modal shift study - technical report

8/3/2019 Modal Shift Study - Technical Report

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PREPARED BY:

TRANSPORTATION ECONOMICS & MANAGEMENT SYSTEMS, INC.

OCTOBER 2008

TEMS

PREPARED FOR:

MARITIME ADMINISTRATION,

U.S. DEPARTMENT OF TRANSPORTATION

IMPACT OF HIGH OIL PRICES

ON FREIGHT TRANSPORTATION:

MODAL SHIFT POTENTIAL

IN FIVE CORRIDORS

TECHNICAL REPORT

IMPACT OF HIGH OIL PRICES

ON FREIGHT TRANSPORTATION:

MODAL SHIFT POTENTIAL

IN FIVE CORRIDORS

TECHNICAL REPORT


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TECHNICAL REPORT -IMPACT OF HIGH OIL PRICES ON FREIGHT TRANSPORTATION:

MODAL SHIFT POTENTIAL IN FIVE CORRIDORS

TEMS,INC. OCTOBER 2008 III

TABLE OF CONTENTS1 THE PURPOSE OF THE STUDY ............................................................................................................................12 INTRODUCTION.....................................................................................................................................................2

2.1 THE OIL PRICE ISSUE ...................................................................................................................................22.2 THE ABILITY TO MAINTAIN AND GROW THE GLOBAL ECONOMY ...............................................................42.3 THE COSTS OF MARINE AND INLAND SHIPPING...........................................................................................42.4 COMPETITIVE RELATIONSHIPS AND INLAND DISTRIBUTION SYSTEM ..........................................................6

3 OIL PRICES TODAY AND IN THE FUTURE .......................................................................................................83.1 THE HISTORY OF OIL PRICES.......................................................................................................................83.2 THE FUTURE RANGE OF OIL PRICES..........................................................................................................10

4 POTENTIAL IMPACT OF OIL PRICE SCENARIOS...........................................................................................134.1 OIL PRICE SCENARIOS...............................................................................................................................134.2 EVALUATION PROCESS ..............................................................................................................................134.3 ANALYSIS METHOD...................................................................................................................................154.4 SUPPLY SIDE ISSUES..................................................................................................................................154.5 DEMAND SIDE ISSUES ...............................................................................................................................19

5 THE IMPACT OF OIL PRICES ON TRANSPORTATION COSTS ...................................................................215.1 OVERVIEW ................................................................................................................................................215.2 TRUCKING EFFICIENCY .............................................................................................................................225.3 RAIL LINE-HAUL EFFICIENCY ...................................................................................................................245.4 MARITIME LINE-HAUL EFFICIENCY ..........................................................................................................255.5 MODAL PERFORMANCE COMPARISON.......................................................................................................31

6 MODAL SHIFT POTENTIAL IN THE FIVE CORRIDORS.................................................................................366.1 OVERVIEW ................................................................................................................................................366.2 BASE-LINE CONDITIONS ...........................................................................................................................366.3 CONTAINER FORECAST RESULTS ..............................................................................................................406.4 CONTAINERIZED FORECAST RESULTS .......................................................................................................446.5 BULK DIVERSION POTENTIALS..................................................................................................................46

7 CONCLUSIONS AND RECOMMENDATIONS ..................................................................................................497.1 KEY RESULTS BY CORRIDOR.....................................................................................................................497.2 NATIONAL IMPLICATIONS .........................................................................................................................507.3 CONCLUSION.............................................................................................................................................51

REFERENCES .............................................................................................................................................................52APPENDICES


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TEMS,INC. OCTOBER 2008 1

1

THE PURPOSE OF THE STUDYIn recent months the pr ice of o il has risen sharp ly and wit h it, g a soline, diesel, and f uel oil p rices. Theimpa ct of these oil p rice increa ses is very strong as it flo ws through the U.S. economy. Firstly, its impa ct onproduction costs results in a reduction on the overall demand for goods and services in the economy.Second, its impact on transport costs is changing distribution systems and the ability of existing logisticschains to serve w orld marke ts. This second impa ct af f ects not only the hinterla nd a nd d istrib ution systemsof major markets, but also the relative competitiveness of the modes that serve those markets.

In order to understand the impact of oil prices on markets and their logistic chains, the MaritimeAdministration (an agency of the U.S. Department of Transportation) asked Transportation Economics &Management Systems, Inc. (TEMS) to evaluate the impact of oil prices on U.S. domestic freighttra nsp orta tion. The study fi rst for ecasts the pote ntial ra nge of o il pri ces in the short and long te rm, a ndthen assesses how such pr ices wo uld imp act tr ansp orta tion log istics cha ins a nd evaluate likely chang es. Theanalysis considers both the national impact as well as the impact in five critical corridor markets, as shownin Exhibit 1 . These five corri d ors include over 9 5 p ercent of the US p op ulatio n a nd an even higher shareof its total production and consumption.

Exhibit 1: The Five Corridors Evaluated in the Analysis


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2

INTRODUCTION2.1THE OIL PRICE ISSUE

Over the last forty years, one of the most difficult transportation policy questions has been the issue of theprice of oil and its associated impact on transportation systems1 . Since the 1 95 0 s the No rth America neconomy and its transportation system have become increasingly dependent on oil both in terms of itsproduction of goods and services, and their distribution from production centers to market consumptioncenters. O il dr ives a larg e p ar t of the costs of the prod uction of a gr icultural, manufa cturing, and serviceindustrie s. Furthermore, a s industries have g lob al ized o ver the last thirty yea rs the low pri ce of oil hasb een critica l in a llow ing log istics cha ins to be come more and more elong a ted . As a result of economicglobalization, more and more of the U.S. Gross Domestic Product (GDP) has become dependent oninternational tra de and movements across the w orld .2 It is estimated that whereas only five percent of U.S.GDP was generated from trade in 1950, the growth of international trade (See Exhibits 2 and 3) by theyear 2000 resulted in twenty percent of GDP being generated by international trade, and that by 2050it will be fif ty p ercent.3

The transport systems that support this growth in economic globalism are very dependent on oil.

W hether its the ships tha t carr y conta iners wit h consumer g ood s f rom Asia a nd Europ e, or the oil ta nkersbringing fuel oil to the U.S., or bulk carriers moving coal, ores, and grain, marine shipping has been drivenby economies of scale being generated by faster and larger ships, and steady if not falling oil prices.Equally, in terms of inland distribution whether by truck, rail, or inland water, steady or falling oil priceshave allowed the growth of an efficient distribution system using existing infrastructure systems that hadad equate capa city. Interstates were built and maintained by Fede ral and state gover nment, ra ilroa dsmaintained by the private railroad companies, and port and inland water systems have been built andmaintained b y the Feder al a nd state g overnment, and the p rivate sector.

In the global economy and both the internal and external transportation systems of the United States,significantly increased oil prices will have a very large impact on a number of demand and supply factors,including:

The ability to maintain and grow the global economy The costs of both marine and inland shipping

The competitive relationships and role of inland shipping services (i.e., modal share).

1 A.E. Metcalf and D. OSullivan. Planning for Energy Conservation in Transportation: The Options, Irish Institute ofEngineers. Dublin. March 1979.2 A.E. Metcalf, E. Kraft, L.Y. Bzhilyanskaya. Ohio Intermodal Rail Freight Growth Strategy-Concept Study. TEMS,Inc. November 2006.3 Bureau of Economic Analysis. U.S. Department of Commerce.


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$0

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1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Canada Latin Amer ica Europe Asia Af r ica Other

$0

$500

$1,000

$1,500

$2,000

$2,500

19 4 5 19 5 0 19 5 5 19 6 0 19 6 5 1 9 70 19 7 5 19 8 0 19 8 5 1 9 90 19 9 5 2 0 0 0 2 0 0 5 2 0 10

YearExpor ts (includes re -expor ts) Impor ts Expor ts & Imports

Exhibit 2: U.S. Exports & Imports, 1950-2005 (Billions of $2005)

Exhibit 3: U.S. Exports & Imports by International Region, 1950-2005(Billions of $2005)


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2.2 THE ABILITY TO MAINTAIN AND GROW THE GLOBAL ECONOMY

In the short run, higher oil prices will undoubtedly have an impact on the rate of growth of the globaleconomy, as oil has such a significant role as a factor of production in agriculture, basic raw materials,

manufa ctured pr od ucts, and service industrie s. For a g riculture, oil impa cts as much as 2 0 -5 0 p ercent oftotal costs, for raw material industries 20-30 percent, for manufacturing industries 10-20 percent, and forservice industries 5-10 percent.4 However, while increased oil prices will slow the growth, and in the shortterm may limit or cut production, there are in many cases a wide range of substitutes for oil that couldrep lace oil g iven time. For ex ample , in the generation of pow er, the electricity supp ly can within the shortor medium term swit ch f rom oil to natura l ga s, coal, nuclea r, sola r, and even wind al terna tives. In a dd ition,a ra nge of conservatio n measures may b e ap plied on the demand side. Changing to these new fuelsources will a llow the pr od uction and consumpt ion ma rkets to exp a nd af ter a shortterm hiatus. As a re sult,oil will tend to become more focused into specific products such as, fertilizers for agriculture, or feedstock for plastics and chemicals as low cost substitutes will be harder to develop in the short and mediumterm (0-1 0 y ear s) in these area s. In the longer term (10- 15 yea rs)5 liquefied coal or cellulose-basedalter natives (e.g., biop lastics) will likely b e d evelope d that can substitute for oil. O vera ll, theref ore, whilethe prices of today may be moderated by substitution, the worldwide expanding demand for oil is likelyto be a consistently upward pressure on oil prices, and result in oil prices stabilizing at far higher levelsthan were ex pe rienced in the 19 90 s or b ef ore 2 00 5. This will result in a short or even medium downturnin the U.S. and w orld economies shaving 1 or 2 per centag e p oints per yea r of f U.S. GDP.

