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Gasoline Prices Could Soar if Railroad Strike Happens

Time is running out for unions and railroad operators to reach a contract agreement.
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A potential railroad strike that would snarl supply chains could occur in less than 48 hours unless unions and management are able to work out a deal.

Ahead of the Sept. 16 bargaining deadline, freight railroads stopped accepting shipments of hazardous and security-sensitive materials and passenger rail company Amtrak stopped long-distance service on Wednesday. The freight railroads prepared to make sure that any cargo that is sensitive and potentially dangerous does not remain unattended.

Railroad workers said they have been penalized for taking time off to go to doctor's appointments or even family emergencies. 

Ten of the 12 unions had reached agreements as of Sept. 15 while talks are still being conducted with the Brotherhood of Locomotive Engineers and Trainmen and SMART Transportation Division.

Discussions are still ongoing to avoid thrusting the U.S. into a standstill with a national railroad strike if the unions do not win their demands from Warren Buffett's BNSF, Union Pacific UNP and other major railroads.

The White House has been working to ensure that essential products that are carried by rail continue to move, including food and energy products such as ethanol which is a key component used in blending gasoline.

Commodity Markets Could Face Price Hikes 

However, the commodity markets could face major disruptions if a strike happens and lasts for more than a few days. That's because shipments of energy and agricultural products such as grain would be delayed creating shortages and likely price spikes.

The threat of a strike has made the largest impact on ethanol since 70% of the commodity is shipped by rail. Ethanol prices shot up past the $2.60 per gallon mark on Sept. 14. 

"Almost all ethanol is moved via rail and it is produced in the Midwest," said Debnil Chowdhury, vice president of refining and marketing at S&P Global Commodity Insights. "There is no easy substitute for rail and the U.S. government will have to make decisions around blend targets if ethanol movements to demand centers are constrained due to a strike."

The near record low inventory levels of gasoline and diesel in the U.S. are problematic since 15% of total crude and refined products are transported by rail, he said.

"The timing of this is at an inopportune time," Chowdhury said. "Rail is necessary to keep inventory balanced. Without it we may see net import regions such as the Northeast US face shortages."

Food supplies could also be disrupted due to where the U.S. is in its crop cycle, said Pete Meyer, head of grains and oilseeds analytics, S&P Global Commodity Insights.

"... a rail strike would pose a large impediment to the movement of both grain and required fertilizers for fall applications after harvest," he said. "The ramifications would be far ranging as global supplies of grains remain constricted due to the continuing conflict in Ukraine and US farmers need to prepare their acres for 2023 soon." 

Coal prices have also risen in anticipation of a strike and demand has increased due to the ongoing war in Ukraine and the European Union sanctions against Russian coal.

Impact on Gasoline Prices

Gasoline prices could increase by 35 to 75 cents a gallon if the strike lasts for more than a few days, Patrick De Haan, head of petroleum analysis for GasBuddy, a Boston-based provider of retail fuel pricing information and data, told TheStreet.

A strike would reverse much of the reprieve drivers have received over the last three months. Gasoline prices have fallen for 13 consecutive weeks after reaching a national average high of $5.03 a gallon on June 14.

Ethanol is blended in gasoline and since it can not flow in a petroleum pipeline, a strike would impede the capabilities of refiners, he said.

“Across the nation, regular gasoline contains 10% of ethanol," De Haan said. "The concern are the additive and blending components - if there is a strike, ethanol can't get into gasoline."

In 2005, the Renewable Fuel Standard program was signed into law by former President George W. Bush. It requires increasing the amount of renewable fuel used in gasoline. The question is whether the EPA would relax those rules, he said.

"If the ethanol can't go to where it needs to, then you have a supply issue," De Haan said. "Right now it is not a huge concern. I’m not too worried about it at this point - the prognosis for gasoline production and prices. It's something to keep an eye on."

Railroad Workers Lack Schedules

Employees for the railroads have complained that the companies fail to provide adequate time off and don't provide schedules.

One worker, Bill A. Chico, said in a Facebook post that "about half of "railroaders are on call 24/7 unless they're on personal time or already at work. We don't have a schedule, there isn't one we are on call."

Chico said he has been an employee for 16 years and only receives three weeks vacation and and nine personal days a year. 

"The railroad is trying its best to make us look like the bad guys here but we're not, we just want to see our family and live a little," Chico wrote on FB.

The railroad companies want all personal time to be scheduled, which is not realistic, he added.

"How do you schedule a funeral in October if it's only February? Schedule for a wedding that hasn't been announced? Schedule to take your spouse to the doctor?"