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Transport Watch: Petroleum Downturn Impacts Transportation Sector, Trucking and Intermodal Freight Face Challenges
Rail and Trucking Transportation Analysis: Review of top transportation trends point to the impact of the petroleum downturn, trucking and intermodal movements shift away from West Coast ports and concerns about future regulations on trucking capacity.
By David Volz
Date Posted: 5/1/2015
Rail and Trucking Transportation Analysis:
Review of top transportation trends point to the impact of the petroleum downturn, trucking and intermodal movements shift away from West Coast ports and concerns about future regulations on trucking capacity.
The U.S. transportation sector faces a number of challenging forces from a slowdown in the oil exploration boom to heavy traffic in the West due to port shutdowns earlier in the year to changing regulations and other market dynamics. So will we face more booms, slowdowns or shortages over the next year? Let’s explore some of the major factors that are starting to take shape.
Oil Boom Goes Bust
Changes in the domestic petroleum, natural gas and energy industry are having a major effect on the transportation sector, especially trucking and railroads. After fracking technology led to a boom in domestic production over the last several years, recent decreases in petroleum product prices has caused domestic development to pull back some.
Fracking has become a victim of its own success. The industry in the United States has grown very fast. In 2008, U.S. oil production was running at five million barrels a day. Thanks to fracking, that figure has nearly doubled, with talk of U.S. energy self-sufficiency and the country becoming the world’s biggest oil producer – “the new Saudi Arabia” – in the near future.
The giant Bakken oil and gas field in North Dakota – a landscape punctured by thousands of fracking sites, with gas flares visible from space – was producing 200,000 barrels of oil a day in 2007. Production is now running at more than one million barrels a day.
But lower oil prices have caused the rapid growth in new oil rig developments to stall. According to the Fuel Fix blog by Ryan Holeywell of the Houston Chronicle, there are 760 oil rigs currently operating in the United States, down from 802 the previous week. In Texas, a total of 29 land rigs recently stopped production. The U.S. oil rig count is down by 52.8% percent from last year’s peak on October 10, according to Holeywell.
And there is simply less activity in the crude sector. A March 2015 article by Thomas Black in Bloomberg Business quoted a number of transportation executives who have seen a decrease in the amount of crude being hauled. Beau Maida, director of rail services at GT OmniPort was quoted as saying, “I’m definitely seeing the drop-off.” His company is located near two refineries at Port Arthur, Texas and has facilities to unload crude from railcars.
CSX Corp. recently announced its fracking business, which supports transporting materials for drilling new wells, has fallen by 10% in the first quarter, and executives believe the trend will continue for at least the second quarter. Overall, CSX railroad reported weak first quarter growth and expects lower than anticipated growth for the remainder of the year.
The BNSF Railway Company, which is owned by Warren Buffet’s Berkshire Hathaway posted a 4.5% drop in petroleum products in the last four weeks after a gain of 12.4% last year. BNSF’s network runs through North Dakota, making it the largest hauler of Bakken oil production. Union Pacific, which serves Texas oil fields, saw its carloads drop 25% in a recent four week period.
As recently as January, companies including CSX Corp. and Canadian Pacific Railway Ltd., were forecasting that even with prices below $50 a barrel, oil projects already under way would buoy production and keep trains hauling even more crude than last year. Instead carloads of U.S. petroleum products fell 2.8% in the last four weeks after growing 13 percent last year.
Rail stocks and tank-car leasing are reflecting the dwindling traffic. The Standard & Poor’s 500 Railroads Index posted its biggest weekly decline since October and lessors’ rates for oil cars have fallen by about a third in the last six months, Cowen & Co. said in a recent report. “We would not be surprised if the downward trend continues as long as oil prices remain depressed,” commented Jason Seidl, a New-York-based Cowen analyst.
An overall slowdown in the oil industry will certainly have ripple effects throughout the transportation and other sectors. This may be somewhat good news as a boom in the oil sector had put pressure on other areas in terms of competing for raw materials (think of wood used for board roads and crane mats) as well as personnel.
Intermodal Freight Faces Myriad of Issues
Labor issues, new federal regulations, limited space on trucks and foreign competition have all created challenges for the intermodal freight industry.
After a labor dispute by ports and dock workers in February caused problems in West Coast ports, some shippers may move some shipments to Canadian, Mexican or East Coast ports. Larry Gross, an expert on intermodal and rail transportation gave a recent presentation on issues facing the transportation industry. He forecasted that the West Coast ports may lose some market share although that is nothing really new.
A diversion of 1% of import volume from the West Coast to the East Coast would shift about 100,000 20-foot equivalent container units per year and most of what is shifted would have been intermodal rail. But this is a small amount when considered against 8.2 million international loads that the railroads handled in 2014.
Gross was quoted by Evan Lockridge of HDT Truckinfo as saying, “We think that for the balance of the year, truck capacity is going to be tight but manageable, so to that extent, intermodal is going to have to earn its way, rather than just having volume shoved at it because of the tight situation on the highway,”
Those in the trucking business will be interested because containers coming into the East Coast ports are more likely to be hauled out of port by truck, according to Gross. Trucking moves about 85% of the freight out of East Coast ports because of shorter hauls.
Another factor impacting the intermodal sector are regulations. The U.S. Congress rolled back the 34-hour restart restrictions on the hours of service that drivers can work before mandated rest. This reprieve from the new hours of service rule has created a 2% increase in truck capacity. But there is still limited space available on over-the-road trucks.
And there could be more challenges ahead. “If the mother of all capacity shortages does come to pass in 2016 and 2017, as we think it might, based on the regulations that are in the pipeline on the over the road side, including speed limiters, electronic logging devices, then that capacity crunch will come back with a vengeance in late 2016 to 2017 – and that will put enormous pressure to move freight via any means possible,” forecasted Gross.