A tentative agreement announced on Thursday is expected to prevent a strike that would have brought freight trains through the United States to a standstill. However, the concern raised by the possibility of such a disruption highlights just how fragile the country’s supply chains remain 2 1/2 years after they were first upended by the COVID-19 pandemic.
The breakthrough in negotiations was announced by Labor Secretary Marty Walsh, who hosted talks between unions representing 115,000 railway workers and the country’s largest railway companies. If unions accept the deal, workers will receive double-digit pay rises, more flexible attendance policies and other benefits. President Biden called the agreement a win for railroad workers who have worked during the pandemic “to ensure America’s families and communities receive supplies of what has kept us going through these difficult years.”
However, those shipments are still not quite back on track despite what appears to be a declining pandemic. And it could be a long time before supply chains function as smoothly as before the days of lockdowns and mask requirements.
“Unfortunately, I don’t see anything in the next year or two that will reduce the number of disruptions,” said Lisa Anderson, supply chain expert and president of the California-based LMA Consulting Group.
Jason Furman, a Harvard professor who chaired the Council of Economic Advisers under President Barack Obama, says there’s room for optimism, but “we’re not over the hill yet.”
“[The] Ports have mostly deleted themselves. Trucking mostly took care of itself. International shipping costs are way below. So there are definitely a lot of things that have gotten better,” he says.
But in other key areas there are still some pretty serious problems, like high fuel and food prices and a shortage of microchipping for vehicles, that aren’t likely to be resolved any time soon, Furman says.
Gas prices are falling, but oil supplies are scarce
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A recovery in demand since the worst days of the pandemic and supply disruptions due to the war in Ukraine pushed gas prices to unprecedented levels earlier this summer.
Things have cooled off a little since then as the peak gasoline season is over, says Patrick De Haan, senior petroleum analyst at GasBuddy. “But mostly diesel and heating oil [still] high in areas of the country. California, the West Coast, is particularly sensitive at this time as several refineries have experienced unexpected downtime.”
Fewer of those refineries are also operating, he says, and that means any shock, like last year’s ransomware attack that crippled the Colonial Pipeline, could send prices skyrocketing.
“Due to COVID, we have seen permanent shutdowns of 5% of the country’s refining capacity since 2019,” says De Haan.
“Three decades ago we had three times as many refineries,” he says.
Due to industry consolidation, “the formerly 200-plus refineries have shrunk to about 119,” says De Haan. “That means if one goes down, it becomes extremely problematic” because it accounts for a much larger portion of the total refinery capacity, he says.
De Haan says he believes refineries that worked overtime earlier this summer may also have postponed maintenance, and that could cause problems later.
As for the war in Ukraine, even if it ended tomorrow, it wouldn’t change the oil picture much, he says.
“Even if Russia pulls out of Ukraine, that doesn’t immediately give Western countries and oil companies confidence to do business with the Kremlin again,” he says. “Especially if there is no regime change.”
Ripple effects can be felt in grocery and retail costs
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As many Americans have realized during the recent rise in gas prices, there is a tremendous knock-on effect when it comes to food.
Higher fuel prices have not only impacted the cost of transporting food, but also the price and availability of fertilizers, Anderson says, since nitrogen fertilizers are made from a carbon-rich byproduct of oil refining known as “petcoke.”
The war in Ukraine made the situation even worse because Russia used to supply many of these fertilizers.
The invasion followed Beijing’s decision to introduce it last summer new frontiers on the export of phosphates, also an important component of fertilizers. By then, China had supplied almost a third of the world’s supply.
Anderson also points to weather-related shocks to US agriculture, such as B. a longer one California droughtwhich could lead to shortages and price increases for some crops.
Retailers are struggling with chronic supply problems
Things are certainly not as bad for retailers as they were at the height of the pandemic, says Jonathan Gold, vice president for supply chain and customs policy at the National Retail Federation.
“While you don’t see the 100+ ships that have been secured outside of LA ports [and] Long Beach, there are still congestion issues affecting these ports and the ability to truck containers on the rails from the port to the warehouses,” he says.
Gold also points to labor negotiations at West Coast ports that prompted retailers to move their supply chains to the East Coast and Gulf Coast to avoid potential disruption. It all happens “at the height of the peak shipping season when they’re mailing all their Christmas items,” he says.
“Our supply chains are only as strong as our most strained link,” Transport Secretary Pete Buttigieg told NPR on Thursday. “And we’ve seen that throughout the pandemic period and recovery from the worst of the days, whether it’s ships, trucks, warehouses or trains, all of these things need to work well for our economy to thrive.”
In many cases, retailers are also experiencing overstocking. With the pandemic abating somewhat, consumer behavior focused on online shopping quickly shifted back to the service sector.
“I think right now a lot of retailers still recognize that there are challenges within the supply chain,” says Gold. “They’re trying to address these. They are looking to build more resilience into their supply chains going forward to be able to address any type of future disruption that comes their way.”