The Unlikely Green Alternative to the Keystone Pipeline? Railroads

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President Obama’s decision last week to kill the Keystone XL Pipeline that would carry oil from Canada to the U.S. was cheered by some environmental activists like Robert Redford. But many mainstream commentators reacted with dismay. A Washington Post editorial called the decision wrong on the substance of the question. And a columnist for the same newspaper described it more hyperbolically as “an act of national insanity.”

The argument for the pipeline is not only that it would give the U.S. a secure source of oil with low transportation costs, create jobs and help our close ally Canada, but also that the alternative is actually worse from an environmental point of view. Canada is still going to produce its oil, and the U.S. is still going to need energy. Without the pipeline, Canada will have to try to sell some of its oil to China, which means building a pipeline to the Canadian West Coast. And we will buy more from the Middle East or somewhere else. The overall result: more oil shipped longer distances and greater chances of an oil spill.

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Whichever side is right in this argument, one beneficiary is clear: Railroads. Quite simply, some of the oil that would have been moved through the pipeline will now have to go by tanker car. If oil is more expensive or less available in some places, that will encourage the use of low-sulfur coal. Either way, it means more hauling business for the Big Rails, especially Burlington Northern, now owned by Warren Buffett’s company Berkshire Hathaway. (Conspiracy theorists were quick to point out that Buffett is an informal advisor to President Obama. Liberal billionaire George Soros is supposedly involved, too, somehow.)

But railroads offer more than just an alternative to a pipeline unpopular with environmentalists. They are in fact one of Americas most energy-efficient modes of transport – and as such a legitimate “green” industry, whether environmentalists acknowledge that fact or not. Here are two key reasons for the rails’ green appeal:

Productivity is high and rising. The industry was largely deregulated in 1980 and had an incentive to reinvest, especially in technology. As railroads merged and rail networks grew more complex, it became increasingly important to route the trains – and even individual cars – in the most efficient ways. Sophisticated software now calculates the best way to put different cars together into trains. And onboard electronics assess topography, track curvature, train length and weight to calculate the optimum speed for conserving fuel.

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Energy efficiency is steadily growing. Railroads are far more energy-efficient than their competitors. Locomotives today get 80% more mileage from a gallon of diesel than they did in 1980. As a result, trains are two-to-five times more efficient than trucks per ton of freight. That not only saves on costs, it reduces emissions of greenhouse gases. In fact, the Environmental Protection Agency calculates that moving freight by train rather than truck over long distances reduces greenhouse gas emissions by up to 75%.

Three railroads stand out as the leaders in the group and all three stocks have done at least as well as the broad market over the past three months. In order of their recent performance, they are: Union Pacific, the largest U.S. railroad, Norfolk Southern, and CSX. All three stocks trade at 12-to-13 times projected earnings for 2012 and offer yields slightly above the 1.9% paid by the S&P 500.

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The trouble with all debates like the one over the pipeline is that no solution is totally safe. If you don’t rely on oil, then you’ll end up instead using fracking to get natural gas and risking water pollution, or building nuclear plants. And that means that decisions end up being based on politics, not rational policy. Whether you think the XL Pipeline would have been good or bad for the environment, one thing is sure: The decision to kill it is good for the railroads.