When it was enacted in 1920, the Merchant Marine Act—aka the Jones Act—probably seemed like a good idea. At the time, it was necessary for national defense and commerce development purposes. But a lot has changed in the 94 years since it was passed, and the expiration date on this archaic act is decades overdue.
The law in question requires vessels used for domestic shipping must be built in the United States, owned by U.S. citizens, and at least 75 percent crewed by U.S. citizens. Just to be clear: the government allows shippers to transport goods domestically on trucks, cars, aircraft and trains built anywhere in the world. The only exception is ships.
Today, the Jones Act hurts the U.S. economy by driving up shipping costs, increasing energy costs, and stifling competition for U.S. shipbuilders. Because of these higher shipping costs, it is frequently much cheaper to import products from abroad instead of purchasing them in the U.S. and shipping them to your part of the country. Research from the Heritage Foundation, for example, shows that it is cheaper for importers in Maryland to buy their rock salt 4,200 miles away in Chile than it is to buy it just 1,600 miles away in Louisiana.
And if the ban on U.S. crude exports is lifted without the Jones Act being repealed, the refining industry could be one of the hardest-hit. At a Heritage Foundation event on the Jones Act last week, AFPM President Charles Drevna spelled out the problems this out-of-date law poses for refiners. He pointed out that as U.S. crude production has increased, so too have waterborne movements of this oil—which is necessary, as the current pipeline infrastructure cannot handle the production increase. This oil has to be carried from export terminals in the Gulf of Mexico to U.S. refiners on Jones Act vessels—and because there aren’t enough, shipping costs have risen.
Furthermore, Drevna added that the Jones Act makes it cheaper for gasoline importers to buy refined crude from abroad. This is just like the Chilean rock salt case mentioned above, but with one key difference: the crude used in the foreign refining process actually comes from the U.S. The higher costs associated with the Jones Act, Drevna stated, means it is cheaper for crude to travel from the Gulf coast to a European refinery on a non-Jones Act vessel and then for the refined products to travel back over the Atlantic on another non-Jones Act vessel than it is to transport the crude from the Gulf to an East coast refiner on a Jones Act ship. This, it hardly needs pointing out, makes no sense whatsoever.
So, just how big is this price difference? According to Drevna, the transport cost for a Philadelphia-bound ship from the Gulf coast is $5-6 per barrel, compared to just $2-3 per barrel for a non-Jones Act ship bound for a European port. This $3 per barrel difference equates to a 7-cent-per-gallon product price difference—more than enough for foreign refiners to process that crude and sell the gasoline back to the Northeast U.S. for less than the cost our refiners would incur.
But even though the price and competition issues are bad enough, the bigger concern is the potential for the loss of jobs at these Northeast refiners and in the surrounding communities. At the event, Drevna pointed out that rising crude production from the Bakken has been instrumental in keeping the Northeast refiners that remain open competitive. However, as crude supplies rise and the Jones Act fleet remains small, these refiners could lose out—leaving their futures, and the jobs of all of those that work at them, at serious risk.
Thankfully, there are others who see the madness in keeping a law the protects one industry to the detriment of so many others. Speaking at the same event, Senator John McCain (R-AZ) estimated that repealing the regulation could save around $1 billion annually. But despite its obvious benefits, Sen. McCain added that it will not be easy to secure a Jones Act repeal: “The power of this maritime lobby is as powerful as anybody or any organization I have run up against in my political career,” he said.
He added, “All I can do is appeal to the patron saint of lost causes and keep pressing and pressing and sooner or later you have to succeed.”