When it comes to energy policy, congressional action (or lack thereof, as in leaving the ban on crude exports in place) sometimes doesn’t make a lot of sense. And perhaps nowhere is that lack of logic more evident than in a little-known law called the Jones Act.
Like the export ban, the Jones Act is a relic of another time. Passed in 1920, it requires that any commodity being shipped on American waters between American ports must be transported by vessels that are American-made, -owned, and -operated.
At first glance, that may not seem like a major concern. But it has a huge impact on the energy industry.
According to a Congressional Research Service report, it costs between $3 and $4 more per barrel to transport oil from the Gulf Coast to the Northeast on Jones Act tankers than it does on foreign-flagged tankers. CitiGroup analysts put the per-barrel differential even higher – at $6 to $8. By some estimates, the price to ship Texas crude from the Gulf region to Asia is $2 per barrel; because of the Jones Act, it costs $7 to ship that same oil to Philadelphia.
An obvious question here is why does this matter if exports are banned. Here’s one answer, from Mark Perry, an economics professor at the University of Michigan and scholar at the American Enterprise Institute:
“Gulf Coast ports currently have more oil in storage than they can transport to East Coast refineries. As a result, the U.S. is paying billions of dollars a year for Venezuelan oil because the Jones Act makes it uneconomic to ship our own domestically-produced crude oil to refineries in Philadelphia and other East Coast cities.”
Perry’s reference to East Coast refineries is significant.
As I have written before, Gulf Coast refineries are generally equipped to handle heavy crude rather than the light, sweet crude coming from the Eagle Ford. On the other hand, those in the Northeast can process that oil. But since there are no pipelines from the coast to the Northeast, those refineries are dependent upon imported oil, which is more expensive.
Costs and geography aside, there is a safety issue. Crude that cannot be shipped by tanker is often shipped by rail, which as recent incidents have demonstrated can pose a danger to communities if the cars derail.
So in effect, the Jones Act is driving up prices, encouraging imports of foreign oil, and promoting a risky transportation option. Show me the logic in that.
And when I say the law is a relic of another time, it’s not just an argument. It’s backed up by hard facts.
The Jones Act’s original purpose was to maintain a strong, reliable maritime fleet for national security and to respond to emergencies. That is a worthy intention. But the number of Jones Act-eligible ships has plummeted over time, falling from 1,072 in 1955 to 193 in 2000, to 90 in 2014. Currently, only 13 ships can haul crude between U.S. ports.
In other words, what we have is a measure whose sole purpose appears to be protecting a shrinking number of vessels in the maritime industry.
An outright repeal of the law is probably a long shot. Arizona Sen. John McCain has been trying for years without success, though he believes the Jones Act will eventually die. However, at a time when domestic storage capacity is strained, Washington can temporarily waive the measure’s requirements. It would give East Coast refiners access to get less-expensive shale oil, potentially lowering the cost of gasoline for American consumers.
There’s precedent for that. In 2012, when Hurricane Sandy hit the Northeast, the Department of Homeland Security allowed foreign ships to transport fuel from the Gulf Coast to ease gasoline shortages.
I’m not sure whether this White House, which has targeted oil and gas companies on a number of fronts, would actually do anything to support an industry that almost single-handedly kept the economy afloat until Saudi Arabia declared a price war against U.S. shale drillers. But waiving the Jones Act requirement would be the right thing to do, at the right time, for the right reasons.