Retire the Jones Act

by Mark J. Perry, American Enterprise Institute, February 18, 2015

Retiring the Jones Act – the nearly century-old legislative relic of the past that drives up energy prices and conflicts with the U.S. goal of achieving greater energy independence – is long overdue.

President Obama has spoken about the need to increase U.S. oil production, which would provide significant economic benefits, not only for oil-producing states like North Dakota and Texas, but nationally. Americans consume more than 19 million barrels of crude oil and petroleum products a day, about 40 percent it imported, down from 63 percent in 2006.

But we still rely on imported oil from some of the world’s most politically volatile countries. Insurgent attacks on production facilities in Iraq, Syria and Libya, and continuing production problems in Nigeria, Venezuela and Mexico, pose significant risks, especially in a global oil market where new discoveries are hard to find.

The 94-year-old statute distorts the allocation of America’s crude-oil resources, and drives up energy prices for oil refiners and manufacturers in the Northeast who pay higher shipping costs because they can’t use cheaper foreign-built and foreign-manned vessels.

Since there are only a limited number of Jones Act tankers and almost all are under long-term contracts, tanker capacity is stretched tight. There are not enough U.S. tankers available to ship the huge amounts of unconventional tight oil that’s being produced in the Bakken shale in North Dakota and the Eagle Ford shale in South Texas, then piped to Gulf coast ports. Consequently, this dislocation is hampering oil production. Gulf Coast ports currently have more oil in storage than they can transport to East Coast refineries. As a result, the U.S. is paying billions of dollars a year for Venezuelan oil because the Jones Act makes it uneconomic to ship our own domestically-produced crude oil to refineries in Philadelphia and other East Coast cities.

The best solution would be for Congress to repeal the Jones Act. Oil refiners, and many manufacturers and state governments are pushing for such action. Studies show that if the Jones Act were repealed, consumers could benefit from an increase in domestic oil production and lower energy prices, which would boost the nation’s GDP, job creation and capital investment.

Sen. John McCain, Republican of Arizona and chairman of the Senate Armed Services Committee, tried but failed last year to have the Jones Act repealed. However, if President Obama were to waive the act, foreign vessels would be able to ship U.S.-produced oil from Gulf ports to East Coast refineries, which could save consumers about $1 billion annually.

The Jones Act has been waived in the past. In 2005, President George Bush lifted the statute briefly after Gulf Coast ports were battered by Hurricane Katrina. In 2011, Obama granted waivers to speed the release of strategic oil reserves to make up for the loss of Libyan oil. And in the aftermath of Hurricane Sandy, Obama waived it again in order to increase gasoline supplies.

There’s no longer any economic reason to keep the anti-competitive, protectionist Jones Act. The antiquated law has for too long hampered free trade and the free movement of goods at the lowest competitive price. Scrapping it would generate a broad range of benefits for the U.S. economy. Refineries would have access to cheaper domestically-produced crude oil, which would lower the cost of gasoline, diesel and fuel oil. And there would be less need for imported oil. Allowing foreign-owned tankers to compete on a level playing-field with domestic-owned tankers to transport crude oil between U.S. ports would not only benefit consumers and refiners but would also be in our nation’s best interest.

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Perry is a scholar at the American Enterprise Institute and professor of economics at the Flint campus of The University of Michigan.