The Jones Act, which requires that maritime transportation of goods between domestic ports take place on US-flagged vessels, is becoming more prominent in the debate over whether to allow more US crude oil to be exported.
Refiners have called for the 1920 law's repeal as light, sweet crude produced from the Bakken and other US tight-oil formations has become uneconomic to transport by tanker or barge to East Coast and other refineries for processing.
"Crude oil exports and the Jones Act can't be divorced," American Fuel & Petrochemical Manufacturers Pres. Charles T. Drevna told OGJ. "This issue has to be part and parcel to any crude export debate. It's an anticompetitive law that has far outlived its usefulness."
Drevna conceded that the law's enactment as part of the Merchant Marine Act may have made sense at the time because the US was emerging from World War I and needed to build up its maritime fleet. "I can understand folks who want more crude exports saying we can't live in the shadow of the 1970s," said Drevna, who would like to see the Jones Act repealed. "Let's also consider other metrics which have changed in 96 years too."
Others suggested that problems may be more a matter of available capacity. "The real story with barges is that there haven't been enough Jones Act vessels to move crude around," said Trisha Curtis, upstream and midstream research director at Energy Policy Research Inc. "Several operators have announced ambitious building plans, so that could change."
'Investing heavily'
In an Oct. 8 speech, American Maritime Partnership Chairman Tom Allegretti said, "The industry's greatest accomplishment over the past year has been its response to America's domestic energy boom, which has sparked remarkable growth in the US shipbuilding and water transportation sectors."
Allegretti said, "The rapid increase in the domestic supply of oil has been accompanied by exponential growth in the waterborne movement of these products. The domestic maritime industry, with the Jones Act as its statutory foundation, is investing heavily to meet the transportation demands of this new energy economy."
In what he termed "a new era of domestic vessel construction," Allegretti said 26 fuel-efficient, state-of-the-art tankers and articulated tug barges are being built in US shipyards, which will add 7.6 million bbl of capacity to the domestic fleet. New inland barge construction peaked in 2013 as 336 barges were delivered for another 8.2 million bbl of new capacity, he said.
"What undergirds this multibillion dollar private-sector investment?" Allegretti rhetorically asked. "The Jones Act, which provides the certainty American companies need to commit the capital that make this construction, and the jobs that go with it, a reality." Moreover, he said, it costs an average 1¢/gal or less to transport gasoline in a Jones Act vessel.
Refiners see a disparity elsewhere. Marathon Petroleum Corp. in Findlay, Ohio, the nation's fourth largest oil products processor, backs free markets and the unrestricted movement of commodities, goods, and services to the markets of greatest efficiency and value, according to communications manager Jamal T. Kheiry.
"We continue to support policy actions that move the US economy in that direction," he told OGJ. "In that context, the Jones Act is a market distortion and should be considered for reform along with other barriers to the free market, such as the [federal Renewable Fuel Standard].
"As just one example of Jones Act distortions," Kheiry said, "consider that it's cheaper for shippers to move gasoline from the US Gulf Coast to Brazil (about $2.30/bbl) than to Boston (about $5.15/bbl)."
An appropriate discussion
Others consider it appropriate to start discussing the Jones Act's other possible impacts on US maritime shipments of petroleum. "About 400,000 b/d of US crude oil is being exported now from the Gulf Coast to Canada," said Shirley Neff, a senior advisor at the US Energy Information Administration, during a recent discussion at the Woodrow Wilson Center for Scholars. "Whether more of it would be moving to refineries on the East Coast without the Jones Act is a legitimate question."
Jan. H. Kalicki, a Wilson Center public policy scholar who leads its regional and global energy issues program, at the same event, said, "There's no question the Jones Act distorts this situation."
Mark J. Perry, a scholar at the American Enterprise Institute and economics professor at the University of Michigan's Flint campus, meanwhile observed, "It is contributing to some misallocation and higher prices for transportation, and for our gasoline and oil. It's ripe for reform. It's a harmful, protectionist policy for the domestic shipping industry, which doesn't have to face any lower cost foreign competition."
Foreign-flagged tankers could transport domestically produced light, sweet crude from the Gulf Coast to East Coast refineries at about one-third the cost of Jones Act vessels, Perry told OGJ. "It's a battle between the domestic maritime industry, which has had this protection for about 100 years, and people who would like to see energy markets work more efficiently," he said.
Refiners also noted that a Jones Act tanker carrying light, sweet crude from Corpus Christi to Philadelphia costs more than a foreign-flagged vessel carrying it to Europe, Perry said. "Not handicapped by such burdensome and costly shipping restrictions, a refiner in Europe would pay $5-6/bbl less for this crude oil than one in America," he said.
'Economic insanity'
The law allows waivers when the government determines that it would be in the national interest. That let foreign-flagged and their vessels work in recovery efforts following Hurricane Katrina in 2005 and the crude oil spill from the Macondo deepwater in 2010 in the gulf. "If it's in the national interest to waive it in an emergency, why wait for one?" said Drevna. "It's economic insanity, and it hurts the American consumer."
There's a substantial foreign presence in the US in aerospace, defense, and other vital industries, Drevna pointed out. "To say we need a protected class of merchant class with a requirement that their crews be 75% US citizens doesn't make sense anymore," he said. "Could you imagine the public's reaction if we started exporting more of our crude, but our own refineries had to import their feedstock?"
He expressed surprise that the World Trade Organization hasn't investigated the matter. "It's way beyond an anachronism. It's an impediment," Drevna said. "Once consumers realize what the Jones Act is doing to them, I believe they will be irate."
Repealing the law would be difficult, he and Perry agreed. "It's not certain whether it's politically possible," the AEI scholar told OGJ. "A lot of subsequent legislation had sunset provisions that required debate after 10 years. This law didn't. It makes it difficult to repeal legislation because a special interest group is so firmly entrenched."
Drevna said, "We don't expect anyone on the Hill to take this up on its own. It will have to be part of a crude exports discussion-and there's not a real push yet for that either."
Perry added, "Now that we're this energy superpower, we're an emerging world oil and gas production leader. It doesn't make sense to keep this outdated protectionism which made sense nearly 100 years ago in this new global landscape where the US has emerged as a new energy superpower."