RAILROAD STRIKE: EFFECTS ON NATURAL GAS DEMAND & PRODUCTION

One of the largest rail unions rejected a deal on Monday, along with 3 other unions which have failed to approve contracts over concerns about demanding schedules and the lack of paid sick time.  The last time the US railroads went on strike was in 1992 and that only lasted a few days as Congress intervened and set contract terms.  An extended railroad shutdown has not occurred for over a century because a law was passed in 1926 to govern rail negotiations which made it more difficult for railroad workers to strike.  Therefore, an extended railroad strike that lasts longer than a week without congressional intervention is highly unlikely.  However, if we do get an extended railroad strike that lasts past a week, what would be the effect on natural gas demand and production?

There would be 3 initial dominant effects on demand for natural gas in the case of an extended railroad strike.  One, power generation demand for natural gas would increase from anywhere between 1.5 to 4 Bcf/d depending on the length and severity of the strike.  Utilities would switch to burning natural gas instead of coal in order to safeguard their limited coal stockpiles that can’t be replenished in the event of an extended railroad strike.  Most coal in the US is transported via railroad.  However, utilities may delay burning natural gas in place of coal on the expectation that the railroad strike will not last longer than a month.  There is no guarantee that power demand for natural gas will automatically increase in an extended railroad strike.

Two, chemical manufacturers would be the first businesses to be affected by a railroad strike because railroads will have to stop shipping hazardous materials and chemicals a week before a strike deadline in order to ensure that no tank cars containing dangerous liquids and materials get lost or stranded. In fact, it is highly likely that chemical plants would shut down even before a railroad strike begins because it is standard safety procedure for railroads to stop shipping chemicals before the actual strike.  This would cause chemical plants to shut down immediately because they won’t have the chemicals to manufacture plastics.  Total chemical demand for US natural gas is about 6 Bcf/d and a large percentage of that demand would immediately disappear in the event of an actual railroad strike.

Three, some refineries would also shut down in an extended railroad strike.  Refineries won’t be able to get needed materials to make jet fuel and gasoline, which primarily come from railroads.  Refinery demand for natural gas is about 2.7 Bcf/d and a significant percentage of that demand would go away in an extended railroad strike.

The 4th sector of demand for natural gas that would be affected in an extended railroad strike would be all other components of natural gas demand which include commercial demand, all other industrial demand besides chemical plants and refineries, and residential demand.  An extended railroad strike would very likely tip the US economy into a recession and that would cause total weather adjusted demand for natural gas to drop.  

Natural gas production would also be negatively impacted by an extended railroad strike.  It is difficult to estimate how much it would be affected and how much in materials, sand, diesel and other materials that natural gas producers receive from railroads.  Additionally, an extended railroad strike would subsequently lead to a shortage of trucking because trucking would be used as a substitute for railroad transportation.  A trucking shortage would lead to decreased fracking activity due to the lack of transportation in receiving sand and diesel for fracking.  A significant decrease in fracking activity would lead to a decrease in natural gas production.

Summary

Most components of natural gas demand would decline in an extended railroad strike scenario, especially chemical and refinery demand, the 2 largest components of natural gas industrial demand.  Chemical demand for natural gas would shut down even before a railroad strike begins.  The only sector of natural gas demand that would see an increase is power generation demand and there is no guarantee of that.  Overall demand for natural gas would decline in an extended railroad strike.  Natural gas production would likely decline due to the inevitable shortage of trucking from an extended railroad strike and its effect on decreased fracking activity.