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A deal to avert a railroad strike is on track, but it won’t fix U.S. supply chain issues

A tentative agreement announced Thursday looks likely to prevent a strike that would have brought freight trains to a screeching halt across the United States. But concern over the possibility of such a disruption underscores how fragile the country’s supply chains remain 2½ years after they were first disrupted by the COVID-19 pandemic.

The breakthrough in negotiations was heralded by Labor Secretary Marty Walsh, who hosted talks between unions representing 115,000 railroad workers and the nation’s largest railroads. If unions accept the deal, workers will get double-digit raises, more flexible attendance policies and other benefits. President Biden called the deal a victory for railroad workers who have worked during the pandemic “to ensure that American families and communities receive deliveries of what has kept us going through these difficult years.”

Those deliveries, however, are still not fully back on track, despite a seemingly receding pandemic. And it could be a long time before supply chains work as well again as they did before the era of lockdowns and mask mandates.

“Unfortunately, I don’t see anything over the next two years that will reduce the number of disruptions,” says Lisa Anderson, supply chain expert and president of California-based LMA Consulting Group.

Jason Furman, a Harvard professor who led the Council of Economic Advisers under President Barack Obama, says there is room for optimism, but “we’re not out of the woods yet.”

“[The] the ports have mostly emptied. Trucking has largely resolved itself. The cost of international shipping is falling. So there are definitely a lot of things that have improved,” he says.

But in other key areas, there are still several fairly serious wrinkles, such as high fuel and food prices and a shortage of microchips for vehicles that are unlikely to be resolved anytime soon, Furman says.

Gas prices fall, but oil supply is tight

A rebound in demand from the worst days of the pandemic and supply disruptions from the war in Ukraine have combined to drive the price of gas to unprecedented levels earlier this summer.

Things have cooled down a bit since then, as we come out of the peak gas consumption season, says Patrick De Haan, chief oil analyst at GasBuddy. “But especially diesel and fuel oil are [still] high in some parts of the country. California, the West Coast is particularly tricky right now as several refineries have experienced unexpected downtime.”

There are also fewer of these refineries in operation, he says, and that means any shock, like last year’s ransomware attack that close the colonial pipelinecould drive up prices.

“Because of 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, “what used to be more than 200 refineries has fallen to around 119,” says De Haan. “This means that when one breaks down, it becomes extremely problematic” because it represents a much larger share of total refining capacity, he says.

De Haan says he thinks refineries that were working overtime earlier this summer could also have deferred maintenance, which could lead to problems later.

As for the war in Ukraine, even if it ended tomorrow, it wouldn’t change much of the oil picture, he says.

“Even if Russia pulls out of Ukraine, it doesn’t immediately give Western countries and oil companies the confidence to do business with the Kremlin again,” he said. “Especially if there is no regime change.”

Ripple effects can be felt in food and retail costs

As many Americans realized from the recent gas price hike, there is a huge ripple effect on food.

Rising fuel prices have impacted not only the cost of shipping food, but also the price and availability of fertilizer, Anderson says, because nitrogen fertilizer is produced from a byproduct rich in carbon from petroleum refining, known as “petroleum coke”.

The war in Ukraine has made matters even worse, as Russia used to supply a lot of these fertilizers.

The invasion follows Beijing’s decision last summer to introduce new limits on the export of phosphates, also a key ingredient in fertilizers. Until then, China provided almost a third of the world’s supply.

Anderson also points to weather-related shocks to U.S. agriculture, such as a california droughtwhich could lead to shortages and price increases for some crops.

Retailers face chronic supply issues

For retailers, things are certainly not as bad as they were at the height of the pandemic, says Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation.

“While you don’t see the over 100 ships backed up outside the ports of Los Angeles [and] Long Beach, there are still congestion issues affecting these ports and the ability to get containers out of the port by rail, to warehouses by truck,” he says.

Gold also notes labor negotiations at West Coast ports that have prompted retailers to shift their supply chains to the East Coast and Gulf Coast to avoid possible disruptions. It all happens “at the height of peak shipping season, when they bring in all their holiday merchandise,” he says.

“Our supply chains are only as strong as our most congested link,” said Transport Secretary Pete Buttigieg. says NPR Thursday. “And we have seen that throughout the pandemic period and the recovery from the worst days, whether it is ships, trucks, warehouses or trains, all of these things have to work well for our economy is prospering.”

In many cases, retailers are also experiencing excess inventory. As the pandemic waned somewhat, consumer behavior shifted from online shopping to quickly shifting to the service sector.

“I think right now a lot of retailers still recognize that there are challenges within the supply chain,” Gold says. “They’re trying to address that. They’re trying to build resilience into their supply chains going forward, to be able to deal with any kind of future disruption that comes along.”

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