Oil boom will sustain the economy, rail-car leasing sector in 2013 - by Toby Kolstad

— by Toby Kolstad

The rail-car leasing market has gone from last year's "same old, same old" or "slow and steady" to "fast and furious" in recent months. How the market changed from the staid realm, old-money rules of East Coast financiers to the Wild West frontier society of the Gold Rush is an oft-told tale of greed, easy money and gold — in this case, black gold.

With inadequate pipeline capacity to move product out of North Dakota, oil producers desperately needed tank cars last year to transport crude oil to far-away refineries, a situation reminiscent of the first Pennsylvania oil boom in the late 1800s. Back then, the short service lives of rail cars paved the way for pipelines, but with today's tank cars costing around $90,000 and approved for 50 years of service, the prospect of pipeline obsolescence scared off most rail-car lessors during the new oil boom's early days.

A few oil companies stepped up and bought cars, but to build an adequate national fleet would have required billions of dollars and new organizations to manage the tank cars — which many firms were reluctant to do. But they were willing to pay lessors for the risks involved in buying and managing tank cars for petroleum service, including a possible short service life and an above-normal possibility of lessee defaults. Extraordinary monthly lease rates attracted many lessors to offer deals and prompted a few large ones — including one relative newcomer known for making risky bets and one industry blue blood thought to be more risk averse — to place huge speculative orders.

It's Not Just Tank Cars

The oil boom is impacting other car types, as well, including mill gondolas and autoracks for transporting automobiles, light trucks and SUVs. Gasoline prices have been falling for more than a year as a result of the increasing flow of crude oil from North Dakota, enabling consumers to have more disposable income for other purchases, including new automobiles and trucks. With auto sales and production rising, railroads have taken many old autoracks out of storage, only to find that many of them need to be refurbished. This never would have happened if railroads had maintained the mandatory autorack recertification program created in the 1980s at the insistence of automobile manufacturers, who had been noticing too much damage to their products while in transit over the rails.

Originally, chief mechanical officers embraced the recertification rules as a way of securing the necessary budgetary funding to cover the repairs. But in the early 1990s, when railroads began to see the true costs of the eight-year programs, they lengthened the recertification period to 12 years. In the early 2000s, when the next recertification round should have started, railroads eliminated the rule's time limit and only required that repairs be made as needed. Now, rack owners are faced with refurbishing their old cars at nearly 40 percent of the cost of a new one while facing the prospect of a shortened service life — even with the supporting flat cars approved for 65 years of interchange. Many owners are considering whether to entirely lease new cars instead, and leasing companies are lining up to serve them.

Orders and leases of new mill gondola cars also can be attributed to the oil boom; drilling pipes, automobiles and new rail cars all are made out of steel that moves in mill gons. More orders have been placed for new mill gons during the past 18 months than in any similar period over the past 18 years. The lessor and lessee concerns of inadequate car hire rates have vanished with rising lease rates and frequent car shortages.

At 2012's end, there was much talk about the fiscal cliff and dire consequences to the economy if politicians had reached it without resolving their differences. This observer believes the oil boom should carry the economy through the cliff perils — and that rail-car leasing should stay strong during 2013.

Toby Kolstad has been in the railroad industry for more than 40 years, with stints at the Illinois Central Gulf Railroad, Denver & Rio Grande Western Railroad, a car builder and lessor. Currently a consultant on rail-car matters and president of Rail Theory Forecasts L.L.C., he can be emailed at Tkolstad@aol.com.