after residents go to the polls Sunday to decide whether to secede from Ukraine.

On the economic front, the initial Thomson Reuters/University of Michigan consumer sentiment reading for March fell to 79.9 from 81.6 in February. That is the lowest level since November. Winter has taken its toll on consumers, and geopolitical factors may be impacting them as well.  

In commodity news, oil was up 0.7% today to $98.85 per barrel and the boom in drilling in the U.S. is starting to have some interesting impacts on the country.

The domestic energy boom has side effects
A huge spike in domestic oil drilling in the U.S. is putting the country on a path to energy independence, but it's having some side effects on transportation throughout the country. Oil coming out of the ground in North Dakota and eastern Montana doesn't have the pipeline infrastructure that's found in Texas so much of the oil is being shipped by rail.

In an article in The Wall Street Journal today, BNSF Railway, the railroad owned by Warren Buffett's Berkshire Hathaway ( BRK.B -0.44% ), said it is running behind on shipping grain, sugar, and coal because it's scrambling to deliver crude oil from North Dakota. A business that shipped 100,000 barrels a day in 2010  was moving 800,000 barrels per day late last year. On average, that's about 4.2% of every barrel of oil consumed in the U.S. last year.

The need to ship more oil is also helping pipeline companies such as Kinder Morgan ( KMI 0.06% ), which said today that it would meet or exceed financial expectations in 2014. CEO Richard Kinder said the company has identified $14.8 billion in expansion and joint venture opportunities that will allow it to grow, largely by shipping oil from shale plays around the country.  

The boom in shale oil is stretching the transportation network, but it's also having a positive impact on trade. In 2005, net imports of oil were 12.5 million barrels per day, or 60.3% of consumption. In January of this year that figure was down to 5.4 million barrels per day and just 28.3% of consumption, which keeps billions of dollars here at home instead of flowing overseas. Long term, that's great news for the economy despite the challenges it may pose to the trade in grain, sugar, coal, and other goods that travel by rail.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$35,754.75 (0.10%) $35.32
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$283.72 (-0.44%) $-1.25
Kinder Morgan, Inc. Stock Quote
Kinder Morgan, Inc.
$16.24 (0.06%) $0.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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