Reforming the Jones Act for American Energy Consumers

Share

The shale revolution is steaming along, bringing the United States abundant energy, high-paying jobs, and new sway in global energy markets. But the Jones Act has cut many Americans off from these new resources, leaving them stranded in energy-starved markets. Congress should reform the Jones Act so these new riches can be shared with all Americans.

The Merchant Marine Act of 1920, colloquially known as the Jones Act, requires that shipments between two U.S. ports be on U.S.-built, U.S.-manned, U.S.-flagged, and U.S.-owned vessels. But there are only 96 Jones Act-compliant large ships, not nearly enough to support the booming U.S. oil and gas industry.i In fact, there is not a single Jones Act-eligible ship that carries liquefied natural gas (LNG). As a result, U.S. LNG is being sent to China, Europe, and South America. And American consumers are entirely cut off from their own country's resources.

The Jones Act has a long list of perverse consequences for American energy producers and consumers:

  • Boston cannot import natural gas from Louisiana, so it skirts U.S. sanctions to import gas from Russia.ii
  • Texas cannot send its flood of crude oil to Puerto Rico or the U.S. east coast, so it ships oil to Europe and China.iii
  • Cut off from cheap American crude, the east coast's biggest refinery was recently forced to declare bankruptcy.iv
  • Puerto Rico, forced to declare bankruptcy in 2017, and desperate for cheap oil and gas to maintain its power grid, must buy these commodities abroad at inflated prices.v

The U.S. energy boom is accelerating. To ensure that it benefits all Americans, the Jones Act must be reformed.

The American Energy Boom

Oil is the commodity that built the modern world. For more than a century, oil booms have built fortunes, nations, and legends. But in the history of the world, there has never been an oil boom like the one that is happening now in the United States.

The biggest previous oil boom was in Saudi Arabia in the late 1960s, when it increased production by 1 million barrels of oil per day in a year. In just the last year, U.S. oil production is up more than two million barrels per day, and more than half of that increase is in Texas. In real terms, oil is worth more than twice what it was in the 1960s, so in monetary terms the current boom dwarfs any previous episode. Simply put, it is the biggest commodity boom the world has ever seen.

This is bringing countless benefits to the United States, including huge growth in the oil producing regions of Texas, North Dakota, and New Mexico. This flood of oil means cheap gasoline to drive the economy. And there has been a significant increase in gas production as well—giving the United States an affordable clean-burning fuel to power its electric grid.

This unprecedented growth, however, is straining transport networks, which are running at full capacity. To keep the boom going, energy producers need to be able to send their oil and gas to new markets. Because of the Jones Act, American producers usually cannot ship this flood of oil and gas to U.S. ports and are instead forced to send it abroad.

How the Jones Act Cuts Off American Consumers and Holds Back U.S. Companies

The Jones Act forbids transport between U.S. ports unless it is on a U.S.-built, U.S.-manned, U.S. flagged and U.S.-owned vessel. It is sometimes defended as an inducement for U.S. shipbuilding, but if that is the goal, it has been an abject failure: over the last century the number of U.S. oceangoing vessels has collapsedvi and what remains is an aging remnant, far older than the international norm for shipping.vii

Consequently, it is generally impractical to ship American oil and gas to American ports. Even if a ship can be found, charter costs for U.S.-flagged ships are approximately four times those for foreign-flagged ships. As a result, it costs three times as much to ship oil from Texas to refineries on the U.S. East Coast as it costs to ship oil to Canada. Even shipping to Europe is just half the price of reaching a U.S. port.

But it gets worse. Even if producers were willing to pay these inflated prices, there often simply is no shipping available. For example, large volumes of gas can only be transported overseas by cooling the gas until it becomes a liquid and then loading it onto a special, refrigerated LNG carrier. But there are no American-built LNG carriers, so LNG simply cannot be shipped to a U.S. port.viii

Thanks to the shale revolution, the United States is now exporting LNG all over the globe. These exports will ramp up in the coming years making the United States one of the premier gas suppliers, providing clean fuel to the world, and increased U.S. economic and geopolitical sway to America. But unless the Jones Act is changed, no U.S. consumer will ever benefit from this bounty.

