Last Tuesday, President Obama followed through on his threat to veto a Republican bill authorizing construction of a new pipeline bringing oil from Hardesty, Alberta to a terminal in Steel City, Nebraska before sending it to refineries in Cushing, Oklahoma, and, ultimately, to Port Arthur, Texas where it’s shipped. The current Keystone Pipeline already transports oil from Alberta to the Gulf of Mexico. The purpose of the “XL” construction was to provide a more direct line from Alberta to Steel City, thereby allowing for quicker transport to the Cushing refineries. The bill garnered 62 Senate votes, five short of the 67 required to override the President’s veto.
As with most national news these days, this issue has become hyper-politicized. There really isn’t anything we can add to that aspect of the debate. Although, drowned out by the partisan rancor is a case study in investing that may be illustrative.
Demand for North American crude is a reality in the early 21st century, and supply is higher than ever. Like a mountain stream swollen by a downpour, the oil will find a way to its market, even if it has to go around its most straightforward course. In the case of oil, the secondary channels are railways and alternate pipelines, and they are “secondary” only in the sense that a larger diameter pipeline, with a more direct route to port, would be the efficient course. Oil is already traveling via rail.
By way of example, Canadian Pacific Railway (CP) began reporting crude oil shipment volume and freight revenue separately during the company’s 2014 quarterly earnings releases. The reporting change highlighted the growth: in fiscal year 2014, CP shipped $484 million of crude oil, 29% higher than the $375 million in 2013. This is just one company among North America’s seven Class I rails, but it illustrates the reality that billions of dollars of crude are finding their way to market via a secondary channel.
Investing is a fundamentally pragmatic endeavor. Shipping crude oil via rail may not be the most efficient means of getting it to consumers, and it may not be the most environmentally sound method either. But it is the reality in which we are operating, and that reality very definitely creates attractive opportunities for investment.
Peloton Wealth Strategists does not own the common stock of Canadian Pacific Railway. The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities. Peloton Wealth Strategists assumes no liability for losses pursuant to investment actions entered into as a result of opinions expressed herein. Changes in economic and capital market conditions and the unique objectives of each investor should be considered before investing in securities.