Chapter 8 WATER CARRIERS AND PIPELINES Chapter Objectives: After reading this chapter, you should be able to do the following: 1. Understand the importance of domestic waterways in the development of the economy of the United States and particularly, cities located contiguous to the waterways. 2. Appreciate the role and significance of the water carrier industry at the present time in the U.S. economy and how it complements and competes with the other basic modes of transportation. 3. Discuss the various types of water carriers and their role in the overall water carrier system. 4. Understand the competitive environment for water carriers on an intra-modal as well as an inter-modal basis. 5. Discuss the service and operating characteristics of water carriers as well as their cost structure and equipment challenges. 6. Understand the current issues faced by the water carrier industry in the 21st century. 7. Appreciate the development and current position of the pipeline industry in the economy. 8. Discuss the types of pipeline companies and their role in the transportation system. 9. Understand the nature of the operating and service characteristics of pipeline carriers and what makes them unique in the transportation system 10. Discuss the cost structure and rates of pipelines. Chapter Overview Water carriers and pipelines are frequently overlooked by the general public. Most people are aware of trucks, planes and trains, but they have limited appreciation of the role and contribution of water and pipeline carriers to businesses and our economy. These two modes of transportation are a very important part of our transportation system and overall infrastructure, particularly for certain types of products. In this chapter, we will explore the role and importance of water carriers and pipelines to a modern transportation system to gain an understanding and appreciation of their significance. Brief History of Water Transport The inland or domestic waterways (rivers, lakes, and oceans) have provided an important link for freight and people movement for centuries. Waterways are a natural highway, and even some motive power (currents and wind) can be provided by nature. Water transportation has, of course, been improved by modern technology and federal investment to enhance motive power, vessel carrying capacity, and even the waterways by building dams and canals, and dredging to increase the potential of water transportation for economic development. Today, there are 26,000 nagivable kilometers of waterways in the Unites States. WATER TRANSPORT INDUSTRY OVERVIEW Significance of Water Transport Water transportation remains a viable mode of transportation for the movement of products and especially basic raw materials. Domestic water carriers compete with railroads for the movement of bulk commodities (such as grains, coal, ores, and chemicals) and with pipelines for the movement of bulk petroleum, petroleum products, and chemicals. In 2004, over $330 billion was spent on freight transportation, classified on the consumer freight expenditures bill, which was a 12% increase from 2000 levels. Intercity ton-miles rose 5 percent during that same period. Expenditures for truck transportation dominated the market, whereas the water transportation market share, excluding international data, slight decline from 2.6 to 2.5 percent of freight expenditures from 2000 to 2004. Water transportation is the second most efficient form of transportation, in terms of energy costs per dollar of gross output, or, the market value of goods and services produced. The most efficient form is rail, with 6% of its energy inputs as a percentage of output, while water transportation has 9%; air travel has 21%. However, water transportation energy costs have raised more rapidly than for other modes.
The distribution of domestic intercity freight as measured in ton-miles has changed dramatically since the advent of transportation deregulation. Motor carriers have been the biggest beneficiary, as noted previously, but water carriers have not fared as well. Barge (river) traffic stayed steady from 2006 to 2007, and Great Lakes traffic declined by 6 percent in the same period. From 2000 to 2005, total waterborne transportation had a total decline of 9% in ton-miles. In contrast to 1990 where water transportation accounted for over 23% of ton-miles, there has been a decline to just under 13% of ton-miles for 2005. To give a broader sense of the trend over the last decade, from 1996 to 2006 water transportation ton-miles declined 29%. In terms of ton-miles, waterborne transportation accounted for 13% of all transportation freight in 2005. Coastwise and internal water transportation accounted for 45% and 46% respectively, of all waterborne traffic. Coastwise domestic shipping has historically not been included in the data for domestic water transportation’s share of intercity ton-miles because of the long distances involved (e.g, from the Atlantic Coast to the Pacific Coast through the Panama Canal). Such movements generate high ton-mile figures for a relatively small tonnage figure. For example, if coastwise shipping had been included in 1980, the water carrier share would have been 33.3 percent instead of 16.4 percent. However, the 2001 figures still would have declined to 15.6 percent (as opposed to 13.2 percent noted above). As of 2007, domestic waterborne freight topped $1 billion