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How the Jones Act Affects Gas Prices

There are two types of people in this world. The first is that those who have never heard of the Jones Act, the law requiring American-built and crewed vessels for maritime commerce within the US, I imagine these people sleep peacefully every night and live in balanced harmony.

The other type is not so lucky. He has a passionate, unwavering opinion about the Jones Act. They either believe it is the root of all evil in the US or something that should be selflessly protected. Eliminating the Jones Act, according to him, would cause the collapse of Western civilization or solve all earthly ills.

If you’re outside the shipping world, you’d find it hard to believe that Jones Act lovers or haters comprise a meaningful segment of the US, and yet they do. Politicians have tried for decades to repeal the protective law, including the late Sen. John McCain met only a group of lobbyists he called the most powerful he had ever encountered.

Every few years, the Jones Act emerges from its pigeonhole and enters the broader media conversation. Now there is another moment as gasoline and diesel prices rise.

Part of the cost of oil includes its transportation. Fuel moves around the US by rail, pipelines, and ships such as tankers and barges. Ships operating from American port to American port must comply with the Jones Act, meaning they are built in the US and owned, operated and crewed by Americans.

These ships are expensive. According to a 2011 Department of Transportation study, the average US-flagged ship costs about $20,000 to operate, compared to $7,400 for a foreign-flagged ship. According to a 2017 Congressional Research Service report, these ships are more expensive to build — six to eight times more expensive than a foreign ship.

A 2011 Department of Transportation report showed that US-flag vessels required to ship within the United States are more expensive to operate than foreign-flag vessels. I prefer a more recent study, but this is the best available. (US Maritime Administration)

Despite these costs, waiving the Jones Act doesn’t really do much to address gas costs in the short term. However, abandoning it in combination with limiting exports will help reduce costs. Here’s the reason.

A neat summary of the Jones Act and its controversy

The Jones Act is a section of the Merchant Marine Act of 1920. In the early 20th century, Americans found the British and German ships they depended on for international commerce abandoned to fight. Congress decided to help the merchant marine with huge subsidies to the United States. These payments dried up in the 1980s when former President Ronald Reagan stopped the flow of taxpayer money to the shipping industry.

During the early and mid-1900s, the US enjoyed a vigorous domestic shipping industry, with 16% of the world’s cargo fleet carrying the US flag by the 1960s. Today only 0.2% of all ships are US-flagged. Many ships now fly under the flags of Panama, Liberia and the Marshall Islands — countries that allow ocean carriers to bypass safety regulations, labor laws and taxes.

The Jones Act is one of the few laws that still supports the U.S. Merchant Marine, said Saul Mercogliano, an associate professor at Campbell University. (Fair warning: He recently wrote an article titled “100 Years of the Jones Act – Here’s to Another 100 Years!”.)

Mercogliano and other Jones Act supporters say it is critical for America to maintain its own fleet of ships in the worst-case scenario of international war.

“It becomes a bargain between the government and the shipping companies: We’ll give you a subsidy, and in exchange we can use your ships in times of war,” said Joshua Hendrickson, an assistant professor of economics at the University of Mississippi.

Ocean carriers generally struggle to turn a profit (save for these past two years), and lawmakers often want to ensure national security by maintaining a fleet of ships that serve them in times of war. Such subsidies are common in most parts of the world. About 80% of international coastlines have domestic shipping restrictions such as the Jones Act, also known as cabotage laws.

A small and attractive Jones Act ship. (Jim Allen/Fright Waves)

But the Jones Act has many downsides. Its strict requirements, paired with a lack of federal funding, eventually undermined its own mission to maintain a strong US shipping industry that would serve the country during wartime. Fewer than 100 Jones Act ships are in operation today. Equivalent laws in Europe, for example, allow ocean carriers to be built overseas even if the ships are owned by European companies.

Another major criticism is that the cost of intra-US shipping has increased due to the Jones Act. This is especially challenging for residents in Alaska, Hawaii and Puerto Rico, where imported goods are more expensive due to Jones Act costs. For example, it costs twice as much to ship to Puerto Rico as it does to the neighboring Dominican Republic. A 2010 study by the University of Puerto Rico found that the island lost $537 million a year from Jones Act restrictions.

Jones Act naysayers are an eclectic group, including activists, free-market economists, oil companies, and some politicians on the right and left. Its supporters largely include the deep-pocketed American maritime industry and unions. (And, possibly, tens of thousands of US merchant mariners.)

Every now and then, these opposing factions get the Jones Act in the headlines, and we’re currently lucky enough to survive another one of those times.

Waiver of the Jones Act will not That is Fuel cost more…

Estimates vary on how much nixing the Jones Act will actually reduce fuel costs. A June 22 JPMorgan report said it would shave 10 cents off the price at the pump, while the American Maritime Partnership, a lobbying group, said waiving the law would have less than 1 percent on the price.

“Because U.S. vessels are more expensive to charter, it is cheaper for a refiner in Baton Rouge, Louisiana to send a cargo of gasoline to Brazil. [rather] than sending that commodity to Philadelphia,” said a June 22 report from JP Morgan’s global commodities research team.

Even if we accept JP Morgan’s bullish 10-cent estimate, the monthly savings for Americans is not substantial. Using the average cost of gas on the East Coast, an area most exposed to Jones Act fleets, a 10-cent reduction in gas prices would save the typical US driver $4 a month. (That’s a calculated car averaging 28 miles per gallon and a person driving 1,200 miles per month – all averages in the US)

… But there is another interesting solution

Another lever that makes more sense is increasing the supply of gasoline and diesel. If we skip the Jones Act And Limit fuel exports that ensure Americans have access to US oil. Even as US oil reserves hit historic lows, especially in the Northeast, the Gulf Coast is exporting more fuel than ever to regions like Europe and Latin America. The Northeast, which has limited refining capacity, imports fuel internationally – but the Gulf Coast provides the lion’s share of domestic energy.

The Biden administration has previously considered limiting US oil exports. But according to Rory Johnston, managing director of Toronto-based research firm Price Street, the move will likely increase the global cost of fuel.

Because we don’t have enough Jones Act tankers to move gasoline to places like the Northeast. (The Colonial Pipeline moves most of the Northeast’s fuel from the Gulf Coast, but it generally “operates at or near capacity,” according to the US Energy Information Administration.)

However, omitting the Jones Act And limiting exports would entice tankers from around the world to move fuel within the U.S. that would increase supplies and make fuel cheaper.

The Colonial Pipeline provides much of the Northeast’s domestic fuel. (US Energy Information Administration)

According to Colin Grabow, a Cato Institute research associate and Jones Act detractor, there are some other, longer-term effects of the Jones Act on gasoline prices. Here are two he mentions:

  • Our fuel price crisis has exposed America’s famously declining refinery capacity. Cleaning is often considered a low-margin, unattractive business. One reason is that it costs too much to import oil. East Coast refineries mainly bring in oil from Africa or the Middle East. If they can refine US oil instead, that could make the economics of refineries more attractive and encourage investors to consider the space.
  • More affordable maritime transport shifts freight from rail and trucks to ships. Lower demand for diesel could positively affect overall gas prices. (On that note, I wonder if truckers and rail people will become the Jones Act’s new allies.)

I hope you enjoyed this week’s mods. Please subscribe to the newsletters every Thursday. If I missed something, email me [email protected].

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