What if they never discovered oil in North Dakota? — by Richard Kloster

While it doesn’t seem that long ago, July 6 marked five years since the tragic derailment of a crude-by-rail train in Lac-Megantic, Quebec. That event had a profound impact on the rail industry. If we could go back and change just one thing, that event may have never occurred. But we can’t, and that is sad.

However, it did get me to thinking: What if there never was a train traveling through Lac-Megantic that night? Or what if they never found oil in North Dakota? Or: What if hydraulic fracking had never been developed? Where would the rail-car fleets be today? And what might have transpired for the rail equipment supply chain since 2011 when the fracking revolution triggered a huge energy-related, new car build cycle?

First, a lot of new cars would not have been built. Since 2011, about 416,000 new cars were built, almost 59,000 cars per year, a delivery rate well above normal. However, with about 40 percent of these cars related to the energy boom — crude and pressure tank cars, frac sand and plastic pellet covered hoppers, even flat cars — the annual delivery rate would have dropped to a little over 35,000 cars per year, considerably below the normal rate.

Investment in new rail cars would’ve fallen off

Without this volume, new car investment would have fallen by more than $15 billion, or about $2.1 billion per year. The significance: These revenues would not have been there to fund the major investments made by many industry players, particularly builders and lessors. Lacking these revenues, the suppliers likely would not have had the funding, or possibly even the desire, to invest in their plants and capacity, which today are more productive and efficient than ever.

Without these energy build cycle lease opportunities, the lessor’s investment growth would have been much lower. Granted, the new flammable tank-car regulations that came about as a result of the Lac-Megantic accident put considerable stress on some of these investments. But overall, the energy build cycle was positive for lessors. In fact, some lessors have developed strategies to mitigate this stress, most notably by retrofitting the affected tank cars to comply with the new regulations.

Also, had the energy boom not happened, we probably would not have seen many of the new investors make the decision to enter the leasing business. Nor would the secondary market and the values of existing rail cars have heated up to the degree they did — and still are.

Without energy car demand, there wouldn’t have been any real growth segments for the rail-car fleet. Faced with lower volumes, the industry probably would have had to focus more on replacing older equipment, but deliveries would not nearly have been as robust. However, while some new car replacement demand was met during the energy build cycle, much of it still remains to be played out over the next build cycle.

One sector that probably wishes fracking was never developed is coal. Much of the steep fall-off in coal traffic and the fleet is directly attributable to the low natural gas prices brought about by fracking. While new coal car demand would not have returned to prior levels, it would have been somewhat higher. More significant: The existing fleet surpluses would not have gotten as large as they did and equipment values would not be as depressed as they are now.

But fracking was developed, and they did find oil in North Dakota. The rail equipment supply chain benefited greatly and will continue to do so with the investments that were made as a result. Crude traffic is picking up and frac sand demand continues to be strong. Downstream commodity demand from fracking-produced oil and gas continues to increase rail freight and equipment volumes. Lower energy costs overall are making U.S. manufacturing more competitive and is translating ultimately to higher demand for other types of rail cars.

While there are always headwinds for the various fleets, the rail car industry overall is largely better off due to the development of fracking and the opportunities that it brought about.

Richard Kloster is senior vice president and chief commercial officer of AllTranstek LLC, a private transportation consulting company that provides fleet management, technical and strategic consulting to the rail industry. In conjunction with FTR Intel, Kloster forecasts the rail equipment markets for a broad client base.