2.3 THE COSTS OF MARINE AND INLAND SHIPPING

In the last f ive y ear s the transpor t industry has exp erienced a five to eig ht fold increa se in the price of fuelfor marine and inland shipping (i.e., as a result of a price increase in crude oil from $20 to $140 perb ar rel). This causes a majo r d islocati on f or industry t hat may signifi cantly impa ct the curre nt d istrib utionpa ttern of g ood s and services. In the yea r 20 00 fuel repr esented only 2 0 p ercent of transpor t opera tingcosts, recently at $140 per barrel it represents over 50 percent, and were the oil price to rise to $200 aba rrel, it would b e over 70 per cent of op era ting cost. Transpor t prices have risen by nearly 1 00 per centbetween 20 02 and 2 00 8, and could increase by almost another 30 0 percent if oil prices increase to $ 20 0per b ar rel. A one-dolla r rise in world oil prices lead s to a 1 per cent rise in trad e transpor t costs. In termsof the mar ine and inland tr anspor t movement of a 40 -fo ot container f rom Shanghai to Columbus, O hio, thetotal transport cost was $3 ,000 w hen oil prices were $2 0 p er ba rrel in the year 2 00 0. Toda y a t $1 40per barrel, the cost is $8,000, and should oil prices rise to $200 per barrel transport cost would rise to$1 5,00 0 pe r FEU (See Exhibit 4).

4 R. Jimenez-Rodriquez. The Industrial Impact of Oil Price Shocks: Evidence from the Industries of Six OECDCountries. Documentos de Trabajo No. 0731. 2007; N. Velazquez. Impact of Rising Energy Costs on SmallBusiness. Congress of the United States. House of Representatives. August 10, 2006.5 M. Der Hovanesian. I Have Just One Word For You: Bioplastics. Business Week. June 30, 2008; B. Elgin. TheDirty Truth About Clean Coal. Business Week. 30 June 2008; D. Montgomery. Air Force Leads Push to LiquifiedCoal Fuel. Seattle Times. March 30, 2008.


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Exhibit 4: Cost of Transporting a Container (FEU) from Shanghai to Columbus, Ohioat Different Oil Prices ($2008)

The prices of food, consumer goods (e.g., electronics, furniture, and clothes), and capital goods items likecars and houses are all likely to suffer from continuing oil price shocks.6 It is estimated that the realignmentof prices will result in a significant set back in the growth of the world economy and both suppliers andconsumers will face a change in equilibrium of the economy, with suppliers having to increase prices topay for the increased production and transport costs, and consumers having to reduce demand as pricesrise. A g ood exa mple of the impa ct of increa sed oil p rices on transpo rtatio n is shown by the change in thesupply and d emand conditions for steel p rod uction. Chinese ex por ts of steel to the U.S. are now f alling ona year over year basis by more than 20 percent, while U.S. steel output is rising by 10 percent a year.W hile prod uction costs in China a nd the U.S. are very similar a t $6 00 pe r ton of rolled steel (due toexchange rate changes), the extra shipping cost faced by Chinese steel of $100 per ton is making ituncompetitive in U.S. ma rkets (See Exhibit 5 ). The new eq uilibr ium wil l result in a short to medium termchange in the market. In ef fect, the elonga ted supply chain fr om China has be en neutralized by higher oilpr ices. As the mar ket had b ecome ref lective of tra nspo rt conditions 10 to 20 yea rs ear lier in terms ofvolumes transported and supplied to the market,7 the result should be a short-term shake out amongpr oducers, and a more competitive market a s dema nd fa lls. Lower cost pr oducers will g ain market shareat the exp ense of high cost p rod ucers. All p rod ucers will look f or cheap er wa ys to supply the mar ket, andconsumers will look f or competitively pr iced goo ds. Clearly pre ssure will be on the tra nspo rt supplyindustry to f ind more cost-ef fe ctive a lternatives.

6 R. Avent. A World Less Flat. Guardian, UK. June 25, 2008.7 J. Rubin. The New Inflation. CIBC World Markets. May 27, 2008.

$0

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$6,000

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$14,000

$16,000

2000 2005 2008

Ocean Shipping Inland Transport

Price per Barrel

$20

$50

$140

$150

$200


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Exhibit 5: Chinas Steel Exports to U.S. Fall, While U.S. Steel Production Rises

2.4 COMPETITIVE RELATIONSHIPS AND INLAND D ISTRIBUTION SYSTEM

In the marine transport system, the higher costs of oil and its market impacts will put tremendous pressureon carriers to become more and more competitive, and to seek both operating savings and economies ofscale to of f set higher f uel prices. For ex a mple, in terms of op era ting sa vings, it is estimate d that ove r thelast 15 years the increase in speed of the world fleet from 20 to 29 knots has doubled fuel consumptionp er unit of f reig ht. As such, it is not surpr ising that the increa sed cost of o il is now slow ing the fle et. Interms of economies of scale this would suggest an even more intense drive to larger ships as a mechanismto of fset higher oil p rices per unit of f reig ht. As a r esult, there may well b e a new round of ta nker, bulk,a nd container ship develop ment a s carr iers seek to be more and more comp etitive . Eq ually , g iven thehigher costs of the inland distribution system, shippers may well seek to maximize marine movements andminimize inla nd d istrib ution costs. Inla nd d istrib ution costs8,9 are much higher per ton, teu, etc., than maritimecosts. As a re sult, higher oil p rices could:

Increase the maritime trip length, which fa vors Atla ntic and G ulf p orts instea d of W est Coa stports for Asian traffic.

Shift traffic from truck to rail and water for inland distribution.

In terms of inland distribution, the increase in oil prices has significantly impacted the relative advantageof the lower cost modes rail a nd wa ter. The truck industry has be en bad ly d amag ed, and in pa rticular,many small owner-oper ator s have been forced out of the market by increased oil p rices. Alrea dy besetwith labor shortages and longer travel times due to highway congestion, the industry is being forced to

consolid at e b y hig her oil p rices, which will have a tende ncy to i ncrea se truck rate s. This wil l occur despitethe impr ovements in prod uctivity that consolida tion will prod uce. For ex amp le, an impr oved p ercentag e ofbackhauls, which are so difficult for the smaller trucking firms to obtain, are more likely in a consolidatedindustry . Lar ge f irms with a w ide r ange of hubs a nd op era ting centers a cross the country can fa r moreeasily find backhauls from one region to another, and consolidate traffic because of their broader networkof routes.

8 Maritime Administration (USDOT)/ Transport Canada, Great Lakes-St. Lawrence Seaway Study- New Cargoes/ NewVessels Market Assessment Report, TEMS, Inc./ RAND. January 2007.9 U.S. Ports Model: Route Choice Model, TEMS, Inc. 2008.


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For rail, increasing oil prices are far less of a problem than for trucking because rail is far more fuel-ef ficient. The cost of fuel oil is a f ar smaller p ercentag e of tota l ra il op era ting costs and as such will resultin fa r smaller per centag e rate increa ses. However, freig ht ra il fa ces a very significant set of cap acitypr oblems and so ra il has only very limited ab ility to ex pa nd market share. As a result, the fr eight railroa d

is likely to price-up (including fuel surcharges), specialize in higher value goods, and reduce low valuetra ff ic. Key ra il freig ht include coal a nd gra in (for ethanol), which while being af fected b y the slow d ownin the world economy due to oil, are in themselves fuels that may be used to substitute for oil, and maytherefore continue to see rising dema nd despite the reduced r ate of w orld economic gro wth. However,another key ra il service, intermoda l tra ff ic has clear ly r ef lected the slow d own in the economy. This isencouraging the railroads into collaboration with trucking industry and may result in more diversion fromtruck to rail , crea ting g row th in some lanes while others shrink. For ex a mple, Kansa s Southern sa wintermoda l revenues rise b y 1 9 p ercent in the f irst quar ter of 20 07 , as tra ff ic switched fr om truck to rail.

For water, the market position is similar to that of rail as it can provide an alternative to truck because ofwa ters lower op era ting costs. The major issue is that b ecause the wa ter mod e is so much slow er tha n truckor rail it has not been able to move into the higher value container or intermodal business, and hastyp ically only substituted for tr uck or rail in bulk and neobulk markets. However, as both truck and ra il

have capacity problems while water has considerable capacity, the opportunity may now exist for waterto move up market from bulk traffic, first into neobulks (steel coil) and then into containerized freight,particularly where market conditions provide additional advantage for water (e.g., shorter water distance,easier port transfers, etc.).


