Dan Reed

80 Years Later, Jones Act Impacting Energy Prices

Sen. Wesley Jones might have died 81 years ago, but he’s still making new enemies in the oil and energy industries and friends in the maritime industries.

Thanks to Jones, propane sold in Houston can’t be shipped easily or economically to the frozen tundra of the Northeastern United States, where a remarkably hard winter has depleted the propane supply for three to five percent of the regions’ homes to dangerously low levels. The same goes for rock salt, which has been used in huge quantities by states as far south as Georgia and Mississippi to de-ice roads during record-breaking winter storms.

Jones Act Designed to Protect American Merchants

That’s because of the Merchant Marine Act of 1920, better known as the Jones Act for its principal author, a Republican who served as a senator from the state of Washington during an era when Republicans were known for merchant-favoring regulatory and protectionist policies. In the post-World War I era, Jones and a large majority of federal lawmakers from both parties wanted to protect the still developing U.S. shipping and ship building industries. They faced competition from well-established European maritime companies and those seeking to undercut established prices by using third-world crews to operate surplus military and merchant marine supply ships sold off at rock bottom prices after the war. Lawmakers also wanted to support U.S. ship builders and maintain lots of high-paid jobs in the shipbuilding and maritime industry.

The Jones Act sought to provide that protection by requiring that all passengers and goods shipped between any two ports in the United States be carried on ships that were built in the U.S., owned by U.S.-based companies and crewed by U.S. citizens or permanent residents. That prevented so-called cabotage, which is the poaching of intra-state or intra-nation goods (or passengers) by carriers from a different nation. Although it has performed as planned, winning the fervent and continuous support of the maritime industry and unions, the Jones Act has been criticized by producers of raw and finished goods, the agricultural industry, consumers’ advocates, and, in recent years, the energy industry. The regulation, critics say, drives up the cost of products made and consumed by Americans by as much as 20 percent compared with the price for those same products produced in and shipped from foreign nations.

Despite Good Intentions, Jones Act Pushing Oil and Energy Prices Higher

Now, with U.S. domestic crude oil and gas production reaching heights unimaginable just 15 years ago, the Jones Act’s inflationary impact on energy prices and its potentially crippling impact on energy supplies in certain regions of the nation is sparking particularly loud calls for its full or partial repeal. At the very least, advocates want a new outlook among federal regulators who can, but rarely do, offer waivers from the Jones Act’s limits to meet crisis-driven needs for refined petroleum products like gasoline, home heating oil, propane and jet fuel.

California might the fourth largest state in terms of crude oil production, and third in refineries, but it still imports nearly 80 percent of the refined products its 40 million citizens use. Shipping natural gas from the nearest sources in the Bakken Play in the Dakotas region by a combination of rail and ship adds at least $14 a barrel to the already high price of crude today. Importing Canadian oil products on tankers sailing from Vancouver costs about the same. Californians already pay among the highest prices in the nation for their gas and other refined fuels. Sourcing more of it via those paths would push the price even higher to uncompetitive and uneconomical levels.

Shipping oil from Texas via the Panama Canal to California isn’t quite as expensive, but because of the Jones Act, there very few available U.S.-built, owned and crewed tankers small enough to pass through the Canal that can carry a profitable load. Those that can cost about $100,000 a day to rent as opposed to $10,000 for tankers that don’t meet the Jones Act’s requirements. Still, Kinder Morgan Energy is building a small fleet of tankers that can do the job, betting that Californian’s thirst for energy will more than support the inevitably higher prices that oil shipped in under the Jones Act’s rule will require.

Talk of Easing Act’s Restrictions in Some Areas

Kinder Morgan Energy also clearly is placing a bet that the Jones Act will remain in place despite the rising cries from the energy industry and consumer groups for its repeal or watering down. That’s most likely a safe political bet because, despite that noise, there’s no apparent appetite in Washington to take on the issue. There is a proposal in Congress to ease the restrictions of the Jones Act on shipping into and out of both Hawaii and Alaska, which didn’t become states until 60 years after the law was passed, and which clearly are situated very differently in terms of their materials transportation needs. There’s also been some discussion about reducing or eliminating the Jones Act’s application to shipping going in and out of Puerto Rico, which, as a U.S. territory, currently is subject to its restrictions.

But there’s no existing proposal, or even serious discussion in Congress, to repeal or alter the Jones Act as it pertains to the 22 states within the contiguous 48 that have coastal ports. President Obama also has said publicly several times during his years in office that he strongly supports the Jones Act as a tool for guaranteeing lots of good paying jobs and maintaining the nation’s shipbuilding capabilities.

That means, however, that unless market conditions change, the Northeast and the West Coast will continue to import large amounts of foreign oil, whether from the North Sea, the Middle East or South America to meet local needs. Plans are moving forward for construction of a few new pipelines and branches of pipelines between the Gulf Coast and the Northeast to ship refined products and shale gas and oils. While those pipelines will help ease the pressure a bit, they won’t have enough capacity to make a major dent in the economic imbalance caused by the Jones Act.

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