The 1920 Jones Act

“The Jones Act” refers to maritime laws enacted more than 95 years ago within the Merchant Marine Act of 1920, and specifically to its constraints on the shipment of goods between U.S. ports. Although once a cornerstone of American maritime policy, the Act is now increasingly seen as anachronistic and outdated.

The Jones Act generally forbids vessels from providing any part of the transportation of merchandise by land and water between points in the U.S. unless those vessels are domestically built, owned and operated by American citizens. Stated more simply, the Act essentially prohibits foreign vessels from engaging in U.S. domestic commerce.

The Jones Act restrictions apply to the entire U.S., including our largest island territories and possessions (e.g., Puerto Rico and Guam).

The Jones Act also provides that merchandise transported in violation of its rules is subject to seizure and forfeiture. U.S. Customs and Border Protection Service is primarily responsible for enforcing the Act. Additional enforcement and regulatory authority is also vested with the U.S. Coast Guard and Maritime Administration. These agencies aggressively enforce the Act to prevent use of foreign vessels in domestic trade.

The 1920 Jones Act was not the first instance of protection for U.S. domestic shipping. In fact, it generally restates policy that can be traced to the first session of Congress in 1789-90. The present Jones Act was adopted, and continues to be enforced, to “encourage the development of an American merchant marine, for both national defense and commercial purposes.” Not surprisingly, the Act is championed by domestic shipping and labor interests. However, while some in the domestic maritime industry may like the Jones Act, a growing number of others, especially bulk shippers and citizens of non-contiguous states, are increasingly concerned that Jones Act costs are being disproportionately borne both shippers and consumers.

U.S. shippers have found that the availability of Jones Act tankers is limited and the cost of constructing Jones Act-compliant vessels to be extraordinarily high. These costs have increased the prices of transportation and make it difficult to efficiently serve America’s own markets. Highlighting this issue, in 2013 Bloomberg News noted that the cost “to charter a Jones Act tanker is up 87 percent over the past year and a half, to a record of more than $85,000 a day.” Bloomberg also cited sales data placing the cost of building a vessel in the U.S. at close to five times that of a comparable vessel built in Asia, and noted that such costs result in a persistent shortage of Jones Act-compliant vessels.

Jones Act requirements that raise costs to construct and operate U.S. flagged vessels ultimately add price-increases to oil transport that affects consumers. In the current U.S. oil market, record domestic production is saturating the Gulf Coast in discounted light, sweet crude relative to the Brent oil price marker. This cost-advantaged oil is obviously attractive to East Coast refineries but Jones Act requirements have imposed prohibitive transportation costs on shippers who have therefore increasingly turned to rail for transport. A September 2013 Platts article summarized the cost issue by noting that the cost to move oil from the Gulf to the East Coast on Jones Act tankers ranged from $5 per barrel to $6 per barrel while shipping it to Canada could be done for close to $2 per barrel.

A more in-depth look at market dynamics, comparing the cost of shipping similar volumes of crude from one U.S. port to another versus moving it from that same U.S. port to a foreign one, illustrates the Jones Act’s consequences for American consumers. The spot market costs from February to August 2014 for moving 325,000 barrels of crude on a Jones Act vessel from Vancouver, WA, to Long Beach, CA, averaged $3.25-$4.25 per barrel. But, the cost to move 600,000 barrels of crude to South Korea on a non-Jones Act vessel averaged over the same interval just $2.10-2.60 per barrel. Similarly, the cost to move 325,000 barrels of crude from Houston on a Jones Act vessel to New York averaged at that time $4.50-$6.00 per barrel while the cost of moving 600,000 barrels of crude from Houston to Rotterdam on a non-Jones Act vessel was $1.75-$4.00 per barrel. Clearly, these cost differentials are enormous.

The impacts of these inflated Jones Act costs ultimately affect U.S. consumers. In fact, the U.S. International Trade Commission (“USITC”) found that repealing Jones Act requirements offered enormous gains to the U.S. economy and consumers. As one commenter explained:

In 2002, the USITC estimated that complete liberalization of the cabotage [shipping] provisions of the Jones Act would create a U.S. economic welfare gain of $656 million, and in 2009, it calculated that figure at $ 1.32 billion…The potential savings of liberalizing the cabotage laws… are attributed to the fact that shipping services in the U.S. cost 22 percent more than equivalent services abroad.”

Of course, these costs are borne by consumers at all stages of domestic waterborne transportation. As a result, a growing number of bulk shippers and advocates representing consumers in Hawaii, Alaska and Puerto Rico have been calling for a review of the Jones Act. Despite the additional costs created by the Jones Act, recent legislation has been introduced that would extend its application to all future U.S. natural gas LNG exports.

In the context of any examination of U.S. energy export policy, particularly with regard to petroleum and finished petroleum products, a comprehensive review of the Jones Act and its consequences on domestic energy prices is overdue. Tesoro does not believe that the former can be honestly had without the latter. Further, just as the Renewable Fuels Standard injects an artificial government mandate into the domestic fuels marketplace, the Jones Act also forces a contrivance into the emerging debate over U.S. energy export policies that creates very discernible winners (foreign consumers) and losers (American consumers).

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