Domestic shipping industry needs load of competition

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Article Highlights

  • Congress should repeal the Jones Act, a protectionist policy adopted during Wilson's administration that has no place in today's global economy.

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  • The Jones Act never made economic sense even when it was passed as a section of the Merchant Marine Act of 1920.

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  • It's time for Congress to scrap the Jones Act and replace it with shipping rules that promote greater competition.

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It's time — indeed way past time — for Congress to repeal a century-old shipping law known as the Jones Act, a protectionist policy adopted during Woodrow Wilson's administration that has no place in today's modern global economy.

The Jones Act never made economic sense even when it was passed as a section of the Merchant Marine Act of 1920. It requires that any shipment of goods from one U.S. port to another only be carried on U.S.-flag vessels built in the U.S., owned by U.S. citizens, and operated by a crew of U.S. citizens.

In other words, it's pure protectionism for the domestic shipping industry, which has never had to face any foreign competition.

Especially in a new era of energy abundance in America, it's time for Congress to scrap the Jones Act and replace it with shipping rules that promote greater competition.

A policy that enables foreign-flagged tankers to transport light sweet crude from Gulf ports in Texas and Louisiana to East Coast refineries for one-third the current cost of Jones Act vessels would produce positive results and save millions of dollars in transportation expenses. And a change in shipping policy would also reduce energy costs on the West Coast and Alaska.

Since U.S. refineries would have more access to domestically produced crude oil, repealing the Jones Act would curb U.S. dependence on imported heavier crude from Saudi Arabia, Venezuela and Nigeria, countries that don't always have America's best interests in mind.

The fact is, the U.S. is still importing more than 7 million barrels of oil a day, supplying more than 45% of the oil needed to fuel our economy.

Repealing the Jones Act would remove an obstacle to greater production of tight oil in the Bakken Shale of North Dakota and the Eagle Ford Shale in South Texas, while generating income, jobs and revenue in the U.S. And it would likely enable consumers to enjoy cheaper prices at the pump, or at least prevent gas prices from rising.

If the Jones Act were repealed, it could open the way to lifting the current ban on U.S. exports of crude oil, which would provide substantial economic and geopolitical gains.

Since Russia relies on foreign cash from energy exports to pay for its imports of goods and services, we should be doing everything possible to use our own, newfound energy bonanza as a strategic foreign policy weapon.

The problem is that Jones Act tankers and coastal barges are not only costly but scarce. In U.S. waters, just three dozen vessels are oceangoing tankers able to carry 235,000 barrels of oil or more, and almost all are locked into long-term contracts.

Within the past year, shipments of domestic crude from the port of Corpus Christi have surged from zero to nearly 400,000 barrels per day, more than one-third of the total output from the nearby Eagle Ford oilfields.

Due to high shipping costs and a scarcity of Jones Act tankers, two-thirds of that oil has remained in the Gulf, and that bottleneck has led to a glut of light sweet crude that is expected to worsen in the future.

U.S. refiners say a Jones Act tanker carrying sweet crude from Corpus Christi to Philadelphia costs more than a foreign-flagged vessel carrying oil to Europe and back. Not handicapped by such burdensome and costly shipping restrictions, Europe is paying $5 to $6 a barrel less for crude oil than in America.

There simply isn't an easy way to move unconventional crude from where it's produced in the U.S. to where refineries can process it. Just one oil pipeline leads to mid-Atlantic refineries, and it's already filled to capacity.

Rail cars and barges are moving some of the domestically produced crude from North Dakota and Texas to the East Coast. But rail and barge capacity is limited. There's tremendous potential for oil production in the Bakken and Eagle Ford shale fields, but output might be greater if there was no backup at Gulf ports.

Repealing the Jones Act has been opposed by some on the grounds that U.S. shipbuilders could lose billions of dollars and it could cost thousands of shipyard and maritime jobs. But that logic doesn't hold.

Protecting U.S. shipbuilders from foreign competition — or, for that matter, protecting any domestic industry — has no place in a market economy, and it should have been abolished decades ago.

Try telling U.S. taxpayers and consumers that paying higher energy prices to protect Jones Act tankers and crews from global competition makes good economic sense.

Congress needs to repeal the Jones Act and allow foreign tankers to carry oil between U.S. ports immediately. This would help move domestic crude oil more efficiently and cheaply to where it's needed for refining, as well as improve our energy security and reduce dependence on foreign oil. And it would provide more incentives for expanding our booming domestic oil supply.

Even if Congress doesn't do something, President Obama should. He can waive the Jones Act, which is what President George W. Bush did briefly after Hurricane Katrina hammered the Gulf Coast in 2005. And in 2011 Obama granted waivers for crude oil shipments to facilitate the release of strategic oil reserves to compensate for the loss of Libyan crude-oil supplies.

The Jones Act was also waived recently by the Obama administration for several weeks in 2012 to alleviate widespread fuel shortages on the East Coast following Hurricane Sandy.

The most important question to ask is what's best for the overall economy and the country as a whole. Repealing the outdated, protectionist Jones Act would be unquestionably good for America and our booming energy industry.

Then, the next logical step would be to lift the outdated ban on U.S. crude oil exports and allow market forces to allocate America's abundant energy resources.

• Perry is a professor of economics at the Flint campus of the University of Michigan and a resident scholar at the American Enterprise Institute.

 

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