A potential rail strike is looming that could shut down supply chains across the country and would affect a number of industries, including energy. A rail traffic stoppage could freeze almost 30 percent of U.S. cargo shipments by weight, idle 7,000 trains per day and cost the American economy as much as $2 billion per day through a number of transport woes affecting U.S. energy, agriculture, manufacturing, healthcare and retail sectors. Rail moves about two-fifths of long-distance American freight and one-third of exports. Rail is a central component of a complex global supply chain that depends on the coordinated movements of cargo ships, trains and trucks. A strike would exacerbate the congestion at American ports and bring additional pressure on the trucking industry — the most obvious alternative for moving freight — as the industry is short of drivers and facing much higher diesel prices. It would stymie the movement of goods as markets wrestle with soaring prices for consumer products. An energy disruption would affect every human activity since energy is the key to modern life.
Oil and Petroleum Products
Petroleum refiners rely on railroads to bring in raw materials and transport finished products. Although most oil is transported by pipeline, refineries rely on rail for supplies like isobutane used in gasoline and to carry away byproducts like sulfur. The Pacific Northwest, which once imported Russian oil, now depends more heavily on rail to bring oil from the Bakken field in North Dakota. Since President Biden nixed the Keystone XL pipeline which would have been operating by now, the rail system transports oil from Canada into the United States and it also transports U.S. gasoline and diesel to Mexico. With diesel prices at record highs, and low diesel stocks, particularly in the Northeast, a major disruption to the supply chain for refineries could also affect the trucking industry and the supply chains it services and home heating oil supply that states in the Northeast have already been rationing. A rail strike could increase gasoline and already high diesel prices, increasing inflation.
A rail strike would disrupt several hundred thousand barrels per day in oil transport. About 200,000 barrels per day of oil moves by rail within the United States, the bulk of it from the Midcontinent. Much of it is Bakken oil from North Dakota. According to the North Dakota Pipeline Authority, about 7 percent of the state’s output moves to market on a tanker car. Another 103,000 barrels per day or so of oil comes to the United States from Canada by rail. While this is a drop in the bucket compared to overall imports from Canada, Canadian oil supply is growing faster than anticipated, and as pipeline capacity becomes more constrained, the barrels of Canadian oil need to clear via rail, or production gets shut in.
Work stoppages among freight rail providers, however, would have a much more severe impact on gasoline and renewable diesel. Although relatively little finished gasoline gets to domestic market via rail, virtually all ethanol needs to travel in a tanker car because ethanol has properties that make it difficult to transport by pipeline. That affects both consumers and producers of gasoline, given blending mandates that require most gallons contain 10 percent ethanol. Terminals typically hold only one or two days’ supply of ethanol. In addition, without egress capacity, producers of ethanol will first put volumes into storage and then eventually have to shut in supply. Most freight railroads currently lack extra capacity to make up for downtime. Thus a sizable portion of freight backlogged due to a stoppage may never be made up, leading to less production from rail-dependent businesses to the detriment of producers and consumers.
While little to no diesel ships domestically by rail, besides the issues mentioned above, a rail strike would have a significant indirect impact via the trucking sector because truck engines’ exhaust and pollutant reduction systems include diesel exhaust fluid (DEF). Key to DEF’s production is urea and the bulk of it is produced in the Midwest. From there it is shipped by rail to distribution centers where it is packaged in smaller containers and sold to truckers. If they do not have DEF, they cannot operate the trucks. Transportation and especially trucking accounted for roughly 77 percent of diesel demand last year—about 3 million barrels per day. Renewable diesel output would face a much more direct threat as the bulk of feedstocks gets to facilities on the West Coast via rail.
Power Sector and Coal
The power sector would also be affected since 70 percent of the nation’s coal travels by rail. Ongoing service issues already continue to threaten coal deliveries, impeding the delivery of fuel as utilities work to switch to coal from natural gas, whose prices are soaring due to President Biden’s anti-oil and gas policies, and build up coal stockpiles to ensure fuel security needed for the winter. Overall coal volume on U.S. railroads is up 3.5 percent for the year to date, according to the Association of American Railroads.
The National Mining Association, the trade group representing coal mining operators, asked federal regulators to take action regarding erratic rail service, particularly in the east on CSX Transportation and Norfolk Southern. Mines have had to curtail production due to poor rail service which is getting worse as the demand for coal increases. While mines are operating at full speed, empty CSX and NS hopper trains arrive hours or days late. Some mining companies have had to bring in third parties to handle switching and loading of trains at their facilities. According to CSX, staffing shortages are the root cause of the service issues experienced in certain regions of CSX’s network and the company is working on them. NS is also working to improve service and ease crew shortages.
Conclusion
A looming rail strike could severely disrupt U.S. energy logistics at a time when the market is already tight, prices are high and the supply chain is already in crisis. Energy, in particular, would be affected as the oil and coal industries use rail for deliveries to consuming industries. In particular, there would be no shipments of ethanol required to meet the 10 percent mandate in gasoline, the trucking industry would not be able to obtain diesel exhaust fluid, and coal deliveries to utility companies would be halted as coal stockpiles are already low. Prices for gasoline, diesel, and electricity would increase for consumers. No wonder, President Biden worked so hard to postpone a rail strike to after the midterm election on November 8!
