OM in the News: Where To Hold All the Oil Inventory?
“The U.S. is so awash in crude oil that traders are experimenting with new places to store it: empty railcars,” writes The Wall Street Journal (Feb. 29, 2016). This is a great story to share with your students when you cover holding costs in Chapter 12, Inventory Management. Thousands of railcars ordered up to transport oil are now sitting idle because current ultralow crude prices have made shipping by train unprofitable. Meanwhile, traditional storage tanks are running out of room as U.S. oil inventories swell to their highest level since the 1930s.
Some are calling the new practice “rolling storage”—a landlocked spin on the “floating storage” producers use to hold crude on giant oil tankers when inventories run high. Energy Midstream, a Texas trading company, stored its ultralight oil on Ohio railcars last month for about 15 days before shipping it to a buyer in Canada. The oil has to go somewhere. The surge in shale-oil production has created a massive glut that the industry is struggling to absorb. BP’s CEO just joked in a speech that by midyear, “every storage tank and swimming pool in the world will be filled with oil.”
The cheapest form of storage—underground salt caverns—can cost 25 cents a barrel each month, while storing crude on railcars costs about 50 cents a barrel and floating storage can cost 75 cents or more. (The cost estimates don’t include loading and transportation.) Railcars hold 500-700 barrels of oil, less than a cavern, tank or ship can store. The plunge in oil prices brought the demand for railcars to deliver oil to a halt. There are now as many as 20,000 tank cars—1/3 of the North American fleet for hauling oil—parked in storage yards or along unused stretches of tracks. The disappearance of available storage is akin to a coloring book where nearly all the white space has been filled in.
Classroom discussion questions:
- Compare the options for storage of excess oil.
- What are companies doing with unwanted oil already loaded on tankers en route to their destinations?