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Railroads are booming, and it's not because of the rising cost of gas or a consumer return to an older form of transportation. It's oil.

The boom started in January, when TransCanada's (NYSE:TRP) $7 billion pipeline was denied. This denial started a train in motion - literally - as oil and petroleum exploration and development companies looked to the railroad to transport its raw materials to refineries and refineries looked for efficient methods of distribution.

According to the U.S. Energy Information Administration (NYSEMKT:EIA), rail deliveries of oil and petroleum rose almost 40% in the first half of 2012. BNSF, a Berkshire Hathaway (NYSE:BRK.A) company and the biggest railway mover of crude in the U.S., posted an increase of 60% in carloads of crude oil and petroleum products during that period, and they are upping that even further.

BNSF Railway recently "expanded its capacity to transport 1 million barrels-per-day of shale oil from the Bakken formation in North Dakota and Montana in 2012, a 25% increase from a year earlier," writes Reuters. "The Forth Worth, Texas-based company expects to use a quarter of this capacity in 2012. Still, with 88.9 million barrels of Bakken crude shipped on its rail cars in 2012, it will witness a nearly 7,000% growth since it started shipping by rail five years ago." The thing is that without pipelines (According to Energy & Capital, there are currently no pipelines running internationally between the U.S. and Canada), trains are the best way to move the oil south to the big refineries along the Gulf coasts.

So, how does this affect investors?

First and foremost, oil products shipped by rail cost more and those costs have to be absorbed somewhere - be it by consumers directly or passed through to the exploration companies and refineries which would translate into increased costs, and reduced profits as a result. While "using rail tank cars allows oil producers to separate grades of crude more easily and ensure their purity than when different oils are mixed in a pipeline," according to the EIA, "Shipping oil by rail costs an average $10 per barrel to $15 per barrel nationwide, up to three times more expensive than the $5 per barrel it costs to move oil by pipeline." So, increased costs to consumers are on the horizon and company bottom lines could take some hit.

Secondly, there is the opportunity posed by the railroads themselves. According to the Wall Street Journal, Statoil ASA (NYSE:STO) "is leasing more than 1,000 railroad cars to carry crude oil from fields in North Dakota to refiners across North America, in a bid to overcome pipeline bottlenecks that plague the booming oil-producing region." Phillips 66 (NYSE:PSX), a refiner, bought 2,000 rail cars to ship crude to its refineries, while Marathon Oil (NYSE:MRO) currently ships roughly 14% of its Bakken production using the railroad.

Moreover, railroads are being used for more than just transporting oil products.

"Hydraulic fracturing -- the oil drilling technique widely known as "fracking" -- has created a major new business for railroads, because each horizontal well requires between 3,000 and 10,000 tons of sand," reports StarTribune. "Drillers in North Dakota and elsewhere need the sand -- together with water, chemicals and organic lubricants -- to break up shale thousands of feet underground that holds natural gas and oil." And, the increased demand is helping revive many routes.

"Railroads are striking deals with a spate of new sand processing plants, bringing dormant rail lines back into service, upgrading tracks and building rail yards and loading facilities across the Upper Midwest." Canadian National Railway Company (NYSE:CNI) recently spent $35 million to rebuild a stretch of track while Canadian Pacific Railway Ltd. (NYSE:CP) has struck several deals with new sand processing plants., including a deal with U.S. Silica Holdings, Inc. (NYSE:SLCA) to be the exclusive rail service provider at the company's Sparta mine according to Reuters in late June. Union Pacific (NYSE:UNP) recorded a 265% increase in sand shipments for fracking in the last two years.

Investors can take advantage of the trend by investing in the railroad companies. Through the first eight months of the year, Canadian Pacific swelled 21.4% and given its recent efforts there is no reason to think that trend will not continue. The amount of oil that Canadian Pacific alone "carries from the Bakken Formation down through the heartland has surged 2,500% since 2009, to 8.5 million barrels per year from just 325,000," writes Fox News. "The company expects to move 45 million barrels per year within the decade."

"We are responding to a growing demand," said Ed Greenberg, spokesman for Canadian Pacific. "There has been unprecedented growth in the energy industry." And, it looks like that growth will continue. The same is true with rival Canadian National, which returned 17.1% from January 1 through the end of August. And, these figures are with the beating railroad companies across the board took earlier this year after the coal freight business slumped.

Of course, not all railroads present the same opportunity - some are more tied into oil companies than others. Further, there are more ways to play this trend than just investing in the railroads themselves. Railcar manufacturers also present a solid opportunity. For instance, American Railcar Industries (NASDAQ:ARII) rose 19.7% in the first eight months of the year and General Electric (NYSE:GE), which is the largest lessor of freight cars in North America, went up 14.7% in that period. The companies that produce the sand used for fracking are good investments as well.

Source: 6 Railroad Stocks Ready To Leap On Booming Oil Transportation