These perverse consequences for the LNG industry are just one constant example of a problem that the Jones Act creates for American companies every day: What can you do when you need a specialized product that is produced in the United States but cannot be transported by Jones Act eligible shipping? Imagine that a U.S. producer needs a specialized rig for a new oil well. As the world's biggest oil and gas producer, the U.S. often has the needed equipment, but the antiquated Jones Act fleet often simply does not have a vessel capable of transporting it. So the U.S. producer will have to find a foreign supplier to ship a replacement rig, increasing its costs and reducing American jobs.

Reforming the Jones Act

At a minimum, the Jones Act must be reformed so that it does not apply to goods such as LNG that have no practical option for transport on Jones Act-eligible shipping. In these circumstances, no party benefits from the Jones Act: U.S. producers pay more to send their product to Asia, U.S. consumers pay more to import LNG from Russia, and this expensive and wasteful charade will never cause a single LNG carrier to be built in the United States. That is simply not a realistic option because under the Jones Act, the U.S. shipbuilding industry has withered away.

Currently, the Jones Act can only be waived when it is in the interest of national defense.ix This waiver authority should be expanded in two ways. First, certain goods like LNG should be categorically exempted from the Jones Act. If it is unlikely or impossible that the good will ever be transported by Jones Act-eligible shipping, there is no reason to hamstring American producers and cut off American consumers; the Jones Act should simply not apply to such goods.

Second, it should be broadened to include economically necessary waivers. Some studies indicate that in shipping dependent locations like Puerto Rico, Alaska, and Hawaii the Jones Act costs consumers as much as $15 billion per year.x Congress should loosen the chains holding back these economies by providing waivers when economically necessary.

Notes

i Thomas Grennes, "An Economic Analysis of the Jones Act," 2017. https://www.mercatus.org/system/files/mercatus-grennes-jones-act-v1.pdf.

ii Ben Lefebrvre, "Russian gas defies U.S. sanctions to reach New England," Politico, January 26, 2018, https://www.politico.com/story/2018/01/26/russia-gas-sanctions-american….

iii James W. Coleman, "Repeal the Jones Act for American Energy," Regulatory Transparency Project, White Paper (2017).

iv Jarret Renshaw, "Refiner goes belly-up after big payouts to Carlyle Group," Reuters, February 20, 2018, https://www.reuters.com/article/us-usa-biofuels-pes-bankruptcy-insight/… ("the refinery remained largely cut off from the cheap crude it needed to survive… it became cheaper to transport crude oil from North Dakota to points in Western Europe than it was to transport the same crude oil to Philadelphia").

v James W. Coleman, "Repeal the Jones Act to speed Puerto Rico recovery," Fox News, October 11, 2017, https://www.foxnews.com/opinion/repeal-the-jones-act-to-speed-puerto-ri….

vi Thomas Grennes, "An Economic Analysis of the Jones Act."

vii Thomas Grennes, "Does the Jones Act Endanger American Seamen?" Regulation 40, no.3 (2017): 2-4.

viii Greg LaRose, "Report Chills Idea to Link LNG Exports to U.S.-Built Ships," The Times Picayune, December 4, 2015, http://www.nola.com/business/index.ssf/2015/1

ix 46 U.S.C. § 501.

x Russ Kashian, Jeff Pagel, & Ike Brannon, “The Jones Act in Perspective: A Survey of Costs and Effects of the 1920 Merchant Marine Act,” Grassroot Institute of Hawaii (2017) http://assets.grassrootinstitute.org/wp-content/uploads/2017/04/Jones-A….

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Jones Act: Charting a New Course after a Century of Failure.

James W. Coleman

James W. Coleman is an Associate Professor at Southern Methodist University.