Warren Buffett didn’t become wealthy by making poor investment decisions. His wealth resulted from years of making prescient investments in very successful companies. He has had the occasional bad year, reportedly losing $25 billion in 2008/2009. But he had an estimated net worth at the time of $60 billion, so his losses didn’t exactly land him in the poorhouse.

While Buffett invests in a wide ranges of industries, some of his investments have been in energy companies. In 2006 he began acquiring shares of ConocoPhillips (NYSE: COP), my employer at that time. He continued to buy shares during the large oil price run-up in 2008, but when oil prices crashed he lost nearly $4 billion and acknowledged that his timing had been off.

But he has since made up for that loss with another acquisition. In 2010, Buffett’s Berkshire Hathaway (NYSE: BRK.B) bought the Burlington Northern Santa Fe (BNSF) railroad. At that time, this wasn’t really recognized as an energy-themed investment. Some analysts recognized the potential for rail to take market share from heavy trucking in a world of higher oil prices, but perhaps nobody — maybe not even Buffett — foresaw the explosive growth that would take place in transporting crude oil produced as a result of drilling booms in places like North Dakota and Alberta.

“Fortunately, they discovered oil where our railroad was,” the Oracle of Omaha said recently on CNBC.

The Bakken formation lies underneath northwestern North Dakota, northeastern Montana, and parts of Canada. The potential resource of the Bakken may be as great as 500 billion barrels of oil, equivalent to 75 years of current US demand.

However, the amount that is recoverable with current technology is only a small fraction of the total. In 2008 the US Geological Survey (USGS) estimated technically recoverable Bakken barrels at 3 billion to 4.3 billion. Nevertheless, that is still a lot of oil: Approximately $300 billion worth at current prices.

While the Bakken formation was known as early as the 1950s to contain oil, the crude was in tight formations that could not be economically produced. But high oil prices and improved horizontal drilling techniques in recent years made oil production in the Bakken economical for the first time.

Buffett’s acquisition of BNSF coincided with the takeoff of the Bakken output. Oil production in North Dakota had hovered around 100,000 barrels per day (bpd) for decades. In 2008, production surpassed the previous monthly record of 148,000 bpd set in August 1984. By the end of 2009, oil production there had climbed to nearly 250,000 bpd, and pipeline operators like Conservative Portfolio holding Kinder Morgan Energy Partners LP (NYSE: KMP) profited handsomely as they tried to move the crude to market.

But the pipeline network would prove insufficient. By the end of 2010, crude oil production in North Dakota had exceeded 350,000 bpd, and by the end of 2012 monthly production had surpassed 750,000 bpd.  In fact, the drilling in North Dakota has been so rapid that last year the state passed Alaska to become the country’s second-largest oil producer behind Texas.

New pipeline capacity continues to be built out, but crude oil production in the Bakken also continues to grow rapidly. The glut of oil in the Bakken has depressed the price of crude oil in the mid-continent region relative to the price of the globally shipped and traded Brent crude. This in turn has made rail transport — generally too expensive in most circumstances relative to pipeline transport — an attractive option for refiners looking to tap into a lower-cost pool of crude oil.

Shipping oil by rail can cost $10 to $15 per barrel, versus $5/bbl for shipping by pipeline. But with West Texas Intermediate trading at a $20/bbl discount to Brent crude, and with Bakken a few dollars per barrel cheaper still than WTI, refiners are finding it economically attractive to purchase Bakken crude and ship it by rail if necessary.

Whether Berkshire’s purchase of BNSF was a happy accident or a brilliant gambit, his railroad  is now profiting like no other. Last year the Energy Information Administration (EIA) reported that year over year delivery of petroleum by rail had increased by 38 percent. The largest mover of that crude oil was BNSF. BNSF has seen shipments of oil grow from almost nothing five years ago to 500,000 bpd today, and envisions growing this business to 1 million bpd.

But BNSF is not the only game in town. Canadian Pacific Railway (NYSE:CP), Union Pacific (NYSE: UNP), CSX Corp (NYSE:CSX) and Norfolk Southern (NYSE: NSC) all benefit from the current crude oil pipeline bottlenecks. Canadian Pacific Railway is even shipping oil to East Coast refineries, having recently announced a deal with Phillips 66 (NYSE: PSX) to ship 50,000 bpd from North Dakota to Phillips’ Bayway Refinery in Linden, New Jersey.

Expect this trend of shipping Bakken crude to East Coast refineries to continue. The main reason that East Coast refineries have struggled while Gulf Coast and Midwest refineries make record profits is that the latter benefit from buying crude oil at Bakken prices and selling finished products at something like Brent prices. Those East Coast refineries have now recognized the potential for saving money on their crude purchases, and so more “rolling pipelines” to the East Coast are being built out.

Besides the deal with PSX, PBF Energy just completed a rail terminal capable of taking 110,000 bpd of Bakken crude. The oil is destined for a refinery outside Wilmington, Delaware.
A former Sunoco (NYSE: SUN) refinery that was bought out last year by Carlyle is building a high-speed rail unloader that can move oil into the refinery. The 330,000 bpd refinery is set to start taking 180,000 bpd of Bakken crude by the end of 2013.

Beyond the railroads, there are profitable opportunities in the companies that build the rail cars. The recently-released Draft Supplementary Environmental Impact Statement (SEIS) for the Keystone XL Pipeline project noted that there are 48,000 rail cars on back order in the US. Who makes these rail cars? Companies like American Railcar Industries (NasdaqGS: ARII) and Trinity Industries (NYSE: TRN). (See more on American Railcar below.)

On the other hand, you want to be selective about those rail car companies. While ARII’s share price has almost doubled in a year, stocks tied to coal cars — like FreightCar America (NasdaqGS: RAIL) — have dropped along with demand for coal transport.