short tons, with inland transportation accounting for 61% of the tonnage. Water carriers collectively (coastwise, lakes, internal, intraport and intra-territory) had an overall decrease in tonnage of 4.7% percent in 2007 compared to 2000 because tonnage shipped declined from 1,069 million to 1,021 million tons. Strong competitive pressures have pushed average freight rate levels down for some modes during the 1990s. However, prices for producers or manufacturers have increased 16 percent during the last decade, but average freight rates for barge shipments have decreased by 8 percent. Rail rates also declined during this period, reflecting the competitiveness of the marketplace, especially intermodal competition. It is obvious that the water carriers’ importance in the U.S. transportation system declined over the past decade. However, many manufacturers and suppliers would experience serious problems in maintaining their competitive position without the availability of low-cost water transportation. The decline in water transportation is attributable in part to the transformation of the U.S. economy from basic manufacturing to service industries and technology. The focus on logistics and supply chain management has also impacted water transportation because companies have switched to carriers offering better service (e.g., motor carriers to offset other costs such as carrying cost for inventory, warehousing cost, packaging cost, etc.). Types of Carriers Like motor carriers, the first major classification of the domestic water carrier industry is between for-hire and private carriers. A private carrier cannot be hired and only transports freight for the company that owns or leases the vessel. Private water carriers are permitted to transport, for a fee, exempt commodities; when they are hauling such exempt goods, they are technically exempt for-hire carriers. The for-hire water carriers consist of regulated and exempt carriers that charge a fee for their services. Exempt carriers, as indicated above, are excluded from the federal economic regulations administered by the Surface Transportation Board (STB). When authority was transferred to the STB under the ICC Termination Act of 1995, the STB’s authority was expanded over domestic water traffic. Water carriers are exempt from economic regulation when transporting bulk commodities, both dry and liquid. Because the majority of freight transported by domestic water carriers consists of bulk commodities, exempt carriers dominate the for-hire segment of the industry. Regulated water carriers are classified as either common or contract carriers. Economic regulation, similar to that controlling motor carriers (e.g., operating certificates, rates, etc.), is administered by the STB. The domestic water carrier industry is most commonly classified by the waterway used. Carriers that operate over the inland navigable waterways are classified as internal water carriers. The Great Lakes carriers operate along the northeastern portion of the United States and provide service between ports on the five Great Lakes that border the states of New York, Pennsylvania, Ohio, Michigan, Indiana, Illinois, Wisconsin, and Minnesota. This Great Lakes-to-Atlantic traffic is classified as a coastal operation. Coastal carriers operate along the coasts serving ports on the Atlantic or Pacific oceans or the Gulf of Mexico. Intercoastal carriers transport freight between East Coast and West Coast ports via the Panama Canal. Number and Categories of Carriers The domestic for-hire water carrier industry consists of a limited number of relatively small firms. The latest numbers available from the Bureau of Transportation Statistics is for 2006, when it was reported that there were 682 vessel operators in service, and that number has decreased from 1,114 in 2000. Operating revenues on the inland waterway has remained relatively constant over the last decade, whereas revenue on the Great Lakes has increased about 23 percent because of an increase in higher-valued freight movements. Water carriers have experienced increased competitive pressure, but the intensity has varied from segment to segment, with carriers operating along the coastal waterways experiencing the greatest impact of the competition especially from railroads and pipeline carriers. Competition Water carriers vigorously compete for traffic with other modes and, to a limited degree, with other water carriers. The relatively small number of water carriers results in a limited degree of competition. Because the number of carriers on a given waterway is limited, there is little incentive for the water carriers to compete with one another by lowering rates because they realize that the rate decrease will most likely be matched. The major water carrier competition is with two other modes, namely rail and pipelines. Water carriers compete with railroads for the movement of dry bulk commodities such as grain, coal, and ores. Rail and water carriers compete heavily to move coal out of the coal-producing states of Pennsylvania, West Virginia, and Kentucky. On the Great Lakes, water carriers compete with railroads for the movement of coal, ores, and grain. Water carriers and pipelines are vigorous competitors for the movement of bulk liquids (petroleum and petroleum products) which account for about one-third of the total tonnage transported by domestic water carriers. To