Repeal Jones Act Before Exporting Oil

by Bernard L. Weinstein, Heartland Foundation, April 29, 2014

For the past 40 years, in response to the OPEC embargo of 1973, crude petroleum exports from the U.S. have been severely restricted. Back then, we referred to oil as “liquid gold” and felt we needed to hoard our limited supplies. But because of the “shale revolution,” U.S. oil output is at its highest level in more than 25 years. In 2013 alone, production jumped by more than 1 million barrels a day, and output is projected to jump another 1 million in 2014.

This newfound abundance has come primarily from the application of horizontal drilling and hydraulic fracturing in the many shale plays currently under development, most notably the Eagle Ford in South Texas and the Bakken in North Dakota. In response, recent months have witnessed a virtual explosion of debate and commentary about the United States getting into the business of exporting crude oil.

Some politicians and pundits claim that exporting oil will divert us from the path toward “energy independence.” Others argue that exporting oil will weaken our energy security since we’re still a net importer. Still others claim that keeping domestic oil at home will help lower gasoline and diesel prices. These arguments are baseless.

What’s more, it’s hard to envision a political scenario that would result in our inability to import oil. Over the past year, we’ve seen political unrest in Iraq, Libya, Bahrain, Syria and other petroleum exporting countries, but there has been little change in oil prices.

But removing the ban on oil exports will be a pyrrhic victory for consumers unless the Jones Act is repealed as well. A section of The Merchant Marine Act of 1920, the Jones Act requires that any ship carrying goods or commodities in U.S. waters between U.S. ports be built, registered, owned and crewed by American citizens or permanent residents. Though originally intended to improve the nation’s maritime security, today the Jones Act is simply a form of protectionism for America’s shipping industry and seafaring unions.

More important, the Jones Act distorts the allocation of America’s crude oil resources, increases our dependence on imports, and drives up energy prices for businesses and households in the Northeast. For example, today we have a glut of “light sweet crude” being produced in the Eagle Ford play of South Texas because Gulf Coast refineries are geared principally to processing heavy grades of crude oil. Unfortunately, because there are no crude oil pipelines connecting the Gulf Coast to the Northeast, where most refineries are designed to process sweet crude, those facilities must rely on imported oil that is typically more expensive. East Coast refineries are also receiving light crude from the Bakken by rail tank car, a costly and risky way to move oil over long distances.

In theory, crude oil could be shipped by Jones Act tankers from the Gulf to the Northeast. But the cost would be prohibitive, about $4 per barrel. By contrast, shipping oil by foreign-flagged carriers would cost only about $1.20 per barrel.

Repealing the Jones Act would generate a broad range of economic benefits, not only for residents of the Northeast but for all Americans. Refineries on the East Coast would have access to cheaper domestically-produced crude oil, which would lower the cost of gasoline, diesel and fuel oil for households and businesses. The resulting drop in imported oil would enhance U.S.’ energy security while at the same time improving our balance-of-payments.

Boosting the demand for domestic oil will also help sustain the energy boom that has created hundreds of thousands of jobs in recent years against the backdrop of a less-than-robust economic recovery from the Great Recession. Should repeal of the Jones Act be accompanied by, or followed by, the removal of restrictions on U.S. crude oil exports, the positive economic impacts would be magnified.

The U.S. has become a global energy powerhouse. Let’s start acting like one by removing anti-competitive and anti-growth relics like the Jones Act and the ban on crude oil exports.

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[First published at the San Antonio Express-News.]

Bernard L. Weinstein is Associate Director of the Maguire Energy Institute and an Adjunct Professor of Business Economics in the Cox School of Business at Southern Methodist University in Dallas. ... (read full bio)