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Friday, July 3, 2020

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Jones Act Impacts in the Coronavirus Crisis


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Is the 100-year-old law helping or hurting the struggling U.S. economy? Maybe both?

2020 marks the centennial anniversary of the Merchant Marine Act of 1920 a.k.a. the Jones Act, which requires American-built and -flagged vessels to be used in transporting goods such as fuels between U.S. ports. As such, Oil & Energy is revisiting this topic throughout the year. Our coverage of the law continues below, with an examination of how the Jones Act may affect U.S. trade and supplies amid the coronavirus crisis. For more takes on this topic, see “The Jones Act: 100 Years Later” from our January/February 2020 issue.  

One of several weaknesses in the U.S. economy exposed by the COVID-19 pandemic is a shortage of domestically produced essential supplies, such as personal protective equipment and cleaning products, which results in an over-reliance on imports of these goods. That reliance exposes additional weaknesses, such as a lack of national coordination on procurement, which could point to further issues with international shipping and trade agreements.

If ever there’s been a time to reconsider the economic implications of the Jones Act, now would seem to be it.

On the other hand, fuel is one essential good the U.S. is not lacking – far from it, in fact. As stay-at-home restrictions wiped out the demand for gasoline, prices of crude oil futures plummeted to record lows while producers turned over every nook and cranny to find a place to offload surplus barrels. This caused at least one group of oil producers to request a temporary waiver from the Jones Act.

Last month, the American Exploration & Petroleum Council wrote Congress, stating, “we believe a temporary waiver can allow American producers to move domestic products with greater ease within the U.S.”

A waiver was also reported to be “on the table” during April talks between the White House and U.S. oil and gas producers, as they met to discuss possible solutions for the crash in fuel prices.

Some partisans have gone even further, calling for a complete repeal of the Jones Act. The Heritage Foundation, a conservative policy group, stated in an article published on its website, “If legislation was passed to make [a Jones Act] waiver permanent, applying it to all shipments, not just oil, that would be a long overdue shot in the arm to the U.S. economy and relieve some of the financial strain households and businesses now face because of the coronavirus pandemic.”

Research from Rice University’s Baker Institute for Public Policy suggests that the cost of using American vessels is more than three times the going rate for international shippers, and that consumers could save some $760.9 million per year if the Jones Act were repealed. In theory, the savings would result from significantly lower transportation costs and a substantial increase in trade between ports along U.S. coasts.

Many heating oil and propane industry stakeholders have criticized the Jones Act in the past, arguing that it puts further strain on Northeast fuel supplies, which can be stretched thin as is during the fall and winter months. Supply might not seem like much of a worry right now, but some sources have expressed concern about what might happen this coming heating season if temperatures suddenly plunge and refineries are unable to quickly restart operations that had been scaled back due to the COVID-19 crisis and economic crash. Such a scenario would likely give heating fuel industry stakeholders cause to request relief from Jones Act restrictions, as they have done in response to previous supply threats.

For now, the Jones Act continues to enjoy bipartisan support from U.S. House Committee on Transportation and Infrastructure leaders. In a joint statement released April 2, committee leaders Peter DeFazio (D-OR), Sam Graves (R-MO), Sean Patrick Maloney (D-NY), and Bob Gibbs (R-OH) reaffirmed their opposition to “any effort to waive the Jones Act,” even in response to the current pandemic.

Their reasoning: protecting U.S. jobs already under threat from COVID-19.

“More than 9 million American workers were laid off in recent days, due to a public health crisis that will likely continue for some time,” the Congressmen said. “The Jones Act has been and remains critical to supporting U.S. mariners’ jobs and our maritime industry. Waiving the law, even temporarily, would be a mistake and weaken our domestic maritime supply chain just when we need it the most. We should not risk the jobs of those U.S. workers who move 99 percent of U.S. overseas trade and 100 percent of our coastwise trade. As the bipartisan Committee leaders, we oppose any effort to waive the Jones Act.”

Still, the Jones Act remains part of several larger discussions on transportation and infrastructure. And the debate around much-needed infrastructure improvement, which already seemed red-hot at the top of the year, could pick up even more steam as it is tied to talks surrounding the next round of COVID-19 relief and recovery legislation. Whether this will spill over into Jones Act reform bids remains to be seen.

One certainty: the underlying debate about the origins and availability of essential goods — and U.S. products in general — isn’t going away anytime soon.

With this in mind, Oil & Energy reached out to frequent contributor and experienced hedger Richard Larkin for his take on the Jones Act’s latest impacts and future implications. As president of commodity trading advisory firm Hedge Solutions, Larkin is no stranger to the oft-discussed shipping policy and its effects on U.S. fuel supplies and prices.    

O&E: From your perspective, how has the Jones Act affected the movement of U.S. goods — not just fuel, but products in general — during the coronavirus pandemic?
RL: The Jones Act is controversial to say the least. Many believe it is outdated and for the most part has outlived its usefulness. I think the data will support the notion that the Jones Act inflates shipping costs and has a trickle down effect on the other logistics industries like rail and trucking. The cost of building and maintaining a Jones Act ship has been estimated to exceed by up to eight times that of ships built in other countries. This forces freight to migrate to other more costly methods like the railroad and trucking industries. The increased costs are passed on to consumers. Some would argue it also increases pollution through the resulting traffic congestion. I don’t know of any evidence that points directly to a “COVID effect.” The cost of the Jones Act has been widely known for some time and there is still an ongoing healthy debate on both sides of whether to keep, abandon or modify the legislation.

Are the effects of the Jones Act on U.S. oil and gas producers any more apparent as a result of the economic and public health crises?
The Jones Act has always been hotly debated in the oil and gas industry. There have been numerous events and crises over the decades that have prompted temporary waivers in order to alleviate significant negative impact to Americans. For sure, this crisis has revived the debate yet again. To put the issue in perspective, it is almost three times costlier to move a cargo of oil from Houston to the Northeast than it is to import it from West Africa. One glaring example of the competitive inequities showed up in the mainstream media in April when it was reported that the Saudis had pointed an armada of VLCCs (very large crude carriers) to the Gulf and West Coasts just as U.S. producers were being slammed with an over supplied market; depressing oil prices to levels not seen since the 1990s. A Permian Basin producer’s productions costs are already at a competitive disadvantage to the Saudis without adding the weight of higher shipping costs, some would argue.

What are the downstream impacts and implications for heating oil wholesalers and retailers?
There’s always been the threat of a bottleneck for moving heating oil supplies to the Northeast and Mid-Atlantic in the midst of a major cold spell. ULSD and ULSHO supplies come to the Northeast via a string of pipelines from the Gulf Coast (Colonial, Buckeye, etc.), a limited amount of refining capacity between Philadelphia and New York, and from imports. The Jones Act makes it very expensive to move oil from a Gulf Coast refinery to a Northeast terminal. Capacity and allocation limitations limit the movement of product via the pipelines. Putting that oil on a Jones Act ship and sending it off to the Northeast almost always turns out to be significantly more expensive than the alternative, importing the oil from another country. But does it make sense to have Gulf Coast products shipping to Latin America while the Northeast is competing for foreign imports out of West Africa and Europe at a critical time?


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