The Problems Facing Class 1 Railroads and the Causes of Congestion

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Chris Blumberg is a software developer in New York who enjoys studying macroeconomic issues. He wrote an excellent comment our our Railroaded series about grain and railroad backlogs last month. We always welcome other views here at MetalMiner. Here is Chris’ explanation of the issues facing rail transportation other than just increased demand for freight cars from the oil and gas industry.

There is currently a lot of anger being directed at class 1 railroads across Canada, Mexico, and the US over the massive backlogs that all industries have been experiencing this year. Almost everyone places this blame entirely on the railroads choosing oil trains over grain trains as the oil is more valuable and oil companies can pay more for it. But if this the case, and why would a couple thousand extra tank cars per week cause such congestion?

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Let’s start with the US highway system which is the main competitor to the US rail system. US rail companies are privately owned and pay taxes on all the land they own including the rail itself. However, all roads, whether it be city, state, or US, are government property and have no tax base. When expressways and roads are expanded, the counties and states actually lose money by doing this. On top of this, they now become responsible for maintaining the new expansions. Now you might be thinking that our taxes cover all of this. That’s true, that’s why we have a fuel tax, and registration fees. Yet, even though this is correct, the US highway fund is bankrupt and has not been able to cover all the maintenance and expansion since those taxes were first created.

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In 1993 the US government raised the fuel tax to 18.4 cents per gallon of gasoline, and 24.4 cents per gallon of diesel. Back then this was quite a big tax, as gasoline was under $1 a gallon, representing more than 20% of the cost. The problem is the politicians in congress have never raised this tax. Since then, states have been gradually establishing their own gasoline and diesel taxes to make up for this shortfall in funding, with the national average now being 30.89 cents per gallon of gasoline and 30.75 cents per gallon of diesel, for a total of 49.28 cents per gallon of gasoline and 55.15 cents per gallon of diesel.

So, from 1993 to 2014 we have gone from nearly 20% per gallon tax to roughly 12.5%, and our Highway Fund is now bankrupt. In the current fiscal year, the US government collected $34 billion in fuel taxes, and had to transfer an additional $18.43 billion to the Highway fund.  Now that may not seem like a lot, but we haven’t taken into account state transfers from their general funds yet. In the current year, Texas has transferred $2.7 billion to their State highway fund, while only collecting 3 billion in fuel taxes.

Using Texas as a base, the state will have an estimated population of 27,194,258 by the end of this year, it will have transferred $101.96 per person to the fund. Applying this to all states and including the US transfer of $18 billion we come to $159.78 per person in state and US taxes subsidizing the US highway system. The sad part is that even with this $50 billion subsidy per year the US road system is in an appalling state with the White House analysis for the latest infrastructure bill estimating that 14% of roads being in “poor” condition and 25% of bridges being in “Deficient or Obsolete” condition.  This analysis released in July 2014 is the basis for the $300 billion infrastructure bill.

You would think that such a huge bill would have other investments besides highway investment, right? you would be wrong again. In total, the bill would fund primarily mass-transit train systems and fixes to the highway system and would provide only $10 billion to improve freight movement. This number would barely scratch the surface, when the Class 1 railroads are spending $20 billion in 2014 on track improvements, locomotive purchases, and rail stock and are expected to increase that number onward even higher in the decade to come.

The ironic part of this situation is that supporting freight rail fits perfectly with President Obama’s goals of reducing US oil consumption and pollution. A freight train can carry 1 ton of freight 458 miles on average compared to 140 miles on an 18-wheel freight truck. This would also result in more then 200 trucks being taken off the highway system which is already strained and underfunded, and at the same time the train will use 70% less fuel, and 80% less emissions then an 18-wheeler. Why freight rail is not a major issue with this administration is beyond me with all the problems the US is facing.

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