The next step for Washington to open the spigot for U.S. crude oil to become more competitive is to repeal a 100-year-old federal law that runs “counterintuitive” to the nation becoming a major oil and gas producer, a new report says.
The first step was Congress removing the 40-year-old ban on crude oil exports in the omnibus spending bill, a major achievement for Republicans. But the new report doesn’t want Washington to stop there.
“Step one was repealing the crude oil export ban, step two needs to follow in haste, revising a law that increases costs, encourages ineffciency, dampens innovation, kills competition and penalizes island economies,” said the new report by the nonpartisan Alliance for Innovation and Infrastructure.
Step two means repealing the little-known, but highly significant 1920s-era Jones Act. The federal law prohibits tankers from hauling oil between U.S. ports unless they are American-made, flagged and manned by a crew that is 75 percent U.S. citizens.
But since most new large oil tankers are on back-order coming from Asia, only about six dozen U.S.-made tankers are left for intercontinental shipping. That makes interstate transport of liquid fuel, oil and anything else uncompetitive and “counterintuitive” to the way the economy should operate, the group argued.
The U.S. still makes large vessels, but most of them are for military use. Nevertheless, the group’s push for repeal likely will come up against opposition from the maritime unions and shipmakers, which have been successful in blocking legislation to repeal the Jones Act previously.
The anniversary of the last repeal effort led by Sen. John McCain, R-Ariz., is at the end of the month. McCain failed to attach his Jones Act repeal legislation to a bill early last year to approve the Keystone XL pipeline. There have been rumblings of another effort, but legislation has not been introduced.
The report makes an economic argument in its repeal push. It says keeping the law in place raises prices for consumers, makes it harder to move goods to market and makes the nation less economically competitive.
“U.S. policy should support allowing cargo to move freely from port to port, whether domestic or foreign, to ensure U.S. consumers are not paying a premium on goods and services delivered,” according to the group. “It should also ensure that it does not cost more to ship a product from one U.S. port to another than it costs to export the same good, which would have the perverse effect of discouraging domestic commerce.”
The law was established nearly 100 years ago when the nation was much more protectionistic, looking to guard against foreign dependence, the group says.
Executive Director Shane Skelton says the rationale for such “protectionist policies” become weaker when faced with “an increasingly competitive global economy.”
“Any policy that increases the price of moving goods, and at times favors exports at the expense of intrastate trade, should be carefully scrutinized,” Skelton said after releasing the report.
The report says the law is hardest on U.S. islands, such as Puerto Rico and Hawaii, that depend on the ships for energy. The effect is obvious: Hawaii is a top contender for highest fuel costs when compared to states on the mainland. It is also one of the nation’s most import-dependent economies.
The law drives up transportation costs for shipping oil and fuel with less room for competition, making the cost of living in Hawaii higher, according to the group.
“Unlike the lower 48 states, that can transport products to, from and through one another by rail, pipeline or truck, islands, including Hawaii and Puerto Rico, rely solely on cargo ships to bring food, energy products and virtually every other good into their economy,” the report said.
Further, the law forces foreign-flagged vessels to bypass those islands en route to the mainland U.S. ports so they can remain in compliance with the law, the report says.
Once at a mainland port, the products are offloaded and then “reloaded onto expensive vessels to be transported to the island at substantially higher cost to consumers.”
A 2013 study by the watchdog Government Accountability Office showed that allowing foreign-built ships to compete in the U.S. intrastate shipping market could be beneficial to Puerto Rico if the Jones Act were relaxed.
“According to proponents of this change, the availability of lower-cost, foreign-built vessels could encourage existing carriers to recapitalize their aging fleets (although one existing carrier has recently ordered two new U.S.-built vessels for this trade), and could encourage new carriers to enter the market,” the GAO study said. “However, as with a full exemption, this partial exemption could also reduce or eliminate existing and future shipbuilding orders for vessels to be used in the Puerto Rico trade, having a negative impact on the shipyard industrial base the act was meant to support.”
The Shipbuilders Council of America, representing shipbuilders, did not like GAO’s finding when it came to hauling liquified natural gas (LNG). “GAO’s review of the LNG and other bulk shipping markets is anecdotal, incomplete, misleading and one-sided,” a statement read.
The study found that Puerto Rico was looking to transition its power plants to natural gas due to the low cost of the fuel in the United States as a result of fracking. But to do that it would be forced to build its own fleet of LNG tankers, which would offset the cost savings of the cheaper mainland U.S. natural gas. Puerto Rico gets most of its LNG from the Carribean energy giant Trinidad and Tobago, forcing it to pay more for the the fuel but not having to comply with the Jones Act.
The maritime group admonished the study, saying “there are already fully compliant American vessels available to transport LNG to Puerto Rico and, of course, others can be built in plenty of time.”
