1. Given the importance of domestically produced oil to the U.S. economy, should the U.S.

government
promote and subsidize the construction of pipeline and/or rail infrastructure? Explain your answer.

Solution:

I agree that the U.S. government should promote and subsidize the construction of pipeline and/or rail
infrastructure. To start with, oil production is a critical source of revenue for U.S. federal, state, and local
governments. In fact, oil industry payments are one of the largest sources of non-tax federal revenue in the
country. Government revenues from the oil industry are important public funds, often used to finance essential
public services and public policy initiatives in a wide range of sectors, which contribute significant economic
benefits to the public.

Furthermore, the monetary value of oil is tied to its being a consistently fungible commodity, which relies on oil
being easily stored and transported throughout market locations. Traditionally, oil is better shipped via
oceangoing tankers or transported via pipelines to reach coastal refineries, but the rise in domestic production
of unconventional crude oil sources has generated the need for increased transportation capacity in form of
large-diameter pipelines to and from new areas with the United States.

However, constraints in pipeline construction related to costs and regulatory processes have incentivized
producers to utilize railroads, which are also expensive to construct. Hence, the need for the U.S. government
to support and subsidize pipelines and railroads construction. For example, the inflation-adjusted cost of oil
increased by 129 percent from 1990 to 2010. As a result, Americans spent $630 million more per day on oil
than they did 20 years earlier. The Energy Information Administration expects crude oil prices to rise an
additional 50 percent between 2011 and 2035 if the government does not intervene. Other things being equal,
the increasing fuel surcharges are responsible for this astronomical increase in the cost of oil over the years.
Hence, the need to subsidize critical energy supply infrastructures like pipelines and railroads.

Aside from the obvious cost benefits of subsidy Americans, the initiative can also make American oil attractive
to the European market which are trying to wean themselves of Russian oil. Invariably, this will go a long way
to earn more revenues for the U.S. government, create more job opportunities, and enhance the standard of
living of the people.

2. Discuss the advantages and disadvantages of increasing capacity to move this oil by pipeline and by rail. Be
sure to include in your discussion environmental, safety, and economic impacts of using each mode.

Solution:

Pipelines and rails have unique advantages and disadvantages in increasing capacity to transport oil across
the United States. One major advantage of pipelines are their low rates. Pipelines are comparatively more
economical and more efficient in terms of total costs and large-diameter pipelines operating near capacity. In
this regard, average revenues for pipeline companies are less than one-half of a cent per ton-mile in the
American market, which indicates their low rates.
Also, pipelines have a good loss and damage record (L and D), which is attributable to the nature of the
pipeline service (as they are buried in the ground), and to the types of products transported (oil). Besides,
pipelines offer warehousing function because their service is slow and if the product is not needed immediately,
the pipelines can serve as a kind of warehouse storage facilities.

Moreover, pipelines are relatively more environmental friendly and safe since they are buried deep under the
ground and often avoid large urban centers. In fact, they are hardly affected by bad weather conditions unlike
water carriers, and they rarely have mechanical failures.

Disadvantages of Pipelines

Pipelines' slow speed can be considered a burden if the company's demand is uncertain. In this regard, the
company involved will have to hold higher levels of inventory to compensate for possible shortages because
the pipeline infrastructure will not be able to deliver an additional amount of oil within a short period of time.

Similarly, pipeline has a disadvantage in terms of completeness of service since they can only offer a fixed
route of service (unidirectional) which cannot be easily reversed or extended to deliver the products to end-
users. Apart from this, pipelines' operation technology prevents small shipment sizes.

Advantages of Rail

Rail transportation's cost and service quality advantages have made it possible for the economic development
of America. For instance, the railroads economically shipped 728.4 million tons of energy-yielding products in
2015, and a significant percentage of these shipments involved oil. In addition, the large carrying capacity of
rail freight cars and the economies of scale in freight train operations enable them to handle efficiently large-
volume movements of low-value commodities over long distances. This kind of carload capacity, plus a variety
of car types, allows the railroads to handle almost any type of commodity including oil. Moreover, railroads are
not constrained by weight and volume restrictions, and customer service is available throughout the United
States.

Another advantage of rail transportation is that the liability of loss and damage is often assumed by the service
providers. It must also be noted that railroads are relatively safe means of transportation with little rates of
accidents caused mostly by human factors.

Furthermore, railroads are more energy-efficient than motor carriers, even when measured in terms of
consumption per ton-mile. In addition to be more fuel-efficient, railroads cause less damage to the environment
than do trucks.

Disadvantages of Rail Transportation

In terms of constraints, railroads are affected by fixed rights-of-way. Hence, they offer uncertain degrees of
service completeness. For instance, the movement of oil must be completed by other mode if no sidings are
available. Also, rail transportation is constrained by a nationwide network of service which necessitates multiple
handlings at interchange points. Invariably, this creates rate-division problems and unnecessary delays.
Also, construction of railroads require large-scale movement of earth, which may create imbalances in the
ecosystem.

3. If you had the authority as a U.S. government official, which mode would you choose and why?

Solution:

If I had the authority as a U.S government official, I would encourage the construction of pipelines to transport
oil across the country. This is because of the comparative advantages offered by pipelines for conveying oil in
the country. Some of these advantages are as listed below:

1. Comparative low rates

2. Good loss and damage record (L and D)

3. Warehousing storage function due to slow service

4. Higher level of dependability

5. High level of automation and efficiency

6. Environmental friendly and less carbon-intensive transportation mode

7. Reduction of congestion on roads, rails, abd water transportation

8. Large capacity transportation

9. Shorter construction time.