a very limited degree, water carriers compete with trucks. However, trucks are usually used to overcome the accessibility constraints of water carriers because trucks tie inland areas to the waterways for pickup and/or delivery. Shipment quantities argue against an all-motor carrier movement for long hauls because one barge can transport the equivalent of 58 tractor–trailers. OPERATING AND SERVICE CHARACTERISTICS Commodities Hauled and Related Characteristics In 2007, water carrier’s hauled 164.8 million short-tons of petroleum, which represents 26.5 percent of the total short tons hauled that year. Chemicals accounted for about 8.2 percent of the water carrier total. Coal and coke and represent about 29 percent of the total freight moved by water carriers. Crude materials transported by water carriers are typically raw materials such as forest products, pulp, sand, metal ores, accounting for 17.6 percent. Agricultural products account for about 15 percent of the total. Water carriers are considered to be medium-to-long-haul carriers. Their carrying capacity is relatively large, which makes short hauls with frequent stops uneconomical. However, the length of haul varies by segment from about 400 miles (inland water carriers) to over 1,500 miles for coastal carriers. Barges are capable of carrying 1,500 to 3,000 tons, and lake carrier vessels can carry about 20,000 tons. A 1,500-ton load represents the typical carrying capacity of 15 railcars or about 50 trucks. The long hauls and the large carrying capacity combined with fuel efficiency allow water carriers to offer low-cost service—about 72 cents per ton-mile on average. Water carriers are relatively slow, with average speeds on inland rivers, for example, of 5.5 to 9 miles per hour. The limited accessibility of the water carrier usually necessitates pickup or delivery by another mode of transportation to bridge the accessibility gap. Service can also be disrupted by weather. Overall, water carriers are an attractive alternative for low-value traffic, where transportation rates are a significant part of the total delivered cost and price of the good. However, the poor service characteristics may add cost for the user, which has to be traded off against the low rate to calculate the true total cost. EQUIPMENT Types of Vehicles Because most domestic water carriers transport bulk materials, they use ships with very large hold openings to facilitate easy loading and unloading which allows a ship to carry more than one commodity at a time. The largest ship in the domestic water carriage industry is the tanker. A tanker can carry anywhere from 18,000 to 500,000 tons of liquid, generally petroleum or petroleum products. Another type of vessel is the barge, a powerless vessel towed by a tugboat. Barges are most commonly used by internal waterway carriers. Additional barges can be added to a tow at very little additional cost. Fuel The majority of fuel used by water transportation is residual fuel oil, also known as heavy fuel oil. This is the remainder, or “residue,” of fuel after crude oil is distilled. Diesel, also typically extracted from crude oil, makes up about a quarter of fuel consumption in water transportation. Terminals Water carrier terminals are often provided by the public. It has been recognized for a long time that water transportation is a catalyst to economic activity in the community, and it is this belief that has spurred public investment in the operation of ports. Over the past few decades, major port improvements have centered on the mechanization of materials-handling systems, especially for internal waterway ports especially handling of larger volumes of bulk commodities. The port facilitates ship loading and unloading, which means that the port must be equipped with cranes, forklifts, and other handling equipment. Because barges and ships carry larger loads than rail or motor carrier vehicles, storage facilities are necessary at the port. COST STRUCTURE Fixed vs. Variable Cost Components The basic cost structure of water carriers consists of relatively high variable costs and low fixed costs. Like motor carriers and air carriers, water carriers do not provide their own highways (rights-of-way). The waterways are provided by nature (except canals) and are maintained, improved, and controlled by the government. The carriers pay user charges—lock fees, dock fees, fuel taxes—for the use of government-provided facilities. These user charges are directly related to the volume of business, and therefore, are considered variable costs. The operating costs for water carriers are approximately 85 percent variable and 15 percent fixed. INFRASTRUCTURE As indicated above, the domestic water carrier’s low fixed costs can be attributed in part to public aid in the area of infrastructure. The construction of locks and dams on rivers makes the waterways navigable for domestic water carriers. An example of a major public aid for domestic water carriers is the Tennessee Tombigbee (Tenn-Tom) project. Opened in 1985, the project connects the Tennessee River and the Warrior River via the Tombigbee River. Another example of public aid was when, in 1986, the federal government built two 1,200-foot locks and a new dam at Lock and Dam Number 26 on the Mississippi River systems. LABOR Water transportation is not labor-intensive. In 1997, 2.72 million ton-miles of freight were transported for each