Five-Dollar Gas Would be a Win for Rail

Increasing fuel costs are likely to be more favorable for rail than for trucking principally because rail is a more fuel efficient mode of transportation than trucking, according to researchers at BMO Capital Markets. These researchers recently conducted a roundtable between its staff economists and equity research analysts from industries that would likely be sensitive to increases in gas prices.

While both rail and trucking have mechanisms designed to pass fuel costs on to shippers, rail’s fuel efficiency advantage over trucks should lead to a modal shift from truck to rail in an environment of increasing fuel prices, the roundtable concluded. Any increase in fuel costs should result in meaningful gains in market share for domestic rail intermodal for hauls 500-750+ miles.
Unsurprisingly, the impact of $5.00 gas prices is expected to have a negative overall impact on the macroeconomies of the U.S. and Canada. While the economic recovery is strong enough at this point such that $5.00 gas prices are unlikely to cause a recession, it would likely result in a surge in the unemployment rate back above 9.0%.

Additionally, the increase in gas prices would divert spending from other parts of the economy and GDP growth would likely slow by ~1.0%.
In summary, the hypothetical scenario would likely be a setback to the economic recovery, but should not plunge the U.S. or Canada into recession.
The impact of higher fuel prices on the trucking industry is likely more negative as more fuel efficient modes of transportation, such as rail and water, become more attractive to shippers for longer hauls. This will be especially true in the eastern U.S. where rail infrastructure is denser and better able to compete with the flexibility of trucking.

However, industry participants, such as J.B. Hunt, with highly developed intermodal businesses, should benefit from the modal shift, the BMO roundtable concluded. In addition, competition is likely to increase in the regional/short haul segment as carriers reallocate capacity to compete where the flexibility of trucking is most advantageous.

“We continue to see signs of ongoing multimodal (rail/truck) cooperation,” the researchers said. “The latest being in the flatbed industry where the Raildecks flatbed intermodal product is gaining market acceptance. Rising fuel costs will accelerate this type of cooperation.”

Related Editorial:

Rail Heading into Busy 2012

How Shippers Must Move Into 2012

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