THE JONES ACT – BACKWARD THINKING

by Charles Drevna, President, American Fuel and Petrochemical Manufacturers, October 15, 2014

It's 1920. Warren G. Harding was nominated by the Republican Party for President. We were five years removed from the sinking of the Lusitania, two years removed from WWI and the reign of Kaiser Wilhelm II, and Edith Bolling Galt was effectively running the United States in the place of an ailing President Woodrow Wilson. The country was then about as removed from Teddy Roosevelt’s Great White Fleet and Henry Ford’s Model T as it is currently removed from the terrorist attacks of Sept. 11, 2001. 

At the time, influenced by an 1887 novel written by Capt. Alfred Thayer Mahan, naval supremacy was viewed as the key to the modern world. In response and to facilitate domestic shipbuilding, the Jones Act was signed into law in 1920 and remains the law of the land today. I bring up this history, because—as with everything—historical context is important. Recently, a national debate has begun over whether the 1970’s-era crude oil export ban should be lifted. The fact that we can have this conversation is an incredible achievement for the men and women of the U.S. oil and gas industry. But it also calls into question what the impacts of lifting the ban will be if we do not step back and take a holistic view of fuel markets. This is the context under which I’ve been talking about the Jones Act.

At its core, the Jones Act requires that cargo shipped between two U.S. ports must be transported on a ship built in the United States, owned by U.S. citizens, and crewed by at least 75 percent U.S. citizens. The purported benefits are for national security and economic development within the maritime industry. Laudable goals, but one must also ask—is it effective, and at what cost?

The Jones Act is driving up shipping costs for all manner of goods, including crude oil and gasoline. In fact, it is now cheaper to ship crude oil from the Gulf Coast to Canada (which can receive U.S. crude oil today), refine it into gasoline, and ship it back to the East Coast rather than simply ship the crude from the Gulf Coast to our East Coast refiners. In the last year, the cost of shipping crude on Jones Act tankers has increased even more as demand out-paces supply. This makes little economic sense and only serves to weaken U.S. manufacturing.

Nor does the national security argument make sense any longer. The U.S. allows allies and international companies to build and operate military equipment and civilian aircraft. The shipbuilding industry should not be treated differently.  

I have recently raised these questions, and recently Tom Allegretti, a “voice of the domestic maritime industry” decided to attack me for my position on this anachronistic law. He accused me of trying to “replace all American workers with foreign workers” and suggested we should do the same to U.S. refineries. 

To be clear, I’ve never suggested that we replace U.S. workers with foreign workers. Americans can compete with anyone in a free market, rather than hiding under the guise of a protectionist statute that actually inhibits greater growth of American manufacturing.

A 2013 report from the World Economic Forum (along with Bain & Co and the World Bank) described the Jones Act as “the most restrictive of global cabotage laws and an anomaly in an otherwise open market like the United States.” In 2001, an OECD study found that “cabotage is recognized as being important to many countries. However the effectiveness of cabotage in preserving employment and national fleets has been questioned, and cabotage regulations have been relaxed within the European Union without obvious downside costs.”

I know Mr. Allegretti is looking out for the interests of his members, and fears global competition against nations with less stringent federal regulation. It’s a frustration the refining industry shares. In the spirit of bringing down artificial barriers for all, AFPM stands willing to work with him to address anti-competitive policies affecting his membership if he’ll work with us on Jones Act reforms. But, as a nation, we should stop compounding our economic challenges by layering one bad policy on top of another. 

With the right policies, the U.S. has an opportunity to become the world’s top energy producer and to continue the return of manufacturing jobs. If we’re taking a hard look at the energy policy of the 1970s, surely we can also take a hard look at the shipping policy of the 1920s.

---30---

Charles Drevna is the President of AFPM.  To learn more about AFPM, visit AFPM.org.