water carrier employee. This compares to 4.74 million ton-miles for each rail employee, 0.4 million ton-miles for each motor carrier employee, and 39.3 million ton-miles for each pipeline employee. Domestic water carrier’s usually do not require much labor at the terminal, because the carriers primarily transport bulk commodities that can be loaded mechanically. CURRENT ISSUES Drug and Alcohol Abuse The U.S. Coast Guard now tests American seamen for drug abuse before they are issued a seamen’s license and before they can be employed. Seamen are also tested randomly during their employment. Port Development Ports now have to balance competitive economic concerns with the concerns of the public, which, rightly or wrongly, often view ports as a main source of air, water, and noise pollution. Also, a current issue facing North American ports is the growth of multicarrier alliances, leading to the expansion of the already gargantuan ships. An increase from 6,000 20-foot equivalent units (TEU) to 8,000 TEU’s has many ports worried for the future. The larger the ships are, the deeper they go, meaning that many of the smaller ports will need to begin the dredging process as soon as possible to be able to compete in the future. Global Perspective “Ports: An Essential Link” Ports are the critical link between the U.S. and foreign countries for global commerce and between waterborne transport and the surface modes of transport within the U. S. which provide the connection to businesses and consumers. The forecasted growth in global trade is expected to bring even more pressure on U.S. ports, particularly on the West coast. The U.S. port infrastructure makes the important connection between the maritime trading system represented by the world fleet to the U.S. economy and U.S. consumers and producers. There are more than 300 ports in the United States, and they vary greatly in ownership, size and the type of cargo and vessels handled. Although the Federal government has the effective role of being a spokesperson for the national interest in port development, neither the Maritime Administration, nor any other federal entity, has the authority for this role. No federal entity determines the national optimal direction in overall port development. Nor does any federal entity study efficient freight routing through the broader multi-modal transportation system. PIPELINE TRANPORTATION Brief History of Pipelines Pipelines have played an important role in the transportation industry in the post-World War II era. A decision rendered by the U.S. Supreme Court known as the Champlin Oil Case, pipelines were required to operate as common carriers if there was a demand by shippers for oil for their services. Pipelines Industry Overview The pipeline industry is unique in a number of important aspects, including the type of commodity hauled, ownership, and visibility. Pipelines are the only mode with no backhaul; that is, they are unidirectional with products that only move in one direction through the line. Significance of Pipelines Pipelines accounted for 20 percent of the total ton-miles shipped in the United States in 2005.22 Pipelines are virtually unknown to the general public but represent a key component in our transportation system. The pipeline network grew steadily until the early 1980s. With the increase in the diameter there has been increased capacity significantly because of the increased volume that can move through the pipeline. The low rates of the pipeline are reflected in the very low percentage of the total intercity revenue paid to all pipeline carriers which account for approximately 4 percent of the total transportation revenues, compared to motor carriers, for example, which account for more than 75 percent of the total revenue. Types of Carriers Many pipelines operate as common carriers. Although some private carriers exist today, the for-hire carriers dominate the industry. Common carriers account for approximately 90 percent of all pipeline carriers. Ownership Oil companies have been the owners of the oil pipelines. Some pipelines are joint ventures among two or more pipeline companies because of the high capital investment necessary for large-diameter pipelines. Number of Carriers In 2006 there were approximately 2,297 total pipeline operators. The oligopolistic nature of the industry is demonstrated by the fact that 20 major integrated oil companies control about two-thirds of the crude oil pipeline mileage. There are a number of reasons for the limited number of pipeline companies such as startup costs and the economies of scale are such that duplication or parallel competing lines would be uneconomic. Large-size operations are more economical because capacity rises more than proportionately with increases in the diameter of the pipeline and investment per mile decreases, as do operating cost per barrel. OIL CARRIERS The pipeline industry experienced rapid growth after World War II, but the rate of growth has since decreased dramatically. Overall, however, oil pipelines play a major role in our transportation network. NATURAL GAS CARRIERS Another part of the pipeline industry is involved with the transportation of natural gas, which, like oil, is an important source of energy. OPERATING AND SERVICE CHARACTERISTICS Commodities Hauled Pipelines are a very specialized carrier in that they transport a very limited variety of products. The