Record diesel prices hit rail margins
As diesel prices hit new record highs in May, rail freight operators face new challenges in balancing fuel costs.
With global diesel supplies tightening in the wake of the Ukraine war, prices have risen sharply in 2022, with the cost per litre hitting new record highs. The decision by European countries to sanction Russian oil is also set to add further pressure heading into the second half of the year.
In announcing the ban, European Commission President Ursula von der Leyen stated that crude oil imports would be phased down to zero within six months, with refined products, like diesel, terminating by the end of the year.
Are higher prices favourable for rail?
This month, retail prices for diesel in the US topped five US dollars per gallon, the highest level on record, and in Europe, many countries are facing diesel prices above two euros per litre for the first time.
“Higher prices could be around the corner”, Bjornar Tonhaugen, head of oil markets research at Rystad Energy, cautioned. “The oil market has not fully priced in the potential of an EU oil embargo, so higher crude prices are expected in the summer months if it’s voted into law”.
As recently as the start of this year, many rail freight operators were considering switching back from electric locomotives to diesel due to the energy crisis driving up the cost of electricity in many markets. The latest pressure on diesel prices may now be driving a rethink for some operators as the outlook for hydrocarbon supply chains remains uncertain.
Major changes in transport
Imports of diesel from Russia to Europe have already hit their lowest since December, falling to just 770,000 barrels per day. At the same time, Europe’s domestic diesel production has faltered, helping to hike profit margins for refineries converting crude oil to diesel to an all-time high. With the current global energy crisis showing no signs of abating, the consensus is that this decade will see significant changes in transport and infrastructure as long-standing norms are changed.
One prospect is that sustained high energy prices will drive a dramatic shift in freight practices, with significant new volumes moving to rail as new technology enables better efficiency and lower emissions.
Despite the challenges ahead, Dr Fatih Birol, IEA executive director, highlights the benefits rail can offer in navigating the energy crisis, emphasising the “substantial benefits” rail can “provide for the energy sector and the environment. By diversifying energy sources and providing more efficient mobility, rail can lower transport energy use and reduce carbon dioxide and local pollutant emissions”.