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Lessons & Stories

Current Railcar Shortages: Predictable and Expected

This issue of rail cars and the rotting wheat in 1979 got me thinking about capacity constraints in the current rail networks. My research shows that currently there are three different freight-car capacity supply issues in the US.

Moreover, while many of the operators and players affected by each of these market conditions are acting surprised, these shortages were predictable if you knew the conditions of the market and applied some critical thinking to the problem. In fact, I could go as far as to argue that each of these were investment opportunities, perhaps the kind a very smart investor made when his company bought up all the stock in one of the five remaining Class 1 railroads.


Grain Shipping Woes

In 2014 West Virginia Democratic Senator John D. Rockefeller IV introduced Senate Bill S.2777 — The Surface Transportation Board Reauthorization Act of 2014. Co-sponsored by South Dakota’s Republican Senator John Thune, the bills proposes to give the Surface Transportation Board (STB) new authority to launch investigations into service backlogs, rate hikes, and other issues.

As chairman of the Senate’s Commerce, Science, and Transportation Committee, Rockefeller for years sought to increase the authority of the STB. The STB is one of the few vestiges of railroad regulation remaining since the Interstate Commerce Commission was shut down in the Reagan era. Captive rail shippers like farmers, coal companies, and chemical plants turn to the STB for mediation of rate and service issues. Rockefeller continues to view railroad managers in the same light as the Robber Barons of the nineteenth century (like his great-great grandfather) and not as capital-investment intensive enterprises.


Moving the Crude

When I hear the term CBR, my first thought is of the Honda CBR1000RR, a fast and nimble motorcycle of the late 1980s. Then I break out of my nostalgic dream and wake up to current times, where CBR means Crude By Rail.

Three years ago, there was not that much crude oil moving by rail. Most tank cars were searching for ethanol as demand for the mandated fuel additive dropped. The Bakken oil fields were just starting to show promise, the development rush was just starting, and the Keystone XL was encountering its first real obstacles.

Funny what can happen in three years. While pipelines still are the dominant method for moving both crude and petroleum products, rail is growing at an exponential rate. When it takes billions of invested caplital and years to clear regulatory hurdles to build a new pipeline, millions invested in tank cars and transfer terminals starts to look like chump change.


CBR Safety: The Wrecks

People are a bit worried about the safety of crude oil transport by rail. The July 2013 wreck that incinerated the center of Lac-Mégantic, Quebec is the most memorable of a series of derailments in the last year. During the course of that year, as CBR shipments have increased, so have derailments. Since March 2013, according to our research, there have been at least 12 derailments of trains carrying crude on North American Railroads. Of these dozen derailments, only three captured national attention.

The Lac-Mégantic derailment is an example of what happens when a whole lot of things go wrong, like track maintenance, locomotive maintenance, work rules, and cargo classification. The final report from the Transportation Safety Board of Canada is pending, so the exact chain of events is still unknown. However, since this accident includes the major causes of derailment and fire, we can break down the risks in a simple failure analysis.


Regulators Will Regulate

From the response of the media — like a report from one Chicago news station, and the panic on the web sites of various environmental groups — you might get the impression that the US Federal government is turning a blind eye to the unsafe transport of Crude By Rail.

That would be a wrong assumption to make. With federal regulators, it is not a matter of if they start to pay attention, but when.

In the case of CBR, they started to pay attention last summer. On July 29, 2013, Thomas Herrmann, Acting Director of the Office of Safety Assurance and Compliance at the Federal Railroad Administration (FRA), wrote a letter to Jack Gerard at the American Petroleum Institute. Herrmann said in his letter that the FRA is “reviewing the potential safety issues related to the transportation of crude oil by rail.”


Reinvesting in Private Infrastructure

Of the different modes of transportation, only the railroads have the ownership of the right-of-way. The railroads own the ground, the ballast, the track and the signals that make up a modern railroad. We see the hardware of rolling stock and locomotives, a combination of private investment by both the carriers and the shippers. What we don’t see is the ongoing investment and operating cost of the mandated signals systems, like the Rail Safety Improvement Act of 2008 (RSIA).

Automated Signals and Controls

The mandated systems employ positive train control (PTC), an advanced technology that automatically stops or slows a train when it detects the risk of train-to-train collisions, excessive speed derailments and unauthorized train movements in repair areas or misaligned track switches. RSIA requires Class I railroads to install PTC on tracks that carry passengers or toxic-by-inhalation (TIH) materials by the end of 2015.


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