four main commodities hauled by pipeline are oil and oil products, natural gas, coal, and chemicals. Oil and Oil Products The bulk of pipeline movements are crude oil and oil products which account for about 60 percent of total pipeline use. Pipelines move about 66 percent of the total ton-miles of crude oil and petroleum products. The length of haul in the oil pipeline industry is medium in length compared to other modes. Crude oil movements average about 800 miles per shipment, and product lines average about 400 miles per movement. The average shipment size for these movements is very large. Natural Gas Natural gas pipelines are an important part of our total pipeline network. They account for the second largest number of miles of intercity pipelines. Coal Coal pipelines are frequently called slurry lines because the coal is moved in a pulverized form in water (one-to-one ratio by weight). The large slurry pipeline that operates between Arizona and Nevada covers 273 miles and moves 5 million tons of coal per year. Chemicals Chemical lines are another type of product line, although only a limited number of different types of chemicals are carried by pipelines. The three major chemicals are anhydrous ammonia, propylene, and ethylene. Relative Advantages A major advantage offered by the pipeline industry is low rates with average revenues are below one-half of a cent per ton-mile. Two other advantages are that pipelines have a very good loss and damage record and they can provide a warehousing function because their service is slow. Another positive service advantage of pipelines is their dependability. They are virtually unaffected by weather conditions, and they very rarely have mechanical failures. Relative Disadvantages The pipeline’s slow speed can be also be a disadvantage as a pipeline will not be able to deliver an extra amount of the product in a short period of time. The use of pipelines is limited to a rather select number of products: crude oil, oil products, natural gas, coal, and a limited number of chemicals. While large shipments and slow speed of pipelines reduces the frequency, the service is offered 24 hours a day, 7 days a week. Pipelines are generally regarded as somewhat inflexible because they serve limited geographic areas and limited points within that area. Also, they carry limited types of commodities and only offer one-way service. Finally, the operations technology precludes small shipment sizes. In summary, pipelines offer a good set of services for particular types of products, but they have some serious limitations for many other products. COMPETITION Intermodal Intermodal competition in the pipeline industry is limited of the small number of companies, the economies of scale and high fixed costs preclude of facilities to a large extent. Intermodal Pipelines compete with railroads, water carriers, and motor carriers but the level of competition is limited. The most serious competition is water, or tanker operations, because their rates are competitive with pipelines. It is difficult for other modes to compete as costs are extremely low, dependability is quite high, and there is limited risk of damage to the product being transported. Equipment The U.S. Department of Transportation estimates that the total pipeline investment is in excess of $21 billion, based on historical costs. Pipelines can be grouped into other categories such as gathering lines or trunk lines. Trunk lines are further classified or subdivided into two types: crude and product lines. The gathering lines are used to bring the oil from the fields to storage areas before the oil is processed into refined products or transmitted as crude oil over the trunk lines to distant refineries. When comparing gathering lines and trunk lines, there are several important differences to note. First, gathering lines are smaller in diameter, usually not exceeding 8 inches, whereas trunk lines are usually 30-50 inches in diameter. Gathering lines are frequently laid on the surface while the trunk lines are laid underground. The term trunk line is often used in conjunction with oil movements and can refer to crude oil trunk lines or oil product lines. Commodity Movement Gathering lines bring oil from the fields to a gathering station, where the oil is stored in sufficient quantity to ship by trunk line to a refinery. After the oil is refined, the various products are stored at a tank farm before they are shipped via product line to another tank farm with a market-oriented location. A motor carrier most frequently makes the last segment of the trip, from the market-oriented tank farm to the distributor or ultimate customer. Trunk lines are usually more than 30 inches in diameter and are the major component of the pipeline system. The pumping stations for large-diameter pipelines can provide 3,000 to 6,000 horsepower. Compressors are used for the movement of natural gas, and pumps are used for the liquid items that move through the pipelines. Computers at the pumping stations continually monitor the flow and pressure of the oil system. In the oil segment of the pipeline industry, sophisticated operating and monitoring techniques are used because of the different petroleum products moving through the product lines and the different grades of crude oil moving through the crude oil lines. When two or more grades of crude oil or two or more products move through a