A Harsh Winter Could Wreak Havoc.

By Nick Cunningham, Oilprice.com:

With winter approaching, the piles of coal at utility yards are running well below average, and several utilities are pressuring rail companies to allow more coal trains through.

The problem is the traffic jam on railways across the country. A bumper crop for U.S. grain has led to a surge in shipments, with farmers shipping 15% more grain so far in 2014 compared to a year earlier. The story is similar with oil. Shipments of oil by rail – owing to a dearth of pipeline capacity – are up more than 13% this year.

But coal still makes up the largest share of commodity-driven rail activity, and about two-thirds of all coal burned in American power plants is shipped by rail. Still in 2014, coal shipments are more or less flat, despite the fact that coal supplies were severely depleted during the unusually cold winter of 2014. Utilities have been trying to stock up since, but their supplies are running well below the five-year average.

And utilities are sounding the alarm, blaming rail traffic for the inability to get enough coal.

Related: The Unwelcome Reality For U.S. Coal Exports

Heading into the winter, supplies are significantly down. About 63% of coal-fired power plants have less than a 60-day supply on-hand this year, up from 42% in 2013. Even worse, 23% of coal plants have less than a 30-day supply, whereas just 13% of them were in that situation last year.

In one example of how depleted coal supplies are affecting utilities, several coal plants in Minnesota were forced to shut down temporarily when electric grid operators decided it would be wise to conserve coal for the winter. If Minnesota has to buy backup power to replace idled coal plants this winter, it will cost utilities extra – and the higher costs will be passed on to ratepayers.

But now some utilities are turning up the heat on rail companies. According to the Wall Street Journal, the utility group Western Coal Traffic League is asking the federal government to force BNSF Railway – a major rail company owned by Warren Buffet – to increase staff and capacity to handle more coal shipments.

On October 22 federal regulators began requiring rail companies to submit weekly updates on congestion and the status of commodity deliveries. Utilities are now asking regulators to require a specific timetable on when congestion will be relieved.

BNSF says that it is already working hard to address the problem. It has invested $5.5 billion in rail capacity this year, adding 5,000 new railcars and hired 6,000 new employees.

BNSF also says it will spend a record $6 billion in 2015 to further expand its rail capacity, at least a third of which will be spent to allow for greater shipments of oil from the Bakken in North Dakota.

BNSF’s competitor, Union Pacific, has fared much better. It too is increasing investment, but it reported a 7 percent increase in deliveries in the third quarter, while BNSF’s shipments dropped by 1 percent.

But the Energy Information Administration says that while the rail congestion is real, it should not be overstated. Rail shipments have been relatively flat for the year, but significantly increased in the month of October – up 4.7% from the same month in 2013.

The severity of the coal shortage problem largely depends on whether or not the upcoming winter is as bad as last year’s. Record natural gas production led to unusually high volumes of natural gas being put into storage in 2014, which should help mitigate the problem of coal deliveries this coming winter.

Moreover, clogged rails will likely be resolved as infrastructure catches up. The surge in oil production has been so quick that it was inevitable that it would cause headaches on transit – pipelines and new rail capacity take time to build up. More railcars, locomotives, and staff will ease congestion in the coming years. But with winter already setting in, there is little that utilities can do in the short-run to get more coal to their power plants. By Nick Cunningham, Oilprice.com

It is possible that a miracle intervenes at any moment now and that the price of oil bounces off and zooms skyward. We’ve seen stocks perform these sorts of miracles on a routine basis. But when it comes to oil, miracles have become rare. Read…  How Low Can the Price of Oil Plunge?

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.