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$-

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1970

1972

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2006

2008

$perbarrel

1973 Arab Oil

Embargo

Iranian

Revolution;

Shah Deposed

Iran-Iraq War

Begins; oil prices

peak

Saudis

abandon

"swing

producer" role;

oil prices

collapse

Iraq

Invades

KuwaitGulf War

Asian economic crisis;

oil oversupply; prices

fall sharply

Prices rise on OPEC

cutbacks, increased

demand

Prices fall sharply

on 9/11 attacks;

economic weakness

Prices spike on Iraq war, rapid

demand increases,

constrained OPEC capacity,

low inventories, etc.

Saudi

Light

Source: EIA, BLS and TEMS

PdVSA

workers

strike in

Venezuela

June-08

$125

August-08

$135 (Est)

Prices spike

due to

demand

factors

3

OIL PRICES TODAY AND IN THE FUTURE3.1 THE HISTORY OF OIL PRICES

Since 1970 and prior to 2004 the world has suffered a number of oil price shocks largely due to thea ctions of O PEC, and M id d le Ea st wa rs (See Exhib it 6 ). Howe ver, the recent oil crisis has resulted in thenominal price of oil fa r exceed ing any p revious crisis at $ 14 0 p er b ar rel. In nominal terms, the ref ineracquisition cost of oil (which is typically 95 percent of domestic market price) did not exceed $40 perbarrel, prior to 2006 and major price spikes were largely due to Middle East wars, such as the Arab oilembarg o (19 73 ), Iran/ Iraq W ar (198 2), and Persian Gulf W ar (199 2). That situation changed a fter theyear 2000 when non-supply issues like the growth in world oil demand (2003 to 2007) began to impactoil prices. From a low of $ 10 pe r ba rrel in 19 99 , oil prices rose quickly in nominal terms to near ly $ 70per barrel in 20 06 a nd to $14 0 per ba rrel in 20 08.

Exhibit 6: Major Events and Nominal World Oil Prices, 1970-2008:Imported Refiner Acquisition Cost


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$140

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Constant$perbarrel

1973 Arab Oil

Embargo

Iranian

Revolution;

Shah Deposed

Iran-Iraq War Begins;

oil prices peak-

$96.74

Saudis abandon "swing

producer" role; oil prices

collapse

Iraq Invades

Kuwait

Gulf War

Asian economic crisis;

oil oversupply; prices

fall sharply

Prices rise on OPEC

cutbacks, increased

demand

Prices fall sharply

on 9/11 attacks;

economic weakness

Prices spike on Iraq war, rapiddemand increases,

constrained OPEC capacity,

low inventories, etc.

Saudi

Light

Source: EIA, BLS and TEMS

PdVSA

workers strike

in Venezuela

June-08

$125

August-08

$135 (Est)

Prices spike

due to

demand

factors

Even in real terms (See Exhibit 7), oil prices (adjusted for inflation) remained within historic norms up to20 06 , when the oil price per b arrel wa s at $ 70 . The price was lower than that in the 19 82 Iran/ Iraq wa rwhen the oil price peak a t over $9 0 per b arrel in 20 06 dollars. However, after 2 00 6 it is clear that thereis a major change in the market with the a verage 20 08 price rising dra matically to $1 25 in 200 6 dollars,

and peaking a t over $14 0 p er barrel in 20 08 dollars.

Exhibit 7: Major Events and Real World Oil Prices, 1970-2008: ImportedRefiner Acquisition Cost (Prices adjusted by CPI using June 2008 as a base)

According to the International Energy Agency (IEA), the recent rise in oil prices reflects the impact of globaldema nd f actors. For the first time wor ld d emand is consider ed to have b ecome a significant influence onoil prices and herald ed a new oil price equilibrium. For exa mple, Mr. Rick W ag oner CEO o f G eneralMotors described the new oil prices as a major dislocation in the world economy to which his firm wouldneed to adjust.10 It was not considered a temporary impact that, in the case of previous war driven oilcrises, wo uld slow ly sub sid e as pe a ce was restored to the Mid d le East. Ra ther, it rep resented a majorpermanent structural economic shift that would need to be responded to on a permanent basis,representing not a temporary shortage of supply but long-term growth in world demand that existing

world supply could not meet.

10 H. Schneider. GM Closing 4 Truck and SUV Plants in North America. washingtonpost.com. June 3, 2008


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3.2 THE FUTURE RANGE OF OIL PRICES

From the review of discussion and historic data on oil prices, it is clear that there is much uncertainty abouthow oil pr ices may change in the f uture. To eva luate how the potential ra nge of oil pr ices might af fe ct the

transport industry, three potential scenarios11 wer e deve lop ed . These include a lo w (optimistic) case, hig h(pessimistic) case, and a central case.

In ord er to p rep are these scenario s the follow ing p rocedures were used. First, historic da ta fr om yea rs2000 to 2007 12 were d erived f rom the Energy Information Administra tion (EIA da tab ase). In ad dition,forecasts from the EIA Short Term Energy Outlook (2008-2009)13 were used that reflected recent priceincrea ses fo r the first six months of 2 00 8. This estab lished new for ecasts for yea rs 20 08 and 2 00 9.Second, in order to develop long-term forecasts, the growth rates developed by the EIA for long termcentral, high, and low case scenarios were used.14 The EIA average annual growth rates were linkeddirectly to the July 2008 short term values, and forecasts were generated to 2020 for the central, high,a nd low ca se scena rios. The fore casts a re shown in Exhib its 8 a nd 9 in bo th nominal a nd consta nt (2 00 8 )dolla rs. To d evelop the nominal dolla r estimate f or the prices of oil, the constant 20 08 dolla r va lues wereinflated by an inflation rate of 3 percent per year.

Optimistic Scenario (Low Case): Under the optimistic view or low price scenario, new oil supplies andsubstitutes are gradually brought on line (i.e., over 2-3 years) and then oil prices fall to a new higherequilibr ium level of $ 60 -8 0 p er ba rrel. This ref lects the fa ct that supply conditions improve a nd that a nincrea se in supply will return the economy to a mod era te or high growth strate gy . W hile conditions willnot be as advantageous as they were in the 1990s, increased oil supplies and improved energy usepr oductivity result in a new e quilibrium level for the economy that will o per ate very ef ficiently with oil costsonly doub le or trip le what they w ere in the 19 90 s. This scenar io is similar to what hap pe ned af ter theIran-Iraq w ar w hen oil prices pea ked a t $9 7 compa red to the $14 0 recently ex perienced. The dif ferencewith that situation is that oil returned to $ 20 - $ 30 per ba rrel af ter five y ears of a stead y fa ll, instead ofhalting a t a higher level of $6 0 - $ 80 per ba rrel f orecast under this scenario . This scenar io a ssumes thatOPEC would expand output so that its nearly keeping pace with the expanding demand in China and

Ind ia so tha t while wor ld d emand is high, so is supp ly . As a r esult, the ab ility to sta b ilize oil p rices even ata new higher equilibrium price floor will lead to renewed growth in the economy and a gradual rise over3 to 5 yea rs in GDP growth to the 19 90 s levels of 3 to 4 p ercent per yea r.

Pessimistic Scenario (High Case): Under the pessimistic or high price scenario, the expansion of worlddemand is so strong that the new equilibrium level will be consistently rising to over $200 per barrel, andthat this change is likely to b e pe rmanent, and specifically , due to the gr owth of A sian and Latin Americanmarke ts. In this scena rio, it is envisa g ed that d esp ite O PECs b est ef f orts to exp a nd p rod uction, the use ofsupply substitutes, and efficient energy use, it is still not possible to keep world oil production up withexp anding w orld dema nd fo r oil. Rising long-term oil prices da mpens the U.S. economys ability to gr owso that growth rates moderate to 1 to 2 percent per year as increasing oil prices almost completelya b sorb s much of the pr od uctivity g ains a nd gr ow th of the economy . W hile living sta nda rd s rise, such slowgrowth will reduce the dynamism of the economy and its ability to rebuild itself every ten to twenty years.

11 Prepared by TEMS using EIA historic data and projections.12 The historic data for 2000-2007 is taken from Energy Information Administration (EIA) website.(http:/ / tonto.eia.doe.gov/ dnav/ pet/ pet_pri_rac2_dcu_nus_m.htm).13 Data for 2008-2009 are obtained from EIA Short Term Energy Outlook, July 8, 2008, (http:/ / www.eia.doe.gov/ steo).14 Long-term forecast for years 2010-2020 was prepared by using growth rates assumed by EIA in accordance with threescenarios - low, reference and high. (See: Annual Energy Outlook 2008, June 2008 Table 12,http:/ / www.eia.doe.gov/ oiaf/ aeo/ index.html). EIA growth rates were applied to the 2009 numbers obtained in step 3.Annual inflation rate of 3.0% was assumed in order to transfer data into nominal prices.


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In the worst case, the U.S. may suffer from the European disease of a mature economy, or theJapanese disease of stagflation.

