Supply Chain Matters readers may have noted business media headlines last week indicating that the BNSF Railway, part of BNSF Locomotive unsizedWarren Buffet’s Berkshire Hathaway, announced plans to test the use of natural gas to power its locomotives.  We view this announcement as highly welcomed and significant news for the transportation industry.

This BNSF trial experiment is slated to begin in the fall of this year.  BNSF is working with locomotive manufacturers Caterpillar and General Electric on prototype LNG fueled locomotives for use in the prototype testing. As a prime consumer of diesel fuel in the U.S., railroads have the potential to reap substantial cost and environmental benefits by converting to natural gas powered locomotives. Diesel fuel prices currently hover in the $4 per gallon range while the equivalent amount of natural gas energy could cost an average of 50 cents at wholesale prices. This move is also motivated by the increasing discovery of cheap natural gas supplies within North America. Railroads also have to conform to increased federal air pollution standards take effect in the coming two years, which will require the installation of new emissions prevention equipment. A conversion to natural gas can mitigate some of these pending costs.

The Canadian National Railway retrofitted two of its locomotives to run on a combination of 90 percent natural gas and 10 percent diesel in September and that pilot program also continues.

It is acknowledged that the conversion to natural gas does face some infrastructure, additional cost and regulatory hurdles. The introduction of gas will require the use of special LNG tank cars to haul the fuel for locomotives as well as the construction of new fuel depots.  However, given that railroads have fixed routes, the location of natural gas fuel depots is a much more known determinant.  With the ability to add multiple tank cars, the travel distance of a single train before the need for re-fueling could also be extended.  Thus far, indications are that natural gas fueled locomotives should have the equivalent power and fuel consumption rates as current diesel fueled equipment.

Thus, while the ultimate conversion of the bulk of railroad locomotives to natural gas will involve significant investment, the long-term and compelling economic benefits may far outweigh the up-front investment costs.  The CEO of BNSF, Matt Rose, characterized the announcement as a “transformational” event, and other railroads are more than likely to follow at some point, once the benefits are better understood.

We also view the transformational aspects as positive for the U.S. economy as well, since the conversion will drive the need for new and more accelerated equipment replacement cycles, infrastructure and added jobs.

Coincidentally, business media last week was highlighting stories of increased challenges in the trucking equipment industry.  North America truck production fell 23 percent in the fourth quarter of 2012 with truck makers considering additional layoffs as the heavy truck replacement market continues to drag.  It seems that truck fleet operators are reluctant to invest in new equipment given a number of uncertainties around markets and the economy.   Meanwhile, older trucks consume more fuel and emit more pollutants than the newer generation of trucks available.

It would seem that if truck makers joined in the movement toward prototyping more natural gas powered vehicles, the economics for truck replacement would also become more compelling for both small and large fleet operators.  Granted, the economics of natural gas fuel depots for trucks is more complex than railroads, the same gaps in diesel vs. natural gas fuel pricing could add to a compelling equipment replacement cycle with positive benefits for industry participants and the economy.

The takeaway is that just as new cheaper supplies of energy in North America have fueled an ongoing  resurgence in North America based manufacturing, a similar resurgence may be on the horizon for transportation equipment and infrastructure. The benefits are just as compelling for industry and for more carbon free supply chains.

Bob Ferrari