Railroad congestion in the Upper Midwest has been a growing problem for some time, but things are coming to a head because we face a very large harvest and North Dakota oil production continues to grow. Five committees of the Minnesota Legislature held joint hearings on the problems in St. Paul recently.
It’s good that elected representatives follow the economy. But it is far from clear whether Minnesota or the federal government can, will, or even should make any great effort to change things.
This is a classic situation in which it isn’t clear that private markets really are “failing” in any significant sense. So it’s unclear if government can do anything to correct the matter.
The situation has multiple causes. The largest — and certainly the most talked about — is the dramatic increase in North Dakota oil production. This past July’s monthly output of 34 million barrels is 6.4 times what it was five years ago and nearly a third higher than in 2013. It would fill up some 1,600 cars a day if it all went by rail. Not all does, but North Dakota’s boom is the primary reason total U.S. tank car loading with oil has increased by a factor of 50 since 2008.
However, this is not the only reason. Technological change continues to ratchet up per-acre yields of most major crops. High grain prices over the past several years, driven largely by demand from Asia, but also by the federal ethanol mandate, motivated an increase in total planted acreages.
And genetic enhancement has allowed corn and soybean planting to spread into areas of the Plains, including the Dakotas, Manitoba and Saskatchewan, that once were limited to wheat and other crops that tolerated low rainfall and a short growing season.
While the value per acre of corn may be only marginally above that of wheat, the physical volume and tonnage per acre can be three times greater. Little is fed in the new corn-growing areas and thus much more must be transported to markets.
Canadian provinces bear mention because dramatic growth of oil production does not stop at the U.S.-Canada border. Moreover, the North American rail system is highly integrated, with the Canadian Pacific playing a big role in North Dakota and Minnesota. There have been rumblings from farmers and grain companies over inadequate rail service for more than a year, and now the iron ore companies are joining in. For grains and oil, it is a question of “motive power” or locomotives, “rolling stock,” or the tank and hopper cars used for oil and grain, and physical capacity of tracks, sorting yards and sidings.
The rub for the ore companies largely is the shortage of locomotives needed for rail shipments to Indiana and Alabama. For companies that have their own lines to Lake Superior, whatever is happening in North Dakota or western Minnesota is of no concern.
What can be done? Precious little in the short run that is not already being done. Railroads can expand their capacity or freight can be shifted to other modes — ship, barge, truck or pipeline.
Rail capacity is growing, but it is a slow process.
There is a fleet of used locomotives owned by leasing companies that railroads can rent to cover short-term gaps, but they often are in poor mechanical condition or obsolete. New locomotives are built on order and production capacity by the two major builders has shrunk over the last two decades. And double- or triple-tracking takes years and billions of dollars.
Shifting oil from rail to pipelines is an obvious measure. The economics and politics of that merit a column of their own, but at present that is a very long-term option. More grain will move by truck, and truck capacity can be boosted faster than that of rail, but as distances grow, trucking becomes evermore expensive compared to rail and the grain sector will squeal.
What is the economics in all of this?
First, it illustrates how imperfect information curbs the efficient response of profit-maximizing firms in a free market. If the railroads had really known 10 years ago that North Dakota oil production would top a million barrels per day in 2014, they certainly would have begun to expand capacity earlier.
But hardly anyone expected increases anywhere near the scale achieved. Second, there are long lags in ramping up capacity in a capital-intensive sector like transportation.
In Econ 102, firms adjust output instantaneously in response to changing market incentives. But in the real world, this can take months or years.
Then there is the question of regulation. In the 1880s, we began to regulate railroad rates because of their perceived abuse of the monopoly power.
But by the Carter administration, there was a consensus that the costs of regulation outweighed the benefits. One reason was that technological change had increased competition. Large semi-trucks, pipelines and extensive water transport infrastructure had not existed when the Interstate Commerce Act was passed.
But while Carter-era deregulation removed control over rates, there still is a “common carrier” service requirement. Railroads must accept cars tendered to them by shippers. If oil companies load tank cars, the railroad cannot say “sorry, but we have to haul our existing customer’s grain first.”
Econ 102 would tell them to ration available capacity by raising rates. Resources will be used most efficiently when customers most willing to pay get the service. If oil companies are willing to pay more for track and motive power capacity than grain elevators, let the corn and wheat go by truck.
Rail companies have indeed raised some rates. But they are loath to do so on all classes of freight to a point where available capacity would meet demand.
Exactly why is a good subject for research by graduate students, but the political ramifications of appearing to stiff farmers certainly must play a role. They don’t want Congress to reinstate regulation in a huff.
Finally, the importance of “basis,” or the cost of moving some good from one location to another, is salient. Elevators in southwest Minnesota can always ship grain by truck to Savage, Minn., if rail service is poor.
Those in the Red River Valley can truck to Duluth, although that route is bottlenecked by ice four months of the year. It is more costly, but bearable. But the extra cost to a grain shipper in western North Dakota of sending a grain by truck either east or west is enormous.
Can Minnesota’s government do anything? Grain interests want higher allowed weight limits for trucks. That benefits farmers and elevators at the expense of taxpayers. Engineers will point out that grain trucks already don’t pay enough in fuel taxes to pay for the wear they impose on the roads.
And the history of Minnesota 200, the highway that is a channel for chronically overloaded North Dakota grain trucks flowing east to Duluth, is a classic case of the taxpayers of one state transferring money to businesses in an adjacent state.
Hearings give elected officials a chance to show that they feel shippers pain and afford some a soapbox from which to shame railroads, but don’t expect much to come from all of this.