Under tremendous criticism, President Trump waived the Jones Act to aid in the response to the disaster in Puerto Rico, just days after refusing to do so.
The Jones Act is a nearly century-old law that requires goods shipped between two American ports to use U.S. ships. The law has long been relevant to the oil and gas industry, raising the cost of moving fuel between American ports, but the series of hurricanes over the past month have demonstrated the widespread costs of the protectionist measure, particularly as it relates to disaster response.
Earlier this week, Trump resisted calls to waive the Jones Act, despite having done so for Florida and Texas just weeks ago during the two hurricanes that hit those states.
For much of the U.S., the Jones Act is an annoyance, but not something that has a massive impact on the economy. If New York wants something from Texas, it can be shipped by truck. Puerto Rico doesn’t have that luxury. Anything imported must go by ship, and that means mostly U.S. ships. If a foreign carrier is coming from a previous stop at an American port, it cannot dock in Puerto Rico. That means foreign ships bypass Puerto Rico to head to the U.S. mainland, where goods are unloaded and reloaded onto American ships and then sent to Puerto Rico. Related: The Driving Forces Behind Today’s Oil Markets
The end result is that Puerto Rico must pay a lot more for goods, including oil and gas, than the rest of the country, despite its people having a much lower per capita income.
Of course, if Puerto Rico was an independent country, it would not have this issue. But as an American territory, it’s being strangled by the Jones Act, forced to pay much more than everyone else for basic goods. Similarly, anything Puerto Rico makes and exports to the U.S. mainland is at a huge competitive disadvantage, having these extra shipping costs attached.
That is a terrible hindrance during normal times, but it has made a horrific natural disaster a much more acute crisis. The Puerto Rican electrical grid was wiped out from Hurricane Maria, leaving the entire island without electricity. Puerto Rico needs to rebuild the grid, but it will also need imported oil in order to fuel the island’s electricity. The Jones Act adds a 30 percent markup to the prevailing market price of this oil for Puerto Rico.
This law has long been a target of conservative groups arguing it hinders free trade, as well as the oil and gas industry, because it increases energy costs for American consumers.
Some studies estimate that the Jones Act adds 15 cents to a gallon of gasoline across the United States. A 2014 report from the Congressional Research Service estimates that moving a barrel of oil from the U.S. Gulf Coast to the U.S. Northeast costs $5 to $6 per barrel on a Jones Act tanker. But moving that same barrel to Eastern Canada on a foreign-flagged ship only costs about $2 per barrel. Despite these costs, the shipping lobby remains very strong, so Congress won’t touch the law.
Still, it’s common for the government to waive Jones Act requirements during disasters. The Jones Act was waived during Katrina in 2005 by President Bush and for New York in 2012 after superstorm Sandy by President Obama. And, again, President Trump waived the act just weeks ago for Florida and Texas.
The bizarre delay by the U.S. government in waiving the Jones Act for Puerto Rico led to widespread criticism. "I am very concerned by the Department's decision not to waive the Jones Act for current relief efforts in Puerto Rico, which is facing a worsening humanitarian crisis following Hurricane Maria," Senator John McCain (R-AZ), longtime opponent of the Jones Act, wrote in a letter to the Department of Homeland Security. “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies and infrastructure due to Jones Act requirements as they work to recover from this disaster.”
Although there are 3.5 million people in Puerto Rico suffering from the lack of food, water, medicine and electricity, President Trump was apparently worried about the interests of the shipping industry. “We’re thinking about that,” Mr. Trump told reporters when asked if he would waive the Jones Act, “but we have a lot of shippers and a lot of people... who work in the shipping industry that don’t want the Jones Act lifted. And we have a lot of ships out there right now.”
The U.S. government insists that there are plenty of ships en route to Puerto Rico, and that there’s no evidence that the Jones Act is slowing the recovery.
Ultimately, the public pressure became too much and the President decided on Thursday to waive the Jones Act.
But the problem is that the President only issued a ten-day waiver. If the waiver is not extended for a much longer period of time, it will do very little to aid Puerto Rico.
The costs of the Jones Act will persist long after the recent natural disasters because Congress probably won’t touch the law. That means all U.S. citizens will continue to pay inflated energy prices, while Puerto Rico, after its waiver expires, will pay higher costs for just about all goods coming into the island.
By Nick Cunningham of Oilprice.com
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