Central Scenario (Middle Case): As a result, we have two very different perspectives on oil prices as

shown in Exhibit 8. A third, centra l scenar io would b e a stab le or slightly f alling set of oil pr ices ba sed onthe idea that increasing world demand will strain existing oil supplies, but that new substitutes wouldgr ad ually b ecome ava ilab le (e.g., ethanol based on sugar cane/ bioma ss), and new oil finds will b ebrought on line such as the recently U.S. Geological Survey announced Bakken oil finds in North Dakota,Montana, and southeastern Saskatchewan.15 This suggests an intermediate course that would fall betweenthe opt imistic and p essimistic ca ses. Howe ver, this scenario w ill see long term oil p rices a t lea st q uad ruplein nominal terms wha t they w ere in the 19 9 0 s. In this scenario, the pa ce of the economy q uickens af tertwo or three yea rs of very low g rowth reflecting the current slowd own. Increased g rowth results fr omincreased oil production, substitute fuels, and energy use productivity, which gradually outpace growth inworld d emand f or oil. This lead s to stab le or slowly fa lling oil prices at $1 00 to $12 0 a ba rrel by 2 01 6in nominal prices, but remaining under $ 10 0 p er ba rrel in 20 08 prices. Af ter six to ten yea rs of 2 -3percent GDP growth, the new equilibrium oil price of $90-$100 enables U.S. economy to increase 3-4per cent G DP gr owth per yea r. This middle- case equilibrium pr ice fo r oil reflects the ba lance betw een

O PEC and the world o il prod uction ca pa bility , and the exp ansion of world dema nd. It assumes majorgains in energy supply, the development of substitute fuels, and improved energy use productivity (e.g.,higher fuel-efficiency standards for automobiles), not just in the U.S., North America, and Europe but inAsia as well.

Exhibit 8: Crude Oil Nominal Prices - Annual Averages (Imported Refiner Acquisition Cost per Barrel)

15 U.S. Department of the Interior. U.S. Geological Survey. April 10, 2008. www.usgc.gov. It is estimated that from this3.6-4.2 billion barrel oil field (which represents an increase of 20 percent in current U.S. reserves), oil can be produced at$16-$20 per barrel and be completely marketed at prices of $40-$80 per barrel.

$0

$50

$100

$150

$200

$250

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Year

Low Central High


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$0

$50

$100

$150

$200

$250

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Low Central High

Exhibit 9: Crude Oil Constant Prices - Annual Averages (Imported Refiner Acquisition Cost per Barrel)


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4

POTENTIAL IMPACT OF OIL PRICESCENARIOS4.1 OIL PRICE SCENARIOS

The analysis of oil price scenarios shows clearly that the operating costs of transportation systems thatsupp ort U.S. g round transp orta tion have funda mentally cha nged . At a minimum, U.S. tra nsp orta tionsystems face a doubling of fuel costs compared with the equilibrium conditions of the late 1990s, and inthe worst case a six-f old to eig ht increase by 20 20 . The most likely centra l scenar io would b e aquadrupling of p r ices by 20 20.

Under any of these conditions, the impact on transportation is very significant with quite radical responsesin log istics chains a nd intermoda l comp etitio n to be ex p ected. All oil p rice scenarios result in sig nifica ntchanges in U.S. logistics and the role of ports, highway, rail, and water infrastructure in meeting nationaltra nsp orta tion req uirements. In conseq uence, it is impo rta nt to unde rsta nd spe cifica lly how oil p rices wil limpact:

Na tional tra nspor tation trends and req uirements

Corridor spe cific changes

4.2 EVALUATION PROCESS

A micro-economic evaluation framework provided a basis for assessing the elasticities associated withpr oviding d iff erent levels of service in the dif fer ent corrid ors. To def ine elasticities, a supply and d emanda naly sis is req uired tha t shows the equilib rium response of d emand to a ny g iven set of sup p ly conditi ons. Itis critical to measure elasticities at equilibrium since elasticities can change dramatically for quite smallchanges in the levels of service provid ed by any mode. For ex ample , service freq uency ela sticities changedramatically as water service increases from one vessel call per week to eight calls per week (-0.95 to

0 .1). As wel l, d if f erent ela sticities a p pl y to either increa sing or de creasing services or costs. As a result,the final form of the structure depended on final corridor and route definitions, but the evaluationframework should provide a basis for comparing alternative logistic structures and the ability to provide acompetiti ve service in ea ch corrid or. To meet this req uirement, bo th the supp ly side and d emand sidefa ctors were evaluated w ithin a w hat-if f ramework.


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The what-if framework contains three major components:

Economic scenarios and transportation strategies what-if alternatives

Demand model f actors and systems

Supply model f actors a nd systems

Exhibit 10: Evaluation Frameworks

The structure shown in Exhibit 10 allows the character of demand for the transportation system to be testedund er a r a nge of di f f erent economic or tra nspo rta tion price (time, cost, etc.) al terna tives. As a re sult, the

model can be used to pe rf orm sensitivity tests of oil p rice potentials. This is do ne by develop ing moda ltransportation networks for each region that include higher oil prices forecast under the optimistic, central,and pessimistic case oil price scenarios described above.

For each of the five corridors defined in Exhibit 1, demand and supply for freight shipments was set up inTEMS G O O DS model b y d efining on the supply side the req uired input Truck, Rail a nd Ma ritimenetworks, with costing coefficients appropriate to the scenarios being tested; and by loading on thedemand side an origin-destination traffic database that was primarily derived from USDOT FreightAnaly sis Fra mework (FAF) data . The traf fic da tab ase, however, was augmented with Bureau ofTransportation Statistics data on cross-border flows and with Transport Canada data for Canadiand omestic flow s in the G LSLS (Centra l Canad a) reg ion, and o ther TEM S sta tistics. The GO O DS mode lwa s then run for ea ch corridor and for ecast scenar io to develop Base Line (20 05 ) and fuel p rice sensitivityscenarios.

The basic calibration of the model is designed to identify the potential for waterborne transportationcapture of containerized traffic, which normally requires a truck pickup and delivery at each end of suchmoves. However, there may b e add itional traf fic potential for develop ment of water f eeder services tospecific p orts. This typ e of analy sis req uires more port- specific da ta than is genera lly a vaila ble in the FAFda ta, which takes an overall metropolita n ar ea view . However, as will b e discussed la ter, it may b epossible to identify a potential for development of additional feeder services, particularly on the East andW est Coast, through a f ollow-up a nalysis of p ort spe cific da ta.

WHAT-I F

ALTERNATIVES

SSUUPPPPLLYYFFAACCTTOORRSS

COST

TIM E

RELIABILITYSERVICE LEVEL

DDEEMMAANNDDFFAACCTTOORRSS

ECONOMIC GROWTH

INDUCED DEMAND

COMPETITIVE

MODES,PORTS

AND ROUTES

POLICYASSESSMENT

EVALUATION

FRAMEWORK


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4.3 ANALYSIS METHOD

For each corridor, an analysis of the potential oil price impact was accomplished using the GOODSdema nd and supply model (See Exhibit 1 1). This model wa s orig inally d evelop ed f or the G rea t Lakes

and St. Lawrence Seaway Study carried out by the Maritime Administration (USDOT) and TransportCanad a fo r the New Carg oes/ New Vessels Ma rket Assessment a s pa rt of the Gr ea t Lakes St. Law renceSeaw a y Study . The mod el wa s subsequently used f or the Pana ma Ca nal Route Choice study , as we ll asfor regional studies (e.g., Northeast Freight Study for USDOTs Federal Railroad Administration). TheG O O DS model sets up a supply and d emand ana lysis fo r freig ht transpor tation in each corrid or beingexamined.

Exhibit 11: GOODS Demand Model

4.4 SUPPLY SIDE ISSUES

The GOODS model uses a generalized cost (GC) framework for assessing the factors that are mostdir ectly releva nt to shipper s and carriers decisions for routing f reig ht. A G C metric incorpora tes all of thecritical fa ctors that motiva te shipp ers a nd ca rrie rs to use a pa rticular route, mod e and shipment ty pe . ThisGC framework focuses on four main factors: Transit Time, Shipping Cost, Frequency a nd Reliability toref lect shipper s choice behavior. The generalized cost of shipping is typ ically d ef ined in shipping time(i.e., hours) rather than do llars. Costs ar e converted to time by ap ply ing ap pr opr iate conversion fa ctors,

a s shown belo w. These conversion f a ctors, VO Tmp, VOFmp, and VORmp are based on the results of statedp ref ere nce survey s, showing how ship p ers value ea ch of these components of ge nera lized cost (GC). Thegenera lized cost of shipping betw een zones i a nd j f or ro ute m and commodity p is calculated as follow s:

pm

mjipm

mjiijmmp

mp

mp

ijmp

ijmijmpVOT

OTPVOR

CFVOT

OHVOF+

VOT

TCTT=GC

)exp(++

BASE & FORECASTYEAR TRAFFIC

FLOWS

TRANSPORTATIONINFRASTRUCTURE,PRICE, & SERVICE

SOCIO-ECONOMICDATA (POPULATION,EMPLOYMENT, ETC.)

TOTAL DEMANDMODELS

STATEDPREFERENCESURVEY OF

DISUTILITY VALUES

MODAL SPLITMODELS

ROUTE CHOICEMODELS

O-D COMMODITYFLOW DATA (BYMODE AND SICCOMMODITY)

NETWORK DATA(TIMES, COSTS BY

MODE)

SOCIO-ECONOMICPROJECTIONS FORFORECAST YEARS

MODEL FORECASTSFOR YEAR 2020

FINANCIALANALYSIS

ECONOMICANALYSIS

ZONE

SYSTEM

BASE & FORECASTYEAR TRAFFIC

FLOWS

TRANSPORTATIONINFRASTRUCTURE,PRICE, & SERVICE

SOCIO-ECONOMICDATA (POPULATION,EMPLOYMENT, ETC.)

