"Stable Fuel" and its Implications for Rail Freight

It's now been just about two years since the run-up in fuel prices that began in 1999 and intensified after Hurricane Katrina "semi-stabilized" and has since seen the price of a gallon of regular vacillate in the $3.25 - $3.75 range, Furthermore, the slow emergence of a number of positive trends in the general energy picture raise the possibility that, as in the years 1981-1999, we might now see a substantial length of time during which fuel prices remain stable, albeit due to occasional demonstrations of political vulnerability.

With this trend in mind, and with the upcoming completion of PANAMAX, I'd like to get some input from other members as to the prospects for retention of the rails' improvement in the freight markets since 1985. While some of the most lucrative traffic might either be lost or face pricing pressures, it would appear to this writer that the rate-setting freedoms gained via the Staggers Act, plus the strides forward in both the reduction of redundant physical plant and the more efficient operation of what remains, would allow the industry to avoid a repetition of the long decline post-1945. Any thoughts from the floor?

I don't believe energy price stability will reverse the growth trends we've been seeing in the domestically produced/consumed freight sector because there are other factors contributing to this trend besides energy prices (as well as the level at which prices are stable). Additionally, all indications are that post-PANAMAX will be net-neutral in terms of volume for the industry as a whole, though perhaps not for individual carriers.

There is no question that shipping in a post-PANAMAX environment will adversely affect the West Coast maritime ports and the transcontinental line hauls the industry presently enjoys. What remains to be seen is will new traffic sources make up for that shortfall?

While I'm hardly predicting the over-the-road trucking industry is going to fold up, I believe that head to head competition with rail will diminish and with rail the winner. Over the road trucking will be concentrated where rail shipment is not feasible or where the speed and flexibility trucking offers over rail is a premium that a shipper is willing to pay. Examples would be "filling the pipeline" with the "must have" toy that needs to be on Wally World's shelves on Black Friday (after the pipeline had been "primed" with air shipments from Asia); same could be said for Apple's launch of the iPhone 10 (or wherever we are at with those).

But with ocean shipping from Asia landing at East Coast ports in post-PANAMAX vessels of size to allow significant economies, it is highly doubtful that line hauls gained by NS and CSX will equal the losses BNSF and UP from West Coast ports are looking at. With the moving of the ports much closer to the markets (there still remains the population concentration within the Eastern US), many shipments can be most economically handled by truck to their destination - that of course represents a loss to any railroad.

There is always the possibility such will prompt a UP-NS and BNSF-CSX (or v.v - who am I to speculate on that?) combination, but discussion of that should best be deferred to another topic.

Now let us address coal for this is really the wild card for the railroad industry. First, anywhere away from the chain of inland waterways, i.e. Ol' Man River, the only reasonable and practical way to move coal is railroad transportation as axiom. But, as has been pointed out at other topics at this Forum, coal is in dire jeopardy of losing its place as the primary industrial fuel. There is of course the perpetual attack from environmental interests but now that natural gas represents a more economical alternative and economical shipment of this commodity by rail is indeed "problematic". Will export coal be the "saviour"? who knows. As noted in a recent New York Times article, export coal moves through West Coast Canadian ports, which, even though originated on BNSF and UP, still will represent a short haul for either road. It appears that plans for several Columbia River ports to handle export coal have been "iced". Furthermore, the infrastructure built by BNSF and UP predecessors to handle Wyoming and Montana coal are oriented towards hauls to the East - just look at a system map of either road and that will be evident.

All told, coal is the wild card.

Now the bright spot is the handling of crude oil. I admit to "being like a little kid" whenever I see a "Train 1267" pass, for I know that this is a traffic source that simply did not exist as recently as three years ago. For myself, I have been skeptical that this traffic is here to stay, but thanks to the contributions made to these topics by Mr. O'Keefe and others, I'm "starting to believe".

However, I still believe that Bakken and other sites of shale oil could be vulnerable (it not a new find folks, I knew of it first during Geology 101 which, let's see, I took during 1962). For what if one Sheik of Araby or the other decided that $15 bbl was a nice price (ostensibly to liberate his subjects from high energy costs) and with the intent of upsetting the world price of crude presently in the range of $100 bbl. Such would cause a "dry gulch" for crude that has a high cost of extraction (Bakken). But further discussion of such takes us into a geopolitical environment that is "a bit over my pay grade".

But finally, lets assume there will not be a geopolitical disruption in the price of crude and consider for the moment the rail-pipeline environmental issues. While all told, "the jury is still out" and will be so until it is possible to develop more meaningful stats on the percentage of spillage by either mode to the percentage handled (unit of measure I know not). Somehow, I think that rail is going to score better than first perceived.

Gilbert B Norman wrote:There is no question that shipping in a post-PANAMAX environment will adversely affect the West Coast maritime ports and the transcontinental line hauls the industry presently enjoys.

Yes, WEST, but replaced by the EAST in the play for international traffic moving to/from Middle-America, and, therefore, a net-neutral volume for the industry as a whole (though one might argue that won't be the case for revenue). The transcontinental traffic to the eastern seaboard moving over West Coast ports has already shifted over to East Coast ports, and as Mr. Cowford has shared with us in these forums, it's Middle America that will be in play post-PANAMAX.

To your point, added with an edit after I posted a response, regarding increased truck-competitiveness from East Coast ports vs. West Coast ports, again, those places reached more economically via truck from the East than rail have to a large degree already been converted from the West. Additionally, capital investments being made by eastern rail carriers will help them better penetrate those more-truck-competitive markets in the Midwest from the East Coast ports. And, lastly, rail possesses additional competitive advantages over truck when it comes to high-volume concentrated movements, like international traffic, where demand is generated by ship sailings/schedules. All in all, post-PANAMAX appears to be essentially net-neutral in scale and not a game-changer for the industry and its traffic prospects when taken in the whole.