system at one time, the “batches” may need to be separated by a rubber ball called a batching pig. COST STRUCTURE Fixed- vs. Variable-Cost Components The pipeline industry has a high proportion of fixed costs with low capital turnover. Property taxes, amortizations of depreciation, the return to investors, and preventative maintenance all contribute to the high ratio of fixed to variable expenses. In addition to the right-of-way costs, the terminal facilities of pipelines contribute to the high level of fixed costs. The same types of expenses associated with the right-of-way, such as depreciation and property taxes, are incurred by the pipeline terminals. The high fixed costs and the economies of scale help to explain the joint ownership and investment in large-diameter pipelines. Labor costs are very low in the pipeline industry because of the high level of automation. Rates Pricing in the pipeline industry is unique compared to its major modal competitors. The nature of operation (one-way movement, limited geographic coverage of points, limited products, etc.) provides little opportunity to provide differential pricing practices. Pipelines quote rates on a per-barrel basis (one barrel equals 42 gallons). Pipeline rates are very low, as they carry more than 15 percent of the total intercity ton-miles and receive only about 2 percent of the total revenues. Study Questions 1. The integrated ownership of pipelines was initially used by some oil companies to gain control of oil-producing area. How did they use their market power to gain market control? What other reasons can be offered for integrated ownership? Are these reasons valid in today’s business environment? The oligopolistic nature of the industry is demonstrated by the fact that 20 major integrated oil companies control about two-thirds of the crude oil pipeline mileage. There are a number of reasons for the limited number of pipeline companies. First, start-up costs (capital costs) are high. Second, like railroads and public utilities, the economies of scale are such that duplication or parallel competing lines would be uneconomic. Large-size operations are more economical because capacity rises more than proportionately with increases in the diameter of the pipeline and investment per mile decreases, as do operating cost per barrel. For example, a 12-inch pipeline operating at capacity can transport three times as much oil as an 8-inch pipeline.
The procedural requirements for entry and the associated legal costs also con¬tribute to the limited number of companies. An additional factor is the industry itself, which has been dominated by the large oil companies that joined together in the post-World War II era to develop pipelines from major fields and entry ports. 2. The pipeline industry has approximately 100 companies, as compared to the motor carrier industry with more than 50,000. How do you account for this difference, given the fact that they both carry approximately the same volume of intercity ton-miles? The tonnage amount transported is a sharp contrast to the revenue earned. Here the low rates of the pipeline, which are discussed later in this chapter, are reflected in the very low percentage of the total intercity revenue paid to all pipeline carriers. The pipelines account for approximately 4 percent of the total transportation revenues, compared to motor carriers, for example, which account for more than 75 percent of the total revenue 3. The typical pipeline company has high fixed costs. What economic factors account for this situation? What special problems does this present? The pipeline industry has high proportion of fixed costs with low capital turnover. The pipeline owners have to provide their own right-of-way by purchasing or leasing land and constructing the pipeline and pumping sta¬tions along the right-or-way. The property taxes, amortizations of depreciation, the return to investors, and preventative maintenance all contribute to the high ratio of fixed to variable expenses. In addition to the right-of-way costs, the terminal facilities of pipelines contribute to the high level of fixed costs. The same types of expenses associated with the right-of-way, such as depreciation and property taxes, are incurred by the pipeline terminals. 4. Pipelines account for more than 20 percent of the intercity ton-miles but less than 5 percent of the revenue paid by shippers to transportation companies. What factors account for this contrast? Is this situation likely to change? Why or why not? Pricing in the pipeline industry is unique compared to its major modal competitors. First of all, pipelines do not use the freight classification system that underlies the class rates of railroads and motor carriers. The limited number and specialization of commodities make such a practice unnecessary. A crude oil pipeline or natural gas pipeline has little need for an elaborate classification system. Even though pipelines have high fixed costs, the differential pricing practices so common in the railroad industry are virtually nonexistent among pipelines. The nature of operation (one-way movement, limited geographic coverage of points, limited products, etc.) provides little opportunity to provide differential pricing practices. Pipelines quote rates on a per-barrel basis (one barrel equals 42 gallons). Quotes for rates are typically point-to-point or zone-to-zone. Also, minimum shipment sizes, usually called tenders, are required; these range from 500 barrels to 10,000 barrels. It is unlikely to change as the factors discussed above are unlikely to change. 