ECONOMIC FORECASTING REVIEW - Parsons Brinckerhoff

Vol. 3 • Issue 2
Fuel Prices and the U.S. Freight Rail Industry
railroads can practically move wind
turbines, providing some (albeit small)
compensatory boost to the railroads.
Agriculture: Recent fuel price increases
have created a more mixed outcome
for the freight railroads in the case of
agricultural products. In the case of
major agricultural commodity exports
from the Midwest farm belt, higher oil
and fuel prices have not been especially
favorable to the railroads. Together,
corn and wheat comprise a significant
share of the through rail traffic from
Upper Midwest production regions
to Pacific Northwest ports. Higher
oil prices resulted—particularly
during the 2008 oil price run up—in
a substantial reduction in U.S. grain
exports, as foreign importers saw
transportation delivery costs increase
greatly. Moreover, higher diesel prices
tend to shift grain exports to the inland
waterway/Mississippi River basin and
Gulf Ports, further eroding rail market
demand. In addition to direct price
effects on grain exports, higher prices
affect the way grain (particularly corn)
is used. According to the Foreign
Policy Association, as much as onethird
of U.S. production of corn was
shifted to ethanol production at the
high point of oil prices. While more
than half of ethanol moves by rail,
much of it also moves by truck, as
ethanol supply chains are relatively
short at the present. Between 2000
and 2005, rail’s share of corn ethanol
decreased from 69 percent to 60
percent.
looking for alternatives to relying solely
on trucking. More shippers have turned
to rail transportation to move fruit to
domestic markets.
Are the nation’s railroads
sufficiently poised to respond
to these increases over time?
In the short run, railroads will
undoubtedly respond by shedding
marginal services and trimming costs,
but the margin for this is already small,
as most marginal services have already
been eliminated. Short line railroads
will have a rockier future in many
cases. Over time, freight railroads
will simply have to respond to fuel
price increases, which—assuming the
mollybob
Rail electrification will be prohibitively costly in
all but the most heavily trafficked corridors
“Tipping Point” model is accurate—
will be unsustainable from a business
perspective. First and foremost, this
will mean shifting from diesel powered
to alternative powered engines.
Electrification will be prohibitively
costly in all but the most heavily
trafficked corridors, although new
rail corridor developments, including
high speed rail corridors, may provide
a solution in some cases. Even clean
diesel or non-petroleum conventionally
fueled engines, powered by ethanol
or other organically derived fuel,
will require expensive adaptations or
equipment replacement. Government
can—indeed will probably have to—
help, through investment tax credits,
carbon credits, a railroad version of
the “cash for clunkers” program, and
possibly other means. Some of the cost
can be passed on to end-users through
rate increases, but not all.
Adaptation will be necessary, and
will occur and government assistance
will be needed to mitigate the
massive costs to U.S. industries and
consumers. Political support for such
assistance, of course, will be difficult
in a perpetual climate of “no new
taxes”, and assistance to railroads will
almost certainly warrant assistance
to the trucking industry as well.
However, absent this assistance, the
U.S. consumer will incur the hidden tax
implicit in increased prices at the store.
It will be costly, but the costs of doing
nothing will be greater. •
In localized markets, diesel price
increases have resulted in some
significant gains from agricultural
customers. Using Oregon as a case
study (where PB is leading the
development of the Statewide Freight
Plan for Oregon DOT), the increases
in fuel costs—starting in 2006 and
culminating at the end of 2008—have
contributed to the shut down of a local
trucking companies; subsequently,
the shortage of available trucks has
Oregon’s $727 million nursery industry
Author:
Dr. Ira Hirschman is a principal economist with over 27 years of
consulting experience. He has managed or been the primary economic
analyst for transportation, urban development, and infrastructure
development studies both in the U.S. and internationally.
Ph.D. and M.A., Rutgers University
hirschman@pbworld.com
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