In a recent response to President Biden’s call for increased oil refining capacity, Exxon Mobil Corp. responded by suggesting that, among other regulatory changes, waiving Jones Act vessel requirements could help relieve gas supply constraints and ultimately lower prices.
Exxon Mobil has a point. The Jones Act may have long outlived its usefulness and could be imposing costs on what U.S. consumers pay for energy that are far greater than its benefits.
Congress adopted the Jones Act, Section 27 of the Merchant Marine Act of 1920, after World War I to ensure that the U.S. would have a robust merchant marine to support military logistics in a future war. To do so, the act created a captive market for the U.S. merchant marine and shipbuilders, mandating that shipments between domestic ports use only vessels built, flagged, and registered in the United States that are crewed 75% by American sailors.
The act sought national security at the price of trade protection. But the tradeoff may not have been effective. Protected from competition, the U.S. maritime shipping industry has shrunk to a minuscule size. Out of more than cargo 43,000 ships worldwide, 180 are U.S. flagged. Of these, only 99 are fully Jones Act compliant. In 1960, there were nearly 4,000 U.S. flagged cargo vessels.
A Cato Institute white paper, The Jones Act, a Financial Burden America Can No Longer Bear debunks the security argument with this example: “When U.S. forces were deployed to Saudi Arabia during Operations Desert Shield and Desert Storm, a much larger share of their equipment and supplies was carried by foreign‐flagged vessels (26.6%) than U.S.-flagged commercial vessels (12.7%). Only one U.S.-flagged ship was Jones Act compliant. In fact, the shipping situation was so desperate that on two occasions the United States requested transport ships from the Soviet Union and was rejected both times.”
But the cost of the Jones Act remains high particularly for oil and gas consumers and the offshore wind industry. The U.S. is a low-cost producer of oil. But in U.S. markets in the Northeast and the West Coast U.S. oil is more expensive than in foreign oil, because of the additional cost of on Jones Act compliant shipping from Texas or Alaska.
The U.S. is a low-cost producer of natural gas. But because of the Jones Act, New England imports its LNG from Norway and Trinidad, not the U.S. Gulf Coast. According to the American Energy Institute, to make U.S. oil and oil products competitive in U.S. markets, producers often ship them to Canada and then transport them back to the U.S. so they can use foreign-flagged ships for both legs of the journey. Even with the extra expense of the additional trip, this approach is cheaper than shipping to U.S. markets on Jones Act vessels.
Consumers in Hawaii rely on waterborne shipping to get food, manufactured goods, construction materials and other staples in addition to oil and gas. A 2020 study by the Grassroot Institute of Hawaii found that the Jones Act costs families in Hawaii $1,800 a year in both energy and non-energy costs.
One can argue that is considerably higher today with a 150% increase in the price of Brent crude per barrel versus 2020's depressed levels). A March 2022 Wall Street Journal article “Jonesing to Give Up Russian Oil”, states that Hawaii imported several million barrels of Russian crude as it was cheaper than crude shipped from the U.S. in Jones Act-compliant vessels.
Puerto Rico imports oil from Trinidad and Tobago instead of from U.S. producers in the Gulf of Mexico because it’s cheaper than getting U.S.-sourced gasoline from Jones Act vessels. And in many cases, because of the Jones Act, seaport towns in Alaska cannot afford to ship fish, forest products, or minerals directly by water to the lower 48 but must transship using Canadian railroads and ports at additional cost.
And the Jones Act is adding hundreds of millions of dollars to the cost of offshore wind projects, by prohibiting specialized installation vessels and experienced crews from Europe from operating freely in U.S. waters. These specialized ships cost as much as $500 million apiece, costs U.S. electric utility customers will ultimately have to pay.
As the late U.S. Sen. John McCain (R-Arizona) once said, the Jones Act is one of the best examples of “legislation [that] still remains on the books many decades after it has served its original, stated purpose.”
Shouldn’t we weigh what are perhaps antiquated pros against modern cons and enact legislation that addresses the challenges of today?
But the Jones Act still has support in the 21st century, particularly in states where the shipbuilding and maritime sectors are major employers and maritime unions are their strongest supporters.
Senators Roger Wicker (R-Miss) and Maria Cantwell (D-Wash) have suggested that the Jones Act ensure the employment of “650,000 American jobs resulting in $150 billion in economic benefits each year.”
Supporters of the act point to the hundreds of thousands of jobs of those individuals involved in these and supporting industries, e.g., ship repairs, supplies/supply chains, the associated economic drivers, and the availability and usage of these ships during national and international needs.
U.S. consumers and U.S. competitiveness are not factored in the cost-to-trade numbers. Nor is the cost to the U.S. military, the intended beneficiary of the act back in 1920. Because the U.S. supplies only its own demand for ships, boats built here are expensive. In 2019, the Defense Department did consider foreign-built ships.
“I can’t afford a lot of $600 million ships. I can’t really afford a lot of $400 million ships when I can go out and buy used RO/ROs (roll-on/roll-off cargo ships) for $35 to $40 million,” said Secretary of the Navy Richard Spencer in May 2019.
The head of U.S. Transportation Command, meanwhile, explained the decision to pursue used foreign‐built ships during a March 2019 congressional hearing by noting that such vessels cost $25 million–$60 million depending on age. New domestic‐built ships, he added, would cost 26 times as much.
These anecdotes suggest that the act seems to be counterproductive to our military efforts. We must ask the question: is the Jones Act an important element in our national defense strategy? Or are there other solutions to meeting our commercial and military needs that support our shipyards as well?
For effective reform to take place, many stakeholders need to be involved and competing interests need to be balanced. But the goal we all share is a U.S. shipbuilding and maritime industry that leverages U.S. technology and know-how to be globally competitive and cost-effective.
We are witnessing geopolitical disruption with economic ramifications to the price and availability of basic commodities (food, energy) not seen since the early 1980s. In this highly inflationary environment, now is the time to repeal, reform, or at least significantly modify/amend the Jones Act to allow for the flexibility in the oil transportation and distribution channels that will result in more efficient supply and hence at least somewhat lower gas prices.
An effective bi-partisan effort to address legitimate concerns made by detractors and proponents can create a win-win for U.S. consumers (particularly those in non-mainland areas) and shipbuilders alike, while not sacrificing national security concerns.
About the authors: Whittle, Zeigler and Rushton are partners at the Womble Bond Dickinson law firm.
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