5. The economic and market position of the pipelines has been described as mature and stable with little likelihood of significant growth in the near future. Do you agree? Why or why not? The most likely answer is that there will be little growth absent some new requirement such as that which led to the construction of the Trans-Alaska pipeline. While not discussed in the chapter, it is unlikely a new pipeline could be built without serious environmental concerns, raising costs and stretching construction out for years. In addition, start-up costs (capital costs) are high and the economies of scale are such that duplication or parallel competing lines would be uneconomic. 6. Water carriers played a dominant role in the transportation system of the United States in the 18th and 19th centuries. Why has their relative position declined during the 20th century? Are they still an important component of the total transportation system? Why or why not? Strong competition from rail with rates that are quite competitive. Rail rates also declined during this period, reflect¬ing the competitiveness of the market place, especially intermodal competition. It is obvious that the water carriers’ importance in the U.S. transportation system declined over the past decade. The decline in water transportation is attributable in part to the transformation of the U.S. economy from basic manufac¬turing to service industries and technology. The focus on logistics and supply chain management has also impacted water transportation because companies have switched to carriers offering better service (e.g., motor carriers to offset other costs such as carrying cost for inventory, warehousing cost, packaging cost, etc.). The major water carrier competition is with two other modes, namely, rail and pipelines. Water carriers compete with railroads for the movement of dry bulk com¬modities such as grain, coal, and ores. For example, the movement of grains from the Midwest to New Orleans (export traffic) is possible by rail as well as by water carrier. The water carriers can use the Mississippi and Missouri River systems to connect the plain states with New Orleans. Both modes move sizable amounts of grain along this traffic corridor. Rail and water carriers compete heavily to move coal out of the coal-producing states of Pennsylvania, West Virginia, and Kentucky. The water carriers are capable of transporting coal via the Ohio and Mississippi Rivers to southern domestic con¬suming points (utilities), as well as to export markets. On the Great Lakes, water carriers compete with railroads for the movement of coal, ores, and grain. Iron ore and grain originating in Minnesota, Michigan, and Wisconsin are moved across the Great Lakes to other Great Lakes ports or out of the Great Lakes region via the Saint Lawrence Seaway to Atlantic and Gulf ports or to export markets. 7. What would be the impact of higher fuel charges on the water carrier industry? Provide a rationale for raising their user charges. While not discussed in the book, higher fuel costs would not have the same impact on water carriers as they do on other modes. The productivity by water borne vessels is such that the ratio of gallon of fuel per ton mile is the smallest of any mode. However, since fuel is one of the major variable expense components, surcharges will be added as need. While other modes have instituted fuel surcharges, they are not at the level of motor carriers. Please also note that fuel surcharges for shipments to Seattle range from about nine to twelve percent for less-than-truckload shipments to as high as eighteen percent for truckload shipments. From a barge carrier website 8. Technology often offers the potential of improving efficiency and effectiveness of transportation companies, but water carriers do not appear to have applied much new technology to improve their service. What impediments slow technological progress in the water carrier industry? Some impeditments slowing tenchnological progress in the water carrier industry include: •Maritime policy and transportation policy at large must align to ensure that U.S. ports are prepared to handle the increase in volume in an efficient and environmentally responsible manner and are able to compete with the ports of neighboring countries. •The existence or lack of rail and road infrastructure has often either facilitated or stymied port development. •No federal entity determines the national optimal direction in overall port development. Nor does any federal entity study efficient freight routing through the broader multi-modal transportation system. 9. Intermodal competition is more intense than intramodal competition for water carriers. Why? Intramodal competition among water carriers is not as important as intermodal competition, with railroads and pipelines. All three of these modes compete for longer distance movements of bulk commodities. 