This will likely be an eventful year in Freight Transportation. As I look ahead to the coming year, there will be two sets of forces at play. The President-Elect of the United States, Donald Trump, has made some bold promises. This blog will look at the potential impacts of his presidency. The next blog will examine some of the other major forces at play.

Infrastructure

Donald Trump has spoken repeatedly about improving America’s highways, bridges, and airports. The Transportation industry has bemoaned the lack of investment in infrastructure for several years. It is likely that at least some elements of whatever plan President Trump’s team puts forth will receive bi-partisan support from the other branches of government. 

It typically takes time to plan significant infrastructure projects so they reach “shovel ready” status. In addition to improving the nation’s infrastructure, these projects also create jobs, albeit over a specific timeline. Watch for some infrastructure projects to be launched in 2017 with the balance moving forward in the coming years. These projects should be a net positive for the transportation industry. However, keep in mind that some of these projects, such as toll roads, may receive some funding from private industry (if permitted by congress) and may result in higher costs for shippers and transport companies.

The two previous blogs in this series highlighted the critical role that the rails play in transporting crude oil. They also noted that the surge in derailments is raising serious questions about the safety of using rail transportation. In addition, as a result the large drop in the price per barrel, below the estimated breakeven cost level, this raises concerns about the ongoing economic viability of moving crude oil by rail. This blog will focus on what can be done to improve rail safety and the economics of rail transportation.

Improve the Safety of Rail Transportation

The key stakeholders on this issue are tank car manufacturers, energy producers, railroads and governments. They each have a responsibility to protect the safety of the public. It should be pointed out that Lac Megantic, Quebec, the site of the worst crude oil rail disaster, has a population of less than 6000 people. There were 47 people who perished in that rail disaster and the cost to clean up and rebuild the downtown where the train hit is projected to be $400 million. In other words, if a disaster of this nature was to hit a mid-size or major city, the cost in lives and dollars could be of an extraordinary magnitude. Since these large stakeholders collectively are deriving billions of dollars in revenue, profits and taxes from this sector, they have a major responsibility to address the safety issue. The following is a summary of what has been done, how these changes are working out and what still needs to be done.

Change the Composition of the Oil

Under regulations adopted last year and to be put into effect in April, oil companies in North Dakota will have to remove volatile gases such as propane from their crude before pumping it into a rail car. This is estimated to add another 10 cents a barrel to the cost. In April, a regulation in North Dakota requires oil to be kept at a vapor pressure below 13.7 pounds per square inch goes into effect. This process known as conditioning, which companies can use to meet that standard, is the “bare minimum” step to lower volatility.

Here are few statistics to consider. On June 27, 2014 a barrel of crude oil cost $107.26 U.S. On the same date, a gallon of diesel fuel cost $3.91 in the U.S. or $1.35 per liter in Canada. The cross-border (Canada/U.S.) fuel surcharge was 20.1 percent on LTL, 47 percent on truckload.

Last week, the price per barrel dropped to $50 while the price of diesel fuel fell to $3.13 in the U.S and $1.18 per liter in Canada. The cross-border fuel surcharge fell to 13.4 percent on LTL and 31.6 percent on truckload. This week the cost per barrel is trending below $50. The cost per barrel has dropped by over fifty percent in the past six months. In the same period, fuel surcharges have declined by about a third. Here are few thoughts that shippers need to keep in mind.

1. Shippers will receive a freight cost saving windfall in 2015

An energy expert suggested this week in Forbes magazine that we may see the cost of a barrel of diesel fuel fall to as low as $20 this year. While no one knows what the bottom is or how long energy costs will remain at these levels, the end result will be an unexpected cost saving bonanza for shippers. Enjoy it as long as it lasts.

2. What comes down will go up

Thankfully, the first quarter of 2014 is behind us. The challenging winter across Canada and the northeastern USA and capacity shortages, brought on, in part by the weather, created a difficult environment for both carriers and shippers. Are we in the clear now? With the winter behind us and with the economy improving, can we expect freight supply and demand to come into balance? Here are some thoughts to ponder.

1. Climate Change will continue to produce Bad Weather

Because of its near-total dependence on petroleum fuels, the U.S. transportation sector is responsible for about a third of America’s climate-changing emissions. Globally, about 15 percent of manmade carbon dioxide comes from cars, trucks, airplanes, ships and other vehicles. A National Research Council report states that America’s transportation infrastructure is at risk due to the effects of global warming. Severe weather and rising water levels will impact roadways, railroads, and airports. Climate change will affect transportation primarily through increases in several types of weather and climate extremes. Climate warming over the next 50 to 100 years will be manifested by increases in very hot days and heat waves, increases in Arctic temperatures, rising sea levels coupled with storm surges and land subsidence, more frequent intense precipitation events, and increases in the intensity of strong hurricanes. The impacts will vary by mode of transportation and region of the country, but they will be widespread and costly in both human and economic terms and will require significant changes in the planning, design, construction, operation, and maintenance of transportation systems.

In other words, get used to it. The next winter may be worse than the last one.

2. Capacity Shortages May Increase and Get Worse

As the year 2013 winds down, it is time to reflect on the major transportation trends of the past year.  While I saw and read about a wide range of developments, these are the ones that resonated most with me.

1.Technology Comes to Freight Transportation

Last year I predicted that we would see a flurry of new technologies come to freight transportation.  They did and I wrote about some of these new companies on several occasions during the year.  Technology was successfully applied to the freight brokerage business, freight portals, LTL density calculations and to other segments of the industry.  Buytruckload.com, PostBidShip, Freightopolis, QuoteMyTruckload,  and Freightsnap were featured in various blogs during the year.  They are changing the way business is done in freight transportation.  Watch for more of these companies to surface in 2014.

2013 has been called the Year of the Network by numerous supply chain and transportation industry thought leaders.  Companies that built a successful supply chain trading partner network focused on three elements:

Connectivity— unite disparate systems and trading partners

The world of freight transportation is changing rapidly.  The signs are there and they are unmistakable.  Recognizing and responding effectively to these signals may help determine which shippers and carriers will survive in the years ahead.  Let’s examine the components of the new paradigm of freight transportation.

The Era is Cheap Oil is Over

The steep escalation in fuel prices this year is a harbinger of things to come for shippers and carriers.  This time there will likely be no major recession to bring energy prices down.  The sad fact is that 95 percent of transportation modes, passenger and freight, run on petroleum products and the likelihood of finding new sources of supply or of shrinkage in global demand is highly unlikely. In fact the use of petroleum in countries such as China and India is on the rise.

The result will be tighter truck capacity, greater use of intermodal rail services, the electrification of transportation systems, the relocation of factories and distribution centres and the slow shift to cleaner, cheaper fuels.  It will drive more LCV’s (long combination vehicles) or “turnpikes” and more triple trailer configurations.  This may be the impetus to harmonize our laws throughout North America to remove barriers to the movement of the most energy efficient vehicle combinations across our highways.   To curb use, many countries will have to begin looking at the Danish example of higher taxes on fuel inefficient vehicles and higher taxes on petroleum.  Get used to it.

The Driver Shortage is Real