TOTAL DEMANDMODELS

STATEDPREFERENCESURVEY OF

DISUTILITY VALUES

MODAL SPLITMODELS

ROUTE CHOICEMODELS

O-D COMMODITYFLOW DATA (BYMODE AND SICCOMMODITY)

NETWORK DATA(TIMES, COSTS BY

MODE)

SOCIO-ECONOMICPROJECTIONS FORFORECAST YEARS

MODEL FORECASTSFOR YEAR 2020

FINANCIALANALYSIS

ECONOMICANALYSIS

ZONE

SYSTEM


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W here:

TTijm = Shipping Time (in hours) be tween zones i and j fo r route m

TCijmp = Shipping Cost ($) be tween zones i and j fo r route m and commodity typ e p

VO Tmp = Value of Time ($/ hr) for route m and commodity typ e p

VO Fmp = Value of Frequency ($/ hr) for route m and commodity typ e p

VO Rmp = Value of Reliability (%/ hr) for route m and commodity typ e p

Fijm = Freq uency in depa rtures per week between zones i and j for route m

O TPijm = O n-time perf ormance (%) for shipp ing between zones i and j for route m

O H = O perating hours per week

The first term in generalized cost function is the shipping time.

The second term converts the cost of shipping into time units.

The third term in the generalized cost equation converts the frequency attribute into time units. Operating hoursdivided by frequency is a measure of the headway or time between departures (e.g., once or twice weekly).Tra deof fs are mad e in the sta ted p ref erence surveys resulting in the value of f req uencies on this measure. Thethird term represents the impa ct of p erceived f requency va luations on genera lized cost.

The fourth term of the genera lized cost function is a measure of the value p laced on reliab ility o f the route. Thenegative exponential form of the reliability term implies that improvements from low levels of reliability havehigher impa cts than similar improvements from higher levels of reliability .

Generalized costs are developed for each origin destination pair, based on the aggregate time, cost, frequency,and reliability characteristics of all the links that make up a route. The following describes each of the key inputsthat a re captured b y the G C formulation.

Price

Line Haul: A key f eature of a ny supply chain is pr ice. Typ ically, wate r transpor tation has been ab le toof f er the lowest line-haul p rice. Although pri ce do mina tes b ulk tra nsp orta tion, it is f a r less impor ta nt in themovement of container traffic where transit time and a wide range of other service variables play a majorrole.

In the ca se of b ulk tra f f ic, gi ven the volumes involved , shipp er concerns f ocus on the lowest rate p er to n. Inthe case of container traffic, by comparison, the main focus is on transit times and the ability to reachcertain markets by a g iven dea dline. Faster tra nsit times allow a higher pr ice to be charg ed. Clearly ,faster transit times that are competitive with rail and truck can attract a price similar to that of rail andtruck a nd d ra matically increa se revenues per ton-mile.

Since wa ter op tions genera lly of fe r longer tra nsit times than rail or truck, the ab ility to of fer lower prices iscritical to their success. This means that f rom an op era ting cost pe rsp ective, the wa ter mod e must belower-cost than rail (including the cost of port or terminal handling) wherever the rail option is present, as itis f or most pro po sed short- sea ship p ing la nes. As a re sult, it will b e import a nt f or vessel op era tors tomaximize economies of scale by using vessels that are both large and fast enough to be able to offer acompetitive service in the marketp lace.


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In this study, fuel is an important component of operating cost and so the impact of rising fuel costs on eachmode w as evaluated for each of the three oil p rice scenar ios.

Access/ Egress/ Terminal Costs and Time: The exp erience of both rail and wa ter transpor tation provid ers is

that access, egress, and p ort/ terminal d well time along w ith dra ya ge are very exp ensive components ofboth shipment cost and time, and can rap idly red uce the viability of a service. For ex ample, the reasonfo r develo pment of the Alameda Corrido r in Calif ornia wa s the need to r educe dwell time, a ccess/ egr ess,a nd dr a yag e times f or the port s of Los Ange les a nd Long Beach. The congestion and d ela ys a ssociate dwith getting from both ports across Los Angeles was such that shippers were willing to pay as much as $17per box for improved service.16

The costs of a ccess/ eg ress a nd terminal t ime wer e mode led b y including centroi d connector links in thenetwor k de f inition. These links connect the traf f ic zone ori gi ns to the po rts a nd include a cost fo r b oth localtrucking a nd p ort charg es. Such access costs can be signif icant, esp eciall y f or a short-haul service, andcomprise a large percentage of the overall shipping cost.

The impact of short-haul trucking or drayage cost is not often understood, but it forms a key component in

estab lishing the viability of intermoda l rail as well wa ter services. The pr oblem is that load ed d ra ya gemoves ar e of ten not ba la nced so the ba ckha ul must return empt y. Up to six tr ucking moves can berequired to get one loaded trailer to and from its destination, as follows:

Truck fr om Dep ot to Port to p ick up load ed container (bob -ta iling)

Port to Customer (loaded)

Customer back to Depot (bob-tailing)

Depot to Customer to p ick up empty container (bob -tailing)

Customer to Port (empty)

Port ba ck to Depot (bob-tailing)

Under these circumstances it is not unusual for drayage to cost anywhere from three up to six times thenormal over- the-roa d tr ucking ra te. This f actor p lus the port hand ing cost impose a minimum d ista ncethreshold, which in rail is thought to be 700-1,000 miles before the efficiency of the line-haul offsets thead de d cost for the dra ya ge a nd por t handling char ges. For do mestic intermod al services, another ef fectof high-cost truck drayage is to generally limit their effective service areas to immediate port hinterlands,usually in the range 30-50 miles around a port, because trucking costs are just too high for collectingtraffic from beyond that range.

Transit Time

In a just-in-time economy, transit time has become the prime factor in shippers decisions for containertra ff ic. Impr oved tra nsit time, theref ore, has a strong rela tionship with the ab ility of the water mod e to

attr act container traf fic. This can happ en in severa l wa ys: wa ter tra nsit time can be improved rela tive toother mod es because of the impro ved o per ation of the ports and w ate rwa y system; by the use of new andfaster vessels; or as a result of increased time and cost for other modes as due to congestion, capacitydela ys, and higher f uel prices. In ea ch case, the rela tive dif fe rence betw een water tr ansit time and itscompetitors transit time must be significantly reduced for water intermodal service to be an effectiveoptio n. For exa mple, nowad ay s it takes ab out ten da ys for a ship to go fr om one end of the G rea t Lakesa nd St. La wr ence Seaw a y (G LSLS) system to the other. Critica l bot tlenecks include the Montre a l-Lake

16 Expanded Preliminary Model Alameda Corridor. Transportation Economics & Management Systems, Inc. March1993.


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O ntario section, which has a 2 2- to 24 -hour a vera ge tra nsit time, and the W elland Ca nal with an 11 -hourtra nsit time. For b ulk fre ig ht such as g ra in, iron ore, coal, and steel, these times a re b oth rea sonab le a ndcompetitive g iven the volume of carg o involved . However, for container or pa lletized p rod ucts thetyp ical wa y to move manufa ctured pr od ucts these time scales ar e ge nerally unaccepta ble. Since the

gap between water service for bulk freight and its competitors is currently three to four days of transittime; water service for containerized freight would probably need to be improved to within one or twoda ys, at the most, to become an ef fective shipping op tion. W hat this means is that f ast ships ope rating inthe 18-22 knots speed-range will likely be required to compete with surface transportation in short-seala nes. Technolog ically , sai ling sp eed s in this ra nge a re not a p rob lem for mod ern vessels.

Frequency of Service

The frequency of service is often a critical factor in a shippers decision to use a particular transportationop tion. O n Europ es Rhine/ Danube River System, conta iner traf f ic b ar g es a re sched uled to ensure thatreq uired fr equencies are b eing met and that their reliability is improved . It is likely that fr equency w ill bea critical factor for any short-sea shipping service where a minimum daily service level will be essential toa ttra cting shipp ers a nd new ca rg oes. In contra st, wee kly service is consid ered to be the norm for

international shipping lanes.

Reliability

The new economy of the 21 st century is entirely dep endent upon relia ble tra nspo rtatio n service to suppor tthe just-in-time manufa cturing and pro cessing of moder n industry . Imp roving relia bi lity sig nifica ntlyimproves the ab ility of a ny short-sea shipp ing service to attra ct container tra ff ic. Reliab ility needs,therefore, to b e built into the supply model.

Other Factors

Several other factors are not explicitly included in the Generalized Cost equation but are reflected in themodal bias constant factors that result from the calibration regressions.

Seasonality: A key issue for w a ter tr ansp orta tion system is sea sonali ty . This concern ap p lies mainly to t heGLSLS system where, over the last quarter century, its St. Lawrence Seaway component has typicallyope ned in late M ar ch and closed in late December, a period of 2 74 da ys, or more than 9 months. W hilethe months of January to March are typically some of the slowest for manufacturing and, in particular, thereta il industry , the inab ility to of fer any service at this time has been per ceived a s a major limitation.