10. Why are pipelines unknown to many individuals? Do you think the pipelines should advertise to change this? The industry is relatively unknown to the general public, which has little appreciation of the role and impor¬tance of pipelines. Pipelines are limited in the markets they serve and very limited in the commodities they can haul. Since they are very limited as to the customers they can serve, advertising would not gain any new business and, as such, would seem inappropriate. “Awareness” ads could even work against the industry as the public might become overly concerned about pipeline safety, leading to more government oversight. Case Questions Case 8.1 Great Lakes Carriers 1. What marketing data would you want to have available to make the decision? You would need annual and quarterly volume of container traffic both into and out the tributary area of each port as an estimate of domestic truckload traffic which might move in containers between U.S. ports in this service. You would also want all rates for both rail and truckload carriers which are transporting containers to and from the Atlantic ports in each area. 2. What cost data would you need to make a rational decision? You would want to gather your own costs as well as fees that the various ports would charge. You would also need drayage costs for container traffic to and from each port within its tributary area. 3. What are some of the logistics supply chain issues that GLC should consider? Since the service is significantly slower that either truck or rail, you would need to know which commodities in each port area would be susceptible to diversion to this service. Since current supply chain thinking is that inventory velocity is critical and this is based on underlying transport speed. A review of the concepts discussed in Chapter 1 would be critical. 4. What is your recommendation regarding the RFID Technology? Why? Technology reader and tag investments would have to be researched. If investment of equipment is minimal and it doesn’t overextend the company the technology could prove invaluable. RFID would offer a competitive advantage for freight visibility along with future supply chain efficiencies and effectiveness. Keep the technology investment to a minimum. After all, you are also creating a new type of container service which is a new niche in the marketplace with smaller than usual containers. 5. Based on what you know what recommendation would you make to the GLC Board of Directors regarding a container ship operation? Initial research indicates a growth opportunity but other aspects including technology investment, infrastructure assessment, additional equipment purchases, financial implications and additional market research would need to be further researched. Case 8.2 CNG Pipeline Company 1. Do you feel the project has any merit for further investigation? Why or why not? Given the information stated in the case, it would appear that there was it was a mixed case for support going forward with the project. The refinery closings in the Midwest meant the CBN would likely lose some their current business but there is no assurance that any new refineries would be built in the areas to be served by the new pipeline. 2. What additional information is needed beyond that provided by Evelyn Thomchick to make a better decision? They need considerable additional information including construction plans by the major producers. Even though there may be demand, since CBN is only an intermediary, they are dependent on those who extract the petroleum and those that refine it on the other end. The rate of return needs to be examined in more detail to determine how the 10 percent figure was developed and, if light of the current global and political situation, a determination as the whether or not such a figure is realistic. 3. What is your the political assessment of building a pipeline that will traverse five states. There does not appear to be any question that stricter environmental regulation will impact upon pipeline construction in some ways that are perceived as being negative to the growth of the pipeline industry. Overall, however the pipeline industry has a good environmental record compared to alternative modes of transportation. The pipeline industry needs to tell its story in terms of its environmental position relative to other modes of transportation. A good project related to this case would be to have the class do some research on the topic of environmental accidents and develop some public relations type press releases. Suggested Internet project Have the student research and find the largest international ocean carriers serving U.S. ports (regardless of flag of convenience). Compare and contrast tonnage in various freight lanes from origin to destination and back – U.S. -Latin America, U.S.-South America, U.S.-Asia, and U.S. – Europe. Use total freight volume both picked-up and delivered at U.S ports as the criteria. Have the student identify the 3 largest oil companies in the world. For each company, identify the number of miles of privately own pipelines by country of operation. Some addresses are: United States Department of Transportation http://www.dot.gov/DOTagencies.htm Maritime Administration http://www.marad.dot.gov/ Pipelines and Hazardous Materials Safety Administration http://www.phmsa.dot.gov/ Research and Innovative Technology Administration http://www.rita.dot.gov/ National Transportation Library http://ntl.bts.gov/ Bureau of Transportation Statistics http://www.bts.gov/ Instructor Manual for Transportation: A Supply Chain Perspective John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bardi 9780324789195
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