Much of the conventional wisdom regarding railroad investing centers around high oil prices. While high oil prices do enhance the economics of rail operators when compared to truckers, as rail transport is much more fuel efficient, there are a few other oil-centric aspects to the long term thesis for rails.
One aspect is the gas tax and the condition of the nation’s interstate system. When the interstate system was funded and initially constructed in the middle of the 20 th century, the United States had the enviable position of having the world’s strongest economy, by far. Additionally, construction costs were low, land for expansion was more readily available, and the U.S. still produced much of their own oil, keeping gas and diesel costs very low.
Currently the tax on gas, collected on a state and federal level, pays for repairs on our nation’s roads and bridges, but the overall state of disrepair of many of these roads and bridges, as well as lack of capacity on the roads, is a daunting challenge. This challenge is almost sure to become more difficult in the next 20 years.
First, the potential for increased mileage of the nation’s vehicle fleet augurs poorly for gas tax collection. Who will pay for road repairs if the nation runs on many more electric vehicles? If the gas tax is not raised on a per gallon basis, or an alternate funding system is not implemented, it is difficult to imagine even flat tax collection. Raising the gas tax has historically been a politically unpalatable proposition. In an inflationary environment for construction costs, this means less and less funding for the interstate system. Flat receipts plus rising costs is not a recipe for a robust interstate system.
The trucking companies have historically received an almost free pass on the interstate system, paying their share of tax on diesel, which is only slightly higher than on regular gasoline. Considering the disproportionate wear and tear on highways by heavy vehicles, they have done quite well to have only paid for the interstate system on a fuel-consumed basis. Their true economic cost has been borne by other motorists, in my opinion.
Economics of long-haul trucking have worsened significantly this decade, thanks to higher diesel costs, but also to higher fleet maintenance expenses, in part due to poor road conditions. I expect the latter will only get worse over time, thanks to the poor revenue outlook for the interstate system. Tolling of more roads will help keep the roads in fair shape, but will, of course, cost more for users, including truckers. In any event, the recent bridge collapse in Minnesota, and astronomical costs to rebuild, are instructive. It has been argued that since rails have to pay for their own infrastructure, they are at a disadvantage. However, I argue that in the future, it will be an advantage, as truckers have absolutely no control over the crumbling infrastructure vital to their business. Since many truckers are independent owner-operators, they have almost no incentive to stay in the business if economics get worse. Companies that have pushed the risks of the business on to the independents in recent years will likely be in big trouble.
Another trend that bodes poorly for trucking companies is the rapid growth of diesel consumption in Asia. In recent years, companies such as PetroChina have been building new diesel refineries, to lessen the need for importing diesel fuel for their domestic economies. These refineries may help ease pressure on global refining capacity, but will allow for even more consumption of crude inputs. Even though diesel prices have already tripled this decade, American companies will very likely find even more competition for these resources going forward.
Because of the fuel efficiency of rail transport, rail customers have much more room to absorb fuel surcharges than trucking customers. During the 1990s, freight volumes moved by trucks increased far more rapidly than by rails, but I believe that trend has been permanently reversed. Only a miraculous decline in oil prices to 1990s levels would change my view. I expect that over the next few decades, a huge disproportion of goods will be moved cross-country by rail at the expense of long haul truckers.
As I have discussed in previous articles, I believe Burlington Northern has the best network to take advantage of this shift.
_______________
Mike Rubsam is President of Liberty Steward Capital, LLC (www.libertystewardcapital.com), and is long shares of BNI.
One aspect is the gas tax and the condition of the nation’s interstate system. When the interstate system was funded and initially constructed in the middle of the 20 th century, the United States had the enviable position of having the world’s strongest economy, by far. Additionally, construction costs were low, land for expansion was more readily available, and the U.S. still produced much of their own oil, keeping gas and diesel costs very low.
Currently the tax on gas, collected on a state and federal level, pays for repairs on our nation’s roads and bridges, but the overall state of disrepair of many of these roads and bridges, as well as lack of capacity on the roads, is a daunting challenge. This challenge is almost sure to become more difficult in the next 20 years.
First, the potential for increased mileage of the nation’s vehicle fleet augurs poorly for gas tax collection. Who will pay for road repairs if the nation runs on many more electric vehicles? If the gas tax is not raised on a per gallon basis, or an alternate funding system is not implemented, it is difficult to imagine even flat tax collection. Raising the gas tax has historically been a politically unpalatable proposition. In an inflationary environment for construction costs, this means less and less funding for the interstate system. Flat receipts plus rising costs is not a recipe for a robust interstate system.
The trucking companies have historically received an almost free pass on the interstate system, paying their share of tax on diesel, which is only slightly higher than on regular gasoline. Considering the disproportionate wear and tear on highways by heavy vehicles, they have done quite well to have only paid for the interstate system on a fuel-consumed basis. Their true economic cost has been borne by other motorists, in my opinion.
Economics of long-haul trucking have worsened significantly this decade, thanks to higher diesel costs, but also to higher fleet maintenance expenses, in part due to poor road conditions. I expect the latter will only get worse over time, thanks to the poor revenue outlook for the interstate system. Tolling of more roads will help keep the roads in fair shape, but will, of course, cost more for users, including truckers. In any event, the recent bridge collapse in Minnesota, and astronomical costs to rebuild, are instructive. It has been argued that since rails have to pay for their own infrastructure, they are at a disadvantage. However, I argue that in the future, it will be an advantage, as truckers have absolutely no control over the crumbling infrastructure vital to their business. Since many truckers are independent owner-operators, they have almost no incentive to stay in the business if economics get worse. Companies that have pushed the risks of the business on to the independents in recent years will likely be in big trouble.
Another trend that bodes poorly for trucking companies is the rapid growth of diesel consumption in Asia. In recent years, companies such as PetroChina have been building new diesel refineries, to lessen the need for importing diesel fuel for their domestic economies. These refineries may help ease pressure on global refining capacity, but will allow for even more consumption of crude inputs. Even though diesel prices have already tripled this decade, American companies will very likely find even more competition for these resources going forward.
Because of the fuel efficiency of rail transport, rail customers have much more room to absorb fuel surcharges than trucking customers. During the 1990s, freight volumes moved by trucks increased far more rapidly than by rails, but I believe that trend has been permanently reversed. Only a miraculous decline in oil prices to 1990s levels would change my view. I expect that over the next few decades, a huge disproportion of goods will be moved cross-country by rail at the expense of long haul truckers.
As I have discussed in previous articles, I believe Burlington Northern has the best network to take advantage of this shift.
_______________
Mike Rubsam is President of Liberty Steward Capital, LLC (www.libertystewardcapital.com), and is long shares of BNI.
