with Walter Kemmsies
As the U.S. and other national economies slowly return to more normal levels of activity, it’s becoming clearer that the composition of freight volumes and the manner in which they are handled will not be the same as they were prior to the 2007-2009 financial meltdown.
Today, exports control a much larger share of freight flowing through U.S. ports. Rising oil and natural gas production, combined with declining use of coal, are changing the mix of rail volumes. More air freight has shifted to ocean transport due to cost considerations. Industry factors such as tighter restrictions on truck drivers, shortages of some transport equipment types and larger vessels, to name a few, are also impacting how cargo is ultimately delivered.
Underlying these trends, industry participants in freight movement must adapt their facilities and operations to this new reality. The time to start planning for these changes is now because getting permits these days is a more difficult and lengthy process than in the past, and there is little to indicate that this trend will change.
Never The Same.
It is unlikely that economic recovery will result in a pattern of freight flows similar to those of 2001-2007, a period marked by high growth driven by imports.
U.S. employment expansion during this period was weak with manufacturing increasingly offshored and displaced workers lacking opportunities in the country’s export-oriented industries.
Consumer spending remained high but financed by loans against rising housing prices. When the housing market imploded, it became evident that underneath it all the U.S. economy was not as strong as many believed. (It should be made clear that the substantial trade deficit must still be addressed to avoid a similar 2007-2009 meltdown. It is unlikely that imports are going to decline in the longer term; therefore the resolution of this deficit will require substantially higher levels of exports.)
As the U.S. economy crumbled in 2008, the deployment of advanced horizontal oil drilling technology accelerated. This has increased the stock of energy that can be accessed at a relatively low cost. Prices on fuel have already begun adjusting, with natural gas declining from an average level of $8.85 in 2008 to $3.80 per million BTU over the last 12 months. Oil prices remain high, but increases in shale oil production are likely to bring those down as well. Electric utilities have responded to relative price changes, as well as environmental pressures, and are shifting more to natural gas use. The transportation sector is also considering this possibility (see the June issue column, page 37). Railroads have felt this acutely. Over 40 percent of railcar shipments used to be coal-oriented, but this share has declined as utilities shift fuel sources. Railroads have tried to compensate for the decline in overall energy use by focusing on oil, ethanol and, where possible, coal shipments.
With the start of the second Obama administration in 2012 the government’s focus shifted to transportation safety. The Federal Motor Carrier Safety Administration, for instance, imposed greater restrictions on hours of service for truck drivers, as well as greater emphasis on their history of fines and accidents. On top of this, trucking companies had their share of financial troubles. It is not surprising that, as a result, the railroads’ share of long-distance freight movements increased. This is unlikely to be reversed. Access to rail is now more important than it has ever been in the last several decades.
Ocean carriers are also shifting their fleets to larger vessels. Alphaliner noted almost half the global order book for containerships is for those with capacities above 10,000 TEUs. This is already impacting carrier service offerings and raising the stress-level from the port to inland locations as volume surges increase.
To accommodate growing exports, more freight consolidation and transload operations near the ports are needed. For example, agricultural goods to be shipped in containers will initially arrive at transload facilities in rail hopper cars.
Highways, particularly bridges, must be upgraded to handle heavier trucks and larger traffic volumes. It is not clear how this will be financed given weak revenues from excise taxes on fuel.
Marine ports are already involved in dredging their access channels and berths, purchasing cargo handling equipment and making improvements to yards, gates and intermodal facilities. They should also focus on their rail connections. The nation’s Class 1 railroads plan to invest about $25 billion of capital expenditures in 2013, an increase over 2012 spending, according to the American Association of Railroads.
When To Start?
Overall, the time to start planning and applying for infrastructure development permits is now. The process of getting these approvals has been lengthening over the last few decades, with a green-field investment potentially taking as long as 14 years before being “shovel-ready.”
Given the current state of public finance and the pressure that demographic trends will put on social programs, it is likely infrastructure will be financed out of household wealth, which Credit Suisse estimated to be around $60 trillion at the end of 2012. This is a significant slice of the amount of money the American Society of Civil Engineers estimated to bring U.S. infrastructure back to a state of good repair.
With so many scenarios that could result from some of the trends mentioned above and discussed in recent columns, it is important for infrastructure planners and developers to always keep their options open.
Kemmsies is chief economist at Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or by email.