Volatile crude and railroad regulation

Newly discovered domestic crude oil has caused large increases in rail traffic and an associated increase in derailments. In principle, derailments expose railroads to liabilities that can be very large, but railroads are protected as long as they comply with federal guidelines. Despite this, the railroads took it upon themselves to design a safer rail car. The railroads have also lobbied federal agencies to make the new standards part of regulation. This paper addresses two puzzles. First, why would the railroads expend resources on selfregulation when protected from tort? Second, why would the railroads push to have these stricter standards enshrined in federal regulation? We conclude that the answer lies in regulatory and legal uncertainty coupled with using regulators to overcome a collective action problem. INTRODUCTION Shale oil is far more volatile than other sources of hydrocarbons. In fact, some in the industry refer to oil rail tank cars as “rolling bombs” (Gurney, 2015). What’s more, given the way that railways were constructed and the way that many cities sprang up around rail lines, these bombs roll past a large percentage of America’s population every day. Train derailments and the resulting oil spills have made the news in recent years. This should not be surprising given the dramatic increase in American oil production from shale and the numerous political and regulatory obstacles to the construction of oil pipelines to transport this output. More oil transported by rail will naturally lead to an increase in oil spills from rail accidents. These accidents have resulted in court cases and calls for increased regulation of the industry. The issue this paper addresses is not the danger that crude by rail (CBR) poses to the American population. The issue addressed is, instead, the industry’s reaction to this danger and to the threat of regulation. Instead of fighting regulation the industry has been requesting increased regulation for years. Moreover, they have voluntarily imposed safety standards that are well in excess of what their regulators require. Lest this appear to be simply a case of optimal selfregulation, the story becomes even more interesting. While Congress has refused to pass liability caps on damages from rail accidents, they did pass legislation that protects railways against tort suits as long as railroads comply with existing federal safety standards. Thus, the issue: railways are protected from tort as long as they comply with existing standards, and yet the railroads lobby for increasingly stringent standards. What can explain this? The paper is structured as follows. First, we present a brief history of rail carriage and derailments. Next, we examine the regulatory and legal environment. Third, we discuss the efforts that the Association of American Railroads (AAR) have made in an attempt to improve the safety of CBR. Fourth, we assess the possible explanations for AAR behavior and determine that the association is being driven by the goal of self-regulation, but is seeking to use regulatory bodies as a means to overcome a collective action problem. Derailments and Fatalities Since July 2013, there have been over fourteen derailments of crude oil trains resulting in 3.3 million gallons of spilled crude oil and 48 fatalities (Associ-