On June 5, 1920, during President Woodrow Wilson's administration, Congress passed the Merchant Marine Act, which is also known as the Jones Act, ushering in a form of protectionism for the United States shipping industry and seafaring unions that would eventually drive up energy prices and conflict with the goal of achieving energy independence.
Now, 97 years later, the need for the Jones Act is sensibly being questioned and challenged as never before.
Why this debate about an obsolete and outdated statute – one that protects the domestic shipping industry from foreign competition? Specifically, the Jones Act requires that vessels carrying goods shipped in U.S. waters between U.S. ports must be built, registered, owned, and crewed by U.S. citizens and fly the U.S. flag.
Since it costs more to build and operate U.S. ships than it does in other countries, the statute has imposed significantly higher shipping costs on the U.S. economy as compared with more competitive international rates. For example, it costs about three times more to ship oil from the Gulf Coast to New England states than to ship the same amount of oil to Europe.
There are the traditional concerns arising from the Jones Act: higher shipping costs, bottlenecks of oil stored at U.S. ports waiting for tankers, higher oil and gas prices, increased reliance on imported oil, and the potential for slower response to hurricanes and oil spills. The century-old statute is raising anxieties that it's become a regulatory hurdle making it more difficult to use our country's rising oil and natural gas production from the shale revolution to reshape the balance of global and economic power.
Some maintain that the protectionist measure has stifled innovation in U.S. shipping, resulting in its long-term decline in the quantity, quality, and competitiveness of our domestic shipping fleet. The U.S.-flag fleet has shrunk from 16 percent of the global fleet in 1960 to less than 1 percent today.
But two new factors are now fueling the debate.
One is a shortage of Jones Act-eligible tankers available to ship oil from Gulf Coast ports to coastal refineries in Philadelphia and other cities. In 2000, there were 193 Jones Act tankers, but by 2014 only 90 remained. Since there are only a limited number of Jones Act tankers and almost all are under long-term contracts, tanker capacity is stretched tight. This has led to a backup of oil in Gulf Coast ports, which is hampering oil production all along the supply chain but especially production of unconventional tight oil in North Dakota's Bakken region and in the Eagle Ford shale area of South Texas.
According to Thomas Grennes, a professor emeritus of economics at North Carolina State University, there are currently no Jones Act tankers capable of carrying liquefied natural gas. This makes it prohibitively expensive to transport LNG to all domestic ports but especially ports in the noncontiguous regions of Hawaii, Alaska and Puerto Rico. To transport LNG from a West Coast port to Hawaii would require building a much more expensive ship. The upshot is that Hawaii and Puerto Rico have been unable to benefit from abundant and cheap natural gas from the U.S.
There's no longer any economic reason to keep the anti-competitive and outdated Jones Act. Congress should repeal it.
Scrapping the century-old legislative relic of the past would generate a broad range of benefits for the U.S. economy and consumers. If foreign vessels were able to ship U.S.-produced oil from Gulf Coast ports to East Coast refineries, it would save U.S. consumers about $1 billion annually.
Repealing the Jones Act would scale back excessive and unnecessary regulation, give Americans access to cheaper foreign-flag tankers, and allow greater energy production – all without any cost to the U.S. Treasury.
Mark J. Perry (@Mark_J_Perry) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan's Flint campus.
If you would like to write an op-ed for the Washington Examiner, please read our guidelines on submissions here.