The impact of closing the GLSLS System for three months is that shippers and carriers will look for otheralter natives. O nce they f ind those alte rnatives, build rela tionships, nego tiate contracts, and d evelop ad ep enda b le log istics cha in it is di f f icult to see why they wo uld return to the G LSLS. To eva luate the impa ctof seasonality, specific shipper and carrier input is required that shows the disruptiveness of theseasonality issue, how it affects costs and the penalty associated with forcing shippers to use alternativera il and truck op tions. Ship p ers a nd ca rrie rs a re looking f or sea mless log istic systems negot ia ted f or a

g iven business cycle. O ne possib le alt erna tive is f or the GLSLS to de velop pa rtnership a rra ngements tomitig at e this issue, as wa s p rop osed in TEMS ea rlier New Car g oes/ Ne w V essels Ma rket A ssessment.

Security: Befo re containeriza tion, pilf era ge f rom all forms of tra nspor tation wa s a p rob lem. As a result ofcontaineriza tion, moving g ood s became more secure a nd the level of p ilfer ag e d iminished. Although theuse of containers has enhanced shipment security, the level of security between different modes oftra nsp orta tion ma y not be the sa me, which can be a significa nt shipp ing issue. In ge nera l, shipp ers reg a rdwater transportation as a safer mode than rail and truck, and this perception could be an advantage inthe movement of some specific kinds of freight, such as hazardous materials or waste.


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Shipment Characteristics: Cargoes have special characteristics that make them more or less subject totra nsp orta tion restrictions on certa in modes. For exa mple, hazar d ous mate ria ls or ca rg o requiringref riger ation both often have spe cial handling cost implications and moda l restrictions. Haza rdo usmaterials might be banned from critical bridges and tunnels, and waterborne transport is also generally

superior to other modes in terms of its ability to handle very large or wide dimensional loads that maysimply be too large or heavy to fit through existing highway or rail bridges or tunnels.

Capacity: An increa singly impor ta nt f a ctor in shipp ing de cisions in the future will b e system ca p acity . Thisfactor generally reflects indirectly through the transit time and reliability factors associated with theservice. It is anticip a ted t hat supp ly side limitat ions including la b or (trucking industry ) a nd infra structurewil l ma ke exi sting d istrib ution systems less cost eff ective and p hysically limited in what they can ca rry . Asa result, capacity issues need to be considered for their impact on transit times and reliability, which areexp ected to worsen in the future fo r highwa y tra nspor tation. However, the forecasts pr oduced for thisassessment assume base-year reliability and parameterize fuel cost only, which makes them conservativewith respect to future for ecast y ea rs.

Conclusion: The supply side model needs to be able to faithfully replicate these factors in freight

shipping decision-making and to show the impact of changing any one of the factors on the supply chainand overa ll modal ef ficiency.

4.5 DEMAND SIDE ISSUES

O n the d emand sid e, a number o f market issues need to b e a ssessed in the ana lysis. These include

Changes in Market Size Due to Economic Growth

O ver the next twenty to thirty yea rs, if current trends continue, the f reig ht volumes will increa se b y at least7 0 to 1 00 pe rcent. Recent Sta tistics Cana d a , U.S. Burea u of Commerce, a nd O ECD d at a show tra d evolumes increasing rapidly from the early 1980s along with the increasing integration of the world

economy. For exa mple, U.S. expo rts increa sed 6 3 p ercent in the ten yea rs fr om 199 2-2 00 2, while U.S.imports grew 138 percent over the same time period, according to the U.S. Bureau of Economic Analysis. 17 The existing infrastructure will find this difficult to handle due to capacity limitations and, once existingmode s rea ch f ull cap a city, ca rg o will seek new op p ortunities to rea ch marke ts. At this p oint, short seashipping w ill become more competitive a nd more attra ctive for container tra ff ic. Assessing the impa cts ofhigher oil p rices on total de mand re quires consider ation of how macroeconomic factors will impa ct supplychains. Initia l indi cations have sugg ested tha t import s may d ecline, b ut bo th d omestic p rod uction andex p orts ma y g o up a s a result not only o f oil p rices, but al so curre ncy shifts. This sugg ests that imp orts ma ylevel o f f a s p rod uction shifts ba ck to the United Sta tes. But a s a r esult of this sa me shift, the do mesticfreight market may be expected to continue to grow rapidly, and it appears likely that a morecompetitive short-sea shipping mode due to its greater fuel efficiency could capture at least some of thisgrowth.

Because of the current uncertainty surrounding economic and traffic growth forecasts, however, this reportbased its projections on the historical Freight Analysis Framework (FAF) traffic levels and will focusprimarily on identifying the prospects for market share shift between direct trucking and rail and waterintermod a l services. The FAF d a ta ba se itself relie s heavil y on the Commodity Flow Survey (CFS) d a ta b utwa s selectively enhanced using other da ta sources pr ior to p ublic release. In ad dition the ba se y ear da tawa s augmented w ith Cana dia n and cross-b ord er d ata for the G LSLS New Car goe s/ New Vessels study, sothe database reflects the best available source for assessing the traffic that might potentially be availableto a new wa ter shipp ing sy stem.

17 U.S. Bureau of Economic Analysis of Current Business. April 2003.


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Impact of Market Accessibility on Total Demand

As existing fr eight op tions rea ch capa city, new ro utes will op en. If these new routes pro ve not to be a scompetiti ve as ex isting routes, this will re duce the size of the overa ll market . Sig nifica nt d istrib utionalimpa cts might fo llow . Conversely , once the minimum volume threshold r eq uired to sup po rt short-seashipping services has bee n atta ined, shipper s will have ad ditional compe titive op tions fo r tra nspor ting theirgoo ds. W hile dema nd for tra nspor tation services is lar gely der ived f rom the need s of the ag ricultural,manufacturing, and service industries, a less competitive transportation market will reduce the totaldemand for shipping freight across all modes of transportation while a more competitive transportationmarke t makes the overa ll marke t la rg er. This is d ue to the imp a ct the competit ion has on the costs oftra nspo rtatio n and the overall pr icing of pr oducts. The demand mod el in conjunction with the supply modelmust be capable of determining the appropriate level of demand at equilibrium (i.e., the balance ofmarket price and supply costs).

Level of Modal and Route Competition

The competition between different modes of transportation and routes was assessed by a comparison oftheir relative p erf ormance a s measured b y tr ansit time, price, freq uency, etc. Changes in the relativeper fo rmance of a mode or ro ute will make it more or less competitive. The size of a given modes marketshare is proportional to its relative competitiveness as measured by its performance compared to othermode s. In eva luating r oute opt ions, the study has consid ered the pote ntial changes in tra d e wit h Asia, theincreasing role of south and west Asia, and the potential for Asian traffic to the Midwest and centralCanad a to divert to Atla ntic routes via the Suez Canal.

Capacity Constraints and Traffic Shifts

The impact of mode, route, or port capacity constraints on ports, railroad, and trucks can cause afunda mental shift in the competitive a dva ntage of the modes. If the relative p erf ormance of tod ay s por tand inland transportation distribution system worsens due to increased fuel prices or capacity constraints,short sea shipping could be come a n overflow op tion for the truck a nd ra il services.

Conclusion: Analysis of the demand side factors was undertaken using a model that provided amecha nism f or eva luating the full supp ly chain of ea ch mode a nd set of mod a l service op tions. Thisshowed the relevance of each component of the supply chain to a shipper or carriers decision-makingprocess, which was assessed in an earlier study with stated preference surveys that allow the strengths andwea knesses of ea ch service/ supply chain op tion to be evaluated . The demand-side a nalysis showed notonly how competitive the existing shipping services are, but also how they need to change in order toa ttra ct new car go . In this wa y, the threshold s that wa ter services need to rea ch to achieve their po tentia lmarket shares have been identified and the actual potential of achieving the threshold defined.


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5

THE IMPACT OF OIL PRICES ONTRANSPORTATION COSTS5.1 OVERVIEW

In general, transportation systems will adjust to fuel price changes by passing through the added costs totheir customers. In a n environment of contra ct rates, f uel surcha rg es that a llow f or short-ter m ratead justments have be en imple mented b y a number of carriers. However, it must be noted that f irms ar eonly ab le to price a ccord ing to what the mar ket will bea r. This means, fo r exa mple, that in acompetitive environment such as that for transcontinental double-stack intermodal service, railroads willconsider rates based on what oceancarriers charge for an all-water movement to the East Coast, ratherthan ba sed solely on their own cost. In these cases, transp orta tion systems may not be a ble to p a ss on thef ull cost of the fuel increases, and so must seek ef f iciency g a ins to rema in viab le. As a r esult, a f uel pri ceincrease may result in a wide range of impacts depending on just how much of the increase can be passedon to consumers.

The key results of t he a naly sis show tha t:

Large fast vessels, such as the 22-knot, 342-FEU (GLSLS-max) ROROs considered by the earlierNew Carg oes/ New Vessels (NC/ NV) M ar ket Assessment, can maintain competitive p ar ity w ith railintermodal service and present a strong opportunity for diversion of truck traffic, through thedevelopment of appropriately structured, water intermodal services.

Sma ll a nd/ or slow vessels, such as the 90 -FEU Europ ea n Coa ster de sig n consid ered b y t heea rlier NC/ NV study , are not rail-competitive. These vessels could d ivert some truck tra ff ic orserve as short-distance feeders, but overall, such vessels were not competitive to rail before thefuel price increases, and become even less so after the increases.

O n shallo w inland w a ters, CO B is the most energy -ef f icient mode . As such, it may see thedevelopment of some container traffic as the differential between COB costs and those of othermodes, continues to widen.

