Energy’s Dynamics Disrupt Transportation Investment

Clean energy, zero-emissions, and an incoming Administration poised to rejoin the Paris Climate Agreement.  This year’s Covid lockdowns have cut global fuel demand 30% driving a global drop in carbon emissions (down 7% in 2020).  The lockdowns impacted transportation which accounts for 24% of global carbon dioxide (CO₂) emissions. Road travel (passenger vehicles and trucking) accounts for 74.5% of transport emissions.  Aviation (which often gets the most attention in climate change discussions) accounts for only 11.6% of transport emissions.  Rail freight emits very little – only 1% of transport emissions.   By December year over year road transport emissions were down 10%, aviation emissions down 40%.   Globally, U.S. and European Union emissions were down 12% and 11% respectively (China a 1.7% drop).  In the U.S. refiners are idling plants in response to a drop in gasoline demand.  In California, the country’s most populous state, the Governor signed an order banning gasoline-powered car sales by 2035.  Many expect electric vehicles will offer a viable option to reduce emissions if conventional gasoline-powered vehicles are phased-out. 

The United States is the world’s largest petroleum consumer.  Through November U.S. rail carloads of petroleum and petroleum products were down 13.8% from 2019.  Gasoline prices are turning higher on hopes the Covid vaccines will return the world to normal levels of oil-fueled travel in 2021 (West Texas Intermediate crude, recently trading near $45 per barrel, could increase to $50 per barrel).  U.S. coal is consumed at electric power plants.  Approximately 70% of that coal is delivered by rail; it remains by far the highest volume carload commodity for U.S. railroads.  But coal volumes are down 25.5% year over year through November mainly because of the increase in U.S. natural gas production (due to extended fracking through horizontal drilling) which has led to sharply lower natural gas prices, making electricity generated from natural gas much more competitive. 

Commercial air passenger flights are estimated to account for 73% of total U.S. jet fuel consumption.  Lower fuel prices (U.S. Jet A1 Fuel Spot Price, December 11, $1.37) allow existing aircraft to remain in service longer as Carriers evaluate flights, using smaller aircraft where possible, and dropping routes that will not be profitable based on expected cargo and passenger revenue.  As newer aircraft are delivered, their upgraded engines will offer more fuel-efficient propulsion, less noise, and less pollution.  CFM’s LEAP-1B (737MAX) and LEAP-1A(A320neo) offer fuel efficiency of 15% above previous engines.  Pratt & Whitney’s Geared Turbofan (A320neo, A220) delivers similar lower fuel burn per seat. Yet low jet fuel prices diminish the benefit of these costly new engine technologies.    And OEM margins on new engines must be sacrificed to secure the longer-term and higher-margin aftermarket business.  

The OECD’s economic outlook expects the global economy will contract 4.2% in 2020 and then recover that loss in 2021.  In the U.S., the forecast is for 4% GDP growth in Q4 2020 and 3.3% in Q1 2021.  Even with the headwinds caused by a fall virus resurgence, the economy is recovering.  With the distribution of vaccines, the level of economic activity will increase.  The business case for transportation investment covers a 20-to-30-year horizon.  Investment thinking requires identifying key trends and responding.  Call RESIDO.  

Glenn P. Davis, 312-635-3161