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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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The Outdated Law Threatening U.S. ‘Energy Independence’

After months of high drama and unceasing tedium, the OPEC+ group of countries, led by Saudi Arabia and Russia, finally granted President Trump his wish and agreed to pull some by 9.7 million barrels/day from the market in response to the epic collapse in demand. Trump’s second act is here already: Exhorting America’s allies to buy ‘America First’ as U.S. storage bursts at the seams.

Yet, Trump might do well to first look at an antiquated law that places limits on shipping oil and gas to customers in the U.S.: The Merchant Marine Act of 1920.

The century-old law, colloquially known as the Jones Act or simply J.A., regulates maritime commerce in the United States in a way that could curtail the nation’s efforts at energy independence.

Jones Act: The Drawbacks

JA demands that vessels undertaking shipments between two U.S. ports be U.S.-built, U.S.- owned and U.S.-manned. Even foreign steel used in repair work on a J.A. vessel should not exceed 10% of the vessel’s original weight. However, that same requirement does not apply to shipments going from a U.S. port to a foreign port or vice versa, meaning any ship can make that trip. 

Originally meant to protect U.S. fleets after suffering heavy losses in World War I, JA is now coming under scrutiny because it limits shipping oil and gas to customers in U.S. ports, encouraging American producers to send their low-cost oil and gas to consumers abroad. 

In many cases, it’s much cheaper to ship U.S. products to foreign buyers in foreign ports considering that J.A. ships cost up to five times as much as their foreign-built counterparts. Further, a 2010 study by the U.S. Maritime Administration (MARAD) revealed that the average operating cost of a US-flag ship was 2.7x greater than that of a foreign-flagged vessel. This can lead to significantly higher prices for goods transported domestically, making them less competitive against imported products.

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J.A. has been detrimental for the U.S. energy industry because it limits inter-state trade in oil products and LNG with the high costs for US-built vessels forcing producers to turn to less efficient forms of transportation oil products. 

The average cost of oil transport by huge oil tankers amounts to only US$5 to $8 per cubic meter ($0.02 to $0.03 per U.S. gallon), the second cheapest after pipeline transport. 

Noncontiguous states and territories, like Puerto Rico, Alaska, or Hawaii, are even more disadvantaged since no pipeline, rail, or truck transport of U.S. energy products can reach them, forcing them to rely on imports.

This problem hits Puerto Rico, in particular, quite hard, with economists estimating that the Jones Act cost Puerto Rico’s economy $29 billion between 1970-2012. 

Reforming JA could potentially save consumers in Puerto Rico, Alaska, and Hawaii as much as $15 billion per year, and possibly prevent Puerto Rico from going bankrupt again.

Shale Producers Disadvantaged

Refineries searching for light oil make up the principal demand for fracked oil. Unfortunately, the refineries at the epicenter of the shale boom are located in the Midwest and the Gulf Coast, where many have upgraded to handle heavy oil from Canada, Venezuela, and Mexico. This leaves refineries on the U.S. east coast as the most obvious destination for light fracked oil. 

Unfortunately, it costs ~3x to ship oil from Texas to refineries on the U.S. East Coast compared to shipping it further to refineries in Canada, thanks to the Jones Act. There are simply not enough JA-compliant ships to transport oil from Texas to the U.S. East Coast, meaning it must be shipped abroad. Similarly, it costs more than 3x for northeastern U.S. refineries to ship oil from Texas compared to shipping from West Africa or Saudi Arabia. 

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As a result, the northeastern U.S. is forced to rely heavily on foreign crude.

U.S. LNG markets face a similar problem. Massachusetts import facilities take in gas from Trinidad & Tobago while new LNG facilities along the Gulf Coast are exporting cargoes across the Pacific Ocean to Japan because there are no U.S. flagged LNG tankers that can carry LNG between U.S. ports.

Repealing Jones Act

Modern-day JA proponents argue that it helps to promote economic growth, national security, and domestic employment by allowing the U.S. to better monitor labor, environmental, and safety standards. But given the heavy burden that J.A. imposes on domestic energy producers and consumers, it is not surprising that it’s now meeting with heavy opposition. 

Will they succeed? Unfortunately, history does not seem to be on the anti-JA’s side.

J.A.’s basic structure has remained unchanged for decades, with the last major challenge to the law coming two decades ago when free-market advocates sought to weaken or repeal the act. 

Unfortunately, they were soundly defeated by a maritime industry coalition consisting of US-flag domestic carriers as well as shipyards and their suppliers. They did score a minor victory though in 2017 after forcing the U.S. Customs and Border Protection (CBP) to withdraw a proposal that would have tightened US-flag shipping requirements by redefining components such as pipes and valves used in domestic offshore oil and gas construction as “merchandise” subject to J.A. 

But given Trump’s ‘America First’ ethos, the pursuit of energy independence, and the fact that the U.S. shipping industry is currently not reaping many benefits from the high demand for crude oil and storage from an oversupplied market, J.A. opposers just might have a fair shot this time around.

By Alex Kimani for Oilprice.com

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Leave a comment
  • Henry Hewitt on April 14 2020 said:
    Thanks Alex,

    Just got a text from Inigo Montoya: "Energy Independence? I don't think that means what you think it means".

    Let's see, we produce 12 million barrels a day and we burn 19 barrels a day. That pretty far from frickin' independent, wouldn't you say? I think people should stop using that phrase.

    The good news is, we will be, in about 10 or 20 years but it won't be because of oil and other sources of capital we are draining that cannot be replaced. It will be due to infinite supplies of inexhaustible sources. Then we will be living off our income; what's not to like?

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