Because the main focus of this study is on the development of coastal short-sea shipping, in general thevessel technology assumptions and costing approach employed here are consistent with that of the earlierG LSLS NC/ NV stud y . This d iscussion fo cuses on the cost impa cts of f uel cost increa ses f or the va rio us ty pesof technolog ies that would b e ap pr opr iate f or de ploy ment on short-haul Intermoda l lanes. However, thecompa ra tive economics of lar ger ships that a re used in the main international trad e la nes will a lso b ediscussed as it impacts the market for movement of goods within the U.S.


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This cha p ter is orga nized a s f ollow s: f irst, there is a d iscussion of t he impa ct of f uel pri ce increa ses on theef ficiency o f each individ ual tra nspor t mode: truck, rail, and w ater ; then these results are integra tedtogether in a Competitive analysis section that identifies the impacts across the modes.

5.2 TRUCKING EFFICIENCY

The trucking sector is highly sensitive to f uel pr ice increa ses. Truck fuel consumption is highly sensitive tovehicle we ig ht, a s shown in Exhibit 1 2. An emp ty tr uck ca n g et 6 miles pe r ga llon, but f uel eff iciencydeclines to 3 miles per gallon for a fully loaded truck.

Exhibit 12: Miles per Gallon vs. Truck Gross Weight*

* Source: http://www.goodyear.com/truck/pdf/radialretserv/Retread_S9_V.pdf

In 2005, average diesel fuel prices were $2.40 per gallon; so with a fully-loaded truck getting about 3miles per gallon, fuel already comprised 80 per mile or 46 percent of the truckers overall operating

cost. There is a dire ct relationship b etween oil cost p er b arr el a nd the cost of diesel fuel, and this allow sthe trucking cost pe r mile to be estima ted as a function of f uel price. In Exhibit 1 3 , it can be seen thattrucking costs rise less rapidly than do fuel costs because capital and labor costs are added to the fuel costto p rovid e the tota l Truck costs. This holds true if cap ita l and la b or costs rema in consta nt, b ut in recentyears these costs have been rising as well, making trucking cost rise even faster than just the fuel priceimpact.


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Exhibit 13: Line Haul Trucking Costs as a function of Fuel Price

Local pickup and delivery, called drayage, is more expensive than normal over-the-road truckingbecause drayage typically requires many empty miles, as well as non-productive time that a truck mustspend at the port, intermodal terminal, and the shippers and consignees loading docks in the process ofpicking up a nd delivering b oth empties and loa ds. Typ ically d ra ya ge moves ar e priced on the ba sis of

10 0-p ercent empty return since it ta kes at le ast two round trip s to complete the movement of one load . Inthe typical example used as the basis for Exhibit 14, 72 empty or bob-tailing miles were required tosuppo rt a o ne-way load ed movement of 3 0-miles. Because of this, while over-the-roa d tr ucking cost$1 .75 per mile in the 20 05 ba se, compa rab le rates where dray ag e is involved were q uoted in the rangeof $5 to $10 per mile.

Taking the large number of empty miles into account, as shown in Exhibit 14, drayage costs do not rise asq uickly (on a pe rcentag e ba sis) as those fo r over- the-roa d tr ucking. In the 20 20 Pessimistic (high oil price)scenario, it can be seen that drayage costs rise only by 66 percent, whereas over-the-road trucking costsrise by 85 pe rcent as fuel costs go up to the anticipa ted level of $6 .88 p er g allon. Nonetheless, the costof a typ ical movement involving dr ay ag e increa sed significantly in a bsolute terms. Cost increa ses of thismagnitude, whether for over-the-road trucking or for drayage, put significant pressure on the owner-operator, causing further consolidation of the trucking industry since larger firms are better able to

minimize e mpty movements.

Exhibit 14: Drayage Costs as a function of Fuel Price

Scenario $/Barrel Diesel/Gal TruckCost/Mile Fuel % of2005 base Truck % of 2005base

2002 Historic $28.85 $1.37 $1.41 53% 80%

2005 Base $54.79 $2.40 $1.75 100% 100%

2020 Optimistic $59.61 $2.61 $1.82 109% 104%

2020 Central $91.03 $3.99 $2.28 166% 130%

2020 Pessimistic $157.18 $6.88 $3.24 287% 185%

ScenarioLoadedCost/Mi

EmptyCost/Mi

AverageCost/Mi

Total Cost fora 30 Mile

Loaded MoveDrayage PerLoaded Mile % of 2005 base

2002 Historic $1.41 $1.18 $1.25 $127.28 $4.24 85%

2005 Base $1.75 $1.35 $1.47 $150.00 $5.00 100%

2020 Optimistic $1.82 $1.39 $1.51 $154.65 $5.15 103%

2020 Central $2.28 $1.61 $1.81 $184.96 $6.17 123%

2020 Pessimistic $3.24 $2.10 $2.43 $248.77 $8.29 166%


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5.3 RAIL LINE-HAUL EFFICIENCY

In terms of the direct op era ting cost that it takes to move a train f rom point A to p oint B, rail line-haul costsalso show a large sensitivity to fuel, as shown in Exhibit 15.

Exhibit 15: Rail Line-Haul Costs as a function of Fuel Price

In the 2020 Pessimistic scenario, it can be seen that rail costs rise by 64 percent, which is comparable withthe trucking cost increa se. But in moneta ry ter ms the ra il cost increa se is much less since overa ll ra il costsstart f rom a lower b ase:

W hile ra il costs rise by 6 4 p ercent, this rep resents only a 2 4 p er FEU-mile increa se (fro m Exhib it15).

Trucking costs rise by 85 percent, but this represents a $1.49 increase per FEU-mile (from Exhibit13).

So in absolute terms, overall rail costs are affected much less by the fuel price increase, reflecting the

rela tive energy ef ficiency of rail over trucking. In ad dition, rail costs include a substantial component ofterminal operating cost, which are largely fixed; and therefore these costs comprise a greater share oftota l cost fo r short hauls, a nd a lesser share f or long hauls. Finally , since ra ilroa ds ha ve to pa y f or theirown capacity expansion, they need to charge more than just their cost in order to have anything left overfor funding capital projects, or return on investment.

As a rule, railroads must price competitively to other modes of transportation and thus, their price increasesmay be more ref lective of other modes costs than of their own. A s roa dw ay congestion and high f uelprices continue to drive shippers to the railroads, CSX expects its rates to rise 5 percent to 6 percent thisyear, with only a small portion of that stemming from fuel surcharges meant to offset rising diesel prices. 18Accordingly, the assertion in Exhibit 4 that inland distribution costs are likely to rise along with maritimecosts is a rea sonab le one, since f or import/ exp ort tra ff ic (pa rticular ly tr anscontinental d ouble-stack tra ff icto the East coast); maritime costs establish the competitive environment within which the railroads must set

their own p rices for intermoda l service.

18 CSX Powers Up,Railway Agemagazine, May 2008, page 28.

Scenario $/Barrel

Fuel %of 2005

base

Rail Costper FEU-

Mile

Rail % of2005base

2002 Historic $28.85 53% $0.30 84%

2005 Base $54.79 100% $0.36 100%

2020 Optimistic $59.61 109% $0.37 103%

2020 Central $91.03 166% $0.45 123%

2020 Pessimistic $157.18 287% $0.60 164%


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5.4 MARITIME LINE-HAUL EFFICIENCY

Ma ritime costs are strongly af fe cted b y fuel cost, since vessels move compar atively lar ge volumes and a reso efficient in terms of crew and capital utilization that fuel still comprises a high percentage of their total

ope ra ting cost. Vessel oper ator s have a g rea t opp ortunity to save f uel by slowing d own, but slowingdown will be difficult for short-sea shipping lanes since they have to compete with surface transportation.Because of the time-sensitive nature of the kinds of loads that would be diverted from trucking, theseservices will need to maintain or even improve their speed, even at the cost of some fuel.

This section pr esents cost curves, as a f unction of vessel speed , fo r t wo d if f erent ki nds of ships:

A 3 42 -FEU G LSLS-max RO RO that wa s de velope d b y the ea rlier G LSLS NC/ NV study .

A smaller 9 0- FEU Coa ster vessel wa s also consider ed by the NC/ NV study.

Ad ditionally , the impa ct of f uel prices on Container-on-Barg e (COB) costs will a lso b e d evelop ed.

Exhibit 16 reproduces the vessel speed versus cost function for the GLSLS-max RORO ship that wasdeveloped by the NC/ NV study at a time when oil prices were a bout $5 5 p er ba rrel. This study foundthat a GLSLS-max RORO ship would have a line-haul operating cost of just 23 per FEU-mile at 22-knots,a s compa red to ra ils cost of 3 6 p er FEU-mile. As shown in Exhibit 1 6, a lthough the minimum op era tingcost for this vessel occurred at about a 12-knots speed, the vessel was still assumed to operate at thehigher spe ed. This stra tegy fo und a sweet spot by pro ducing a cost a nd transit time combination thatcould be rail-competitive.

