While the United States is on the verge of an energy revolution, an obsolete law threatens to stall oil production and already inflates the price of gasoline. Passed over ninety years ago, the Merchant Marine Act of 1920 – commonly referred to as the Jones Act – requires all vessels carrying goods between domestic ports to have been built in the U.S. and crewed/owned by Americans.
In the energy industry, the Jones Act raises the cost of gasoline at all points in the supply chain. We’ll look at two examples that show how the protectionist Jones Act increases the price of gasoline and inhibits the flow of crude oil.
Refiners to consumers
Due to the limited pipeline infrastructure in the North East, consumers from this region rely heavily on ships to deliver the large amounts of gasoline they require. Since the two major Pennsylvania refineries are closing, the East Coast will depend almost entirely on gasoline manufactured in the Gulf. An EIA report describes a “major logistical hurdle” that must be overcome to transport gasoline from the Gulf to the North East:
The pipeline that delivers products from the Gulf Coast to the Northeast is at or near capacity. As a result, additional volumes will need to move from the Gulf Coast to the Northeast by water. Shipments between two U.S. ports require vessels that meet Jones Act requirements. Generally, Jones Act ships are chartered months in advance, limiting their short-term availability.
Only a small number of American ships meet strict Jones Act requirements driving up transportation costs and removes nearly all flexibility from the shipping market. The EIA report warns that:
In 2012, close to 40 tankers and perhaps as many as 270 barges are used to move petroleum products and crude oil in coastal waters. But not all of these vessels are capable of or available to move product from the Gulf Coast to the Northeast due to size and other factors.
Since this Administration has shown a reluctance to support new pipelines, they should at least mitigate nation-high gasoline prices by suspending or repealing the Jones Act. According to the Wall Street Journal, John Demopoulos of Argus Media, which tracks shipping pricing, estimates that foreign-flagged carriers could move oil from the Gulf Coast to the Northeast for about $1.20 a barrel, compared with $4 a barrel on U.S. ships.
Oil producers to refiners
North Dakota has passed Alaska and California and now ranks as the second highest oil producing state in the U.S. Owing much of the new development to the pervasive practice of hydraulic fracturing on private lands, North Dakota’s oil production ascendency happened, what seems like, overnight. While the welcomed oil renaissance has turned sleepy towns to vibrant economic centers, the influx of activity has increased roadway traffic. Missing adequate pipeline infrastructure and with the Keystone XL pipeline in limbo, North Dakota oil producers are forced to transport substantial amounts of crude oil mostly by road and train, hence the congestion.
If the Jones Act were repealed, it would give oil producers another medium to transport oil, by boat. Platts reports that:
“Among the obstacles for moving crude by ship in the Great Lakes region are vying regional crude pipelines and a US-flagged vessel shortage, sources say. A Jones Act (US-flagged) vessel is needed to ship from one US port to another.”
With the Jones Act in place, it doesn’t usually make economic sense to transport oil to regional ports – but it could. Repealing the Jones Act would lift this unnecessary shortage, reducing road congestion and injecting competition into the shipping market.