Market Trends

OTD Concerns Due to Surge of Oil Shipped by Rail

April 17, 2014

SHARING TOOLS        | Print Subscribe

The railroad industry is the primary long-distance shipper of automobiles from assembly plants to dealers, which represents almost 9 percent of total rail freight. However, the auto industry is not the only railroad customer, and it competes with other shippers for scarce rail resources. Such is the case with petroleum companies shipping crude oil by rail, which is putting heavy demand on finite rail resources. The exponential growth in crude oil shipped by rail has been breathtaking. In 2008, 9,500 carloads of crude oil were shipped by train in the U.S.; by 2012, that increased to 234,000 carloads. The same growth in crude oil shipped by rail is occurring in Canada. In 2009, there were 500 rail tanker loads of oil shipped in Canada; by 2013, that number grew to 160,000. The increased freight volume is affecting all industries that use rail transportation, such as agricultural, mining, chemical, and timber industries, which is congesting the rail network. As a result, there is emerging concern about the potential impact of this rail congestion on the auto industry, specifically fleet order-to-delivery (OTD) times.

Domino Effect of Rail Congestion Caused by Oil Shipments

This new and growing demand on railroad capacity is having a domino effect through the supply chains of different industries across the U.S., causing delays for a variety of shippers, such as the coal industry. For instance, powerplants burning coal to generate electricity find that coal supplies are now averaging below the normal 30-day inventory. Similarly, the spike in demand for rail assets to transport crude has delayed or driven up the cost of other railroad-shipped products, such as corn and grains. For example, delays in the shipments of corn, which is distilled by ethanol plants into the E-85 fuel, have decreased ethanol shipments, contributing to the price increase of the fuel. In addition, train delays are futher impacting ethanol production, because plants typically have limited storage capacity for the refined fuel, causing production bottlenecks until this fuel is shipped.

At the heart of the problem is the booming shale oil fields, such as Bakken formation straddling North Dakota and Montana, Eagle Ford in Southern Texas, and Niobrara in the Great Plains, all of which are located outside the traditional U.S. network of pipelines. New pipelines are being built, but, as the Keystone XL pipeline controversy demonstrates, there are powerful opponents to these new projects and construction completion dates are uncertain. As a result, railroads are being used to transport much of the extracted shale oil inventory. However, the shortage of tank cars that carry crude oil is causing about 75 percent of the rail industry’s current freight backlog. This has resulted in railway congestion for the Burlington Northern Santa Fe (BNSF) Railroad, which transports most of the oil extracted from the Bakken shale formation to refineries around the U.S. The increased rail volume and this past winter’s severe weather has caused railroads to experience a shortage of locomotives and crews, especiallly as weather conditions forced them to use shorter length trains for safety reasons. This caused a domino effect across the U.S. triggering delays in rail shipments that impacted a variety of industries.

ADVERTISEMENT

The industry forecast is for rail shipments of crude oil to continue to increase each year as the U.S. accelerates toward achieving energy independence, projected to occur post-2020. The logistics weak link, however, is the shortage of locomotives to pull rail shipments. Also, as a result of several high profile derailments of oil train shipments, legislation is being proposed to limit the length of trains hauling crude oil. If mandated, this would put even greater demand on locomotive assets, which will impact most rail shipments, including automotive OEMs. In addition, the increased rail volume is placing increased demands on rail crews. Just as with the trucking and aviation industries, federal regulations mandate that rail crews can only work so many hours. Freight trains must sometimes stop mid-track to relieve crews who have reached the federal maximum they are permitted to work — a 12-hour shift.

The confluence of all of these combined factors creates rail congestion, primarily at rail choke points, which are comparable to freeway choke points that exacerbate the rush-hour commute. Examples of rail choke points are found in Chicago, Houston, and Richmond, Va. When train traffic backs up, it causes a ripple effect of delays. Typically, these choke points occur in areas where multiple railroad right-of-ways converge or where trains are frequently handed off from one railroad to another. For instance, one-third of all rail freight passes through the Chicago metro area since all of the six largest North American railroad company networks intersect there. Sometimes it can take 24 hours to move 20 miles in Chicago due to congested rail traffic and time-consuming coordination of numerous inter-railroad train moves.

As with the tank car shortage, there is a similar shortage of railcars to transport vehicles, which perennially impacts fleet OTD times. The railroads are making efforts to increase the number of specially designed, fully enclosed railcars used to transport newly assembled vehicles. These railcars are built with either two or three levels within them, called either bi-level or tri-level autoracks, respectively. In addition, the increasing ratio of trucks sold by automakers has compounded the autorack shortage because fewer trucks, due to their larger dimensions, can be loaded on a railcar than passenger cars.

A New Variable Potentially Impacting Fleet OTD

There is a cyclicality to rail freight volume. The peak freight season is triggered by the fall grain harvest, the shipment of retail merchandise for Christmas, and the transportation of new vehicles to dealers for the start of the new model-year. The degree of congestion within the rail network is influenced by the strength of the economy, the volume of new-vehicle sales, and the bountifulness of the agricultural harvest. Now a new variable has been added — the exponential growth in crude oil shipments by rail. The unknown is whether the railroads can adriotly adjust the allocation of their rail assets, primarily locomotives and crews, to accommodate this increase in freight volume without impacting fleet OTD, which, even without this increased freight volume, has been struggling for years with rail-related delays.

Let me know what you think.

[email protected]

Comments

  1. 1. Abe Stephenson [ April 18, 2014 @ 01:53PM ]

    Great information, and the oil and gas shipping impact appears to be a long term consideration. Another example of why we need additional delivery and transport choices. And the rail process is furthest removed from the OEM's core competencies, across all OTD touch points, so we need different options vs attempting to improve rail delivery alone. Especially for 'sold' fleet vehicles (unlike dealer stock), we have real-time needs to get to end destination, so other turnkey services like truck-away or even drive-away, with accompanying PDI and registration, should be part of the standard OEM D&D options. Even at an increased expense, the costs of additional delivery options could still trump the opportunity costs for not delivering vehicles timely and predictably.

Comment On This Story

Name:  
Email: (Email will not be displayed.)  
Comment: (Maximum 2000 characters)  
Leave this field empty:
* Please note that every comment is moderated.

Author Bio

Mike Antich

Editor and Associate Publisher

Mike has covered fleet management and remarketing for more than 20 years and entered the Fleet Hall of Fame in 2010.

Sponsored by

Newsletter

We offer e-newsletters that deliver targeted news and information for the entire fleet industry.



GotQuestions?

LUBRICANTS

The expert, Mark Betner from Citgo will answer your questions
Ask a question

Sponsored by

Magazine