Exhibit 16: GLSLS-max RO-RO Costs, original NC/NV Study, $55 per barrel

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

0.0 5.0 10.0 15.0 20.0 25.0

Knots

Time Cost Fuel Cost Total Cost


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Exhib its 1 7 -2 0 show f our other oil pr ice scena rios that a re a lso of inter est in this study . Ex hibit 1 7 show sthe conditions in 20 02 when oil prices were much lower, a t less than $3 0 per ba rrel, the price of oil d uringthe 19 9 0 s. Exhibits 1 8 -2 0 show the vessel op era ting cost curves f or the three fo recast scena rios where oi lprices are $ 60 , $90 and $ 16 0 p er ba rrel, respectively. Note that a ll three forecast scenarios are f or oil

pr ices that a re much higher than they w ere d uring the equilibrium mar ket conditions of the late 19 90 s andear ly 20 00s.

Exhibit 17: GLSLS-max RORO Costs, Historic 2002 Market Equilibrium, $30 per barrel

Exhibit 18: GLSLS-max RORO Costs, Optimistic Forecast Scenario, $60 per barrel

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

0.0 5.0 10.0 15.0 20.0 25.0

Knots


$0.00

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$0.10

$0.15

$0.20

$0.25

$0.30

0.0 5.0 10.0 15.0 20.0 25.0

Knots



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Exhibit 19: GLSLS-max RORO Costs, Central Forecast Scenario, $90 per barrel

Exhibit 20: GLSLS-max RORO Costs, Pessimistic Forecast Scenario, $160 per barrel

$0.00

$0.05

$0.10

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$0.20

$0.25

$0.30$0.35

$0.40

0.0 5.0 10.0 15.0 20.0 25.0

Knots


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Knots



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The results of Exhibits 16-20 are summarized in Exhibit 21, which presents the resulting maritime costp roje ctions f or a 2 2 -knots G LSLS-max RO RO vessel und er ea ch of the for ecast scenarios. As has b eenmentioned previously, the cost-optimizing speed declines as fuel prices go up, but this is of little relevanceto a vessel service that has to compete w ith surfa ce transp orta tion mod es f or time-sensitive tra f f ic. All the

costs in Exhibit 21 are based on the full speed 22-knot service that is quite a bit faster than the costminimizing point.

Exhibit 21: GLSLS-max RORO Costs Summary

In terms of the economics of a smaller ship, Exhibits 22-26 show the speed performance curves for the 90-FEU Coa ster RO RO vessel that wa s evaluated by the earlier N C/ NV study. Exhibit 2 7 summarizes thoseresults, which show t hat t he G LSLS-max vessel o f f ers consid era b le e conomies of scale over the smalle r ship .

Exhibit 22: Coaster RORO Costs, original NC/NV Study, $55 per barrel

Scenario $/Barrel

Fuel %of 2005

base

ROROCost per

FEU-Mile

Ship %of 2005

base

2002 Historic $28.85 53% $0.15 66%

2005 Base $54.79 100% $0.23 100%

2020 Optimistic $59.61 109% $0.25 106%

2020 Central $91.03 166% $0.34 148%

2020 Pessimistic $157.18 287% $0.55 236%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

0.0 5.0 10.0 15.0 20.0 25.0

Knots



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Exhibit 23: Coaster RORO Costs, Historic 2002 Market Equilibrium, $30 per barrel

Exhibit 24: Coaster RORO Costs, Optimistic Forecast Scenario, $60 per barrel

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

0.0 5.0 10.0 15.0 20.0 25.0

KnotsTime Cost Fuel Cost Total Cost

$0.00

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$0.20

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$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

0.0 5.0 10.0 15.0 20.0 25.0

Knots



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Exhibit 25: Coaster RORO Costs, Central Forecast Scenario, $90 per barrel

Exhibit 26: Coaster RORO Costs, Pessimistic Forecast Scenario, $160 per barrel

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

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$0.90

0.0 5.0 10.0 15.0 20.0 25.0

Knots


$0.00

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$1.00

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Knots



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Exhibit 27: Coaster RORO, Summary of Vessel Costs

It can be seen in Exhibit 27 that the Coaster RORO costs per FEU are all substantially higher, almostdoub le, those of the larg er G LSLS max ship at a ll levels of fuel pr ice. This dif fe rential ref lects theimproved capital, operating, and energy efficiency of the larger ship, which in turn becomes a key factor

in the a bility of maritime technology to successf ully compete with ra il a nd truck f or mar ket share.

Finally, Container on Barge (COB) service, which is one of the few options available for the MississippiRiver, is the most energ y ef f icient tra nsp orta tion mode b eing eva luated . CO B shows a surpr isinginsensitivity to rising energ y p rices. According to MARAD19 , COB can move a ton of freight 514 miles onone ga llon of f uel; while ra il moves it 2 0 2 miles a nd trucks move only 5 9 miles. This shows up in the costingmodels as well, where fuel comprised only 18 percent of COB line-haul cost in Base Year 2005, while itrepresented 35 percent of rail cost and 46 percent of trucking cost.

Accordingly as fuel prices go up, COB costs rise only a small amount in comparison to the costs of othermode s. CO B costs rise f rom 21 per FEU-mile in the 20 0 5 Base up to o nly 2 8 per FEU-mile in the 20 2 0Pessimistic oil-p rice scena rio. This op ens up a hug e d if f erentia l in the cost compa rison bet we en COB a ndthat of other modes. In the pa st the price d iff erential has not b een quite enough f or shippe rs to justify the

ad ded time that CO B service would ta ke. In the future, the dif fer ential may be much larg er if energyp rices continue to rise, ma king CO B service much more compe titive .

RORO is suggested for both ship and COB options, because RORO vessels can be loaded and unloadedmuch more quickly a nd a t a lower cost than cra ne-load ed vessels. This makes RO RO ap pr opr iate fo rshort-distance shipping lanes where high port charges could easily overwhelm any advantage that watermay have in line-haul eff iciency. RO RO makes fo r a more cost ef fective movement overall b ecause eventhough its line haul cost has gone up by a little, this added transportation cost is more than offset by themuch larger savings in port handling charges.

5.5 MODAL PERFORMANCE COMPARISON

The imp a ct of hig her oil p rices on U.S. transp orta tion costs is d ra matic. Exhib it 2 8 show s how inlandshipping costs change under the low , central, a nd high oil pr ice scenar ios by 20 20 .20 In the Central Casescenario w ith oil prices at over $ 90 per b arrel in 20 20 :

Truck costs increase from $1.41 per FEU-mile to $2.28 per FEU-mile, an increase of over $0.87per FEU-mile.

19 See: http:/ / www.irpt.net/ irpt.nsf/ LinksView/ EnvironmentalAdvantages?Opendocument.20 The order of modes in the legend goes from most expensive to least expensive mode, respectively.

Scenario $/Barrel

Fuel %

of 2005base

RORO

Cost perFEU-Mile

Ship %

of 2005base2002 Historic $28.85 53% $0.37 76%

2005 Base $54.79 100% $0.48 100%

2020 Optimistic $59.61 109% $0.50 104%

2020 Central $91.03 166% $0.64 133%

2020 Pessimistic $157.18 287% $0.93 193%


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$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$1 .00 $2 .0 0 $3 .00 $4 .00 $ 5 .00 $ 6 .0 0 $7 .0 0

Diesel Fuel Price/ Gallon

Line-

HaulCostperFEU-

M

ile

Truck Coa ster RO RO Ra il G LSLS-M ax RO RO CO B

2002Historical

ase

ase

2020LowC

ase

2020CentralCase

2020HighCase

A widening

gap due to

higher oil

prices

Rail line-haul costs rise f rom $0 .30 per FEU-mile to $0 .45, a n increase of $0 .15.

For CO B, the increa se f rom $0 .19 per FEU-mile to $0 .23 per FEU-mile is only $0 .04.

Exhibit 28: Comparison by Mode of Fuel Prices and Line-Haul Costs ($2008)

* Rail IMX is rail intermodal traf fic.* * G LSLS-max ship s a re vessels b uilt to the ma ximum phy sical constra ints of t he St. La wr ence Seaw a y a nd other

lock restrictions in the Great Lakes.

Exhib it 2 9 shows the impa ct of increa ses in diesel fuel p rices on line-haul costs. The fuel-e f f icient rail a ndwa ter modes, espe cially CO B, are f ar less af fected b y f uel price increases than trucking. The gapbetween line-haul costs for truck versus rail and water widens as fuel prices increase, such that shippers willbe a ble to rea lize significant savings by diverting to rail a nd wa ter.

Exhibit 29: Comparison by Mode of the Impact of Diesel Fuel Prices on Line-Haul Costs ($2008)

ScenarioCrude Oil per

BarrelDiesel per

Gallon Truck Rail IMX*

GLSLS-Max

RORO**

Coaster

RORO COB

200 2 Historical $28.85 $1.37 $1.41 $0.30 $0.15 $0.37 $0.192005 Base Case $54.79 $2.40 $1.75 $0.36 $0.23 $0.48 $0.21202 0 Low Case $59.61 $2.61 $1.82 $0.37 $0.25 $0.50 $0.212020 Central Case $91.03 $3.99 $2.28 $0.45 $0.34 $0.64 $0.232020 High Case $157.18 $6.88 $3.24 $0.60 $0.55 $0.93 $0.28

Fuel Prices Line-Haul Costs per Container (FEU) Mile


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TECHNICAL REPORT -IMPACT OF HIGH OIL PRICES ON FREIG

modal shift study - technical report

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