Regulation & Environment: the ever-enduring Jones Act isn’t going away

It’s been around a long time, it gets a lot of derision, but the Jones Act isn’t going away. In this week’s Oilgram News column Regulation & Environment, Melanie Wold discusses its impact.

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The US maritime industry loves it, refiners tolerate it and traders scorn it. The nearly 100-year-old Merchant Marine Act of 1920, or the Jones Act, is regarded both as an American job saver and as a protectionist burden on taxpayers that raises the price of gasoline.

The Jones Act requires that all goods transported by water between US ports be carried in US-flag ships, built in the US, owned by US citizens and crewed by US citizens (and permanent residents). It was designed as both a national security measure and as a way to support US shipyards, tug and barge owners, as well as other US maritime interests.

Almost a year ago, when Hurricane Sandy battered oil market infrastructure on the US Atlantic Coast — taking pipelines, ports and refineries offline that caused widespread fuel shortages — the Department of Homeland Security was forced to issue a blanket waiver of the Jones Act to all shipping for 12 days. It was the first time it had been waived since Hurricane Katrina struck in 2005.

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From November 2-13, 2012, traders were free to ply their much-needed wares up and down the East Coast using foreign-flag vessels—and they had a field day. Platts reported that 12 foreign-flagged tankers carried 3 million barrels of gasoline, diesel, ethanol and other fuels from the US Gulf Coast to the storm-battered Northeast under the temporarily lifted shipping law.

One year later, with another active storm season upon us, Jones Act ships remain scarce and pipeline capacity to the US Atlantic Coast is limited. Both of these constraints appear to be galvanizing the oil industry to find alternative methods of transporting oil, as an abundance of crude springs from the depths of the country and fumbles its way to refineries and terminals in the Gulf, West and Atlantic Coasts.

Although East Coast refiners have embraced crude by rail, deliveries are throttled by the capacity of railcars and competition on the tracks. To keep their runs high, they still need deliveries from larger tankers. And, thanks to competitive US crude prices, many of these are coming from the US Gulf Coast.

But a Jones Act tanker carrying Eagle Ford crude oil from Corpus Christi, Texas, to Philadelphia, Pennsylvania, costs more than a foreign-flagged vessel carrying the same oil to ports in eastern Canada, such as Quebec or St. John, New Brunswick.

One shipbroker said: “It is easily double the cost to send cargoes on USGC-USAC than it is for USGC-East Coast Canada.”

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This is partly because spot Jones Act tankers are hard to come by. Refiners have increasingly snagged barges and tankers on time charter to secure their supplies. Barge operator Vane Brothers, in its client newsletter The Pipeline, said that a year ago its entire fleet of 50,000 barrel barges was employed in the spot market. This year they are all “locked into long-term time charters” moving domestic crude oil, it said.

A shipbroker confirmed this: “Most of the Jones Act vessels are on a long-term time charter to major oil companies.”

Analysts and brokers said that the rates for moving oil on 35,000-55,000 mt tankers from the Gulf to USAC are typically $6/b or more for spot, and probably $5/b for a time charter. Whereas, a refiner told Platts, USGC to Canada on a foreign flagged vessel is more like $2/b.

Adding insult to injury, the US Department of Commerce insists that any refiners in Canada importing US crude must export a certain amount of refined products back to the US. In other words, Canadian refiners are selling refined products made from US crude oil to US buyers at a cheaper price than USAC refiners can.

One would think that alone could be discouraging USAC refiners from using tankers to move US crude oil. But one refiner, at least, said no. He told Platts that the refinery will use pretty much any method possible, including Jones Act vessels, pipelines, rail, and truck to get crude oil from shale plays throughout the country. Cost and availability are the major factors in choosing the transport, he said.

So it seems that cost alone will not sink the Jones Act, which has massive support from the US shipping industry.

Kent Furlong, president of Hines Furlong Line, an operator based in Bowling Green, Kentucky, said that the Jones Act means his company’s vessels are safe and its crews are experienced and professional.

“Safety is the top goal of all barge operators that I know and/or am affiliated with,” said Furlong.

And the US government is unlikely to let it go away either. According to the American Shipping company, Jones Act industry accounts for $14 billion in annual economic output, 84,000 jobs in US shipyards, and 70,000 jobs working on or with Jones Act vessels. Few politicians would ignore those numbers.  

–Melanie Wold in New York


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Comments

  1. Barry Parker, bdp1 Consulting Ltd at September 10, 2013 1:12 pm

    Simon and I agree sometimes; other times we disagree, and this is one of those times.

    The Jones Act is extremely entrenched politically, and opponents/ commentators need to understand that. Congressional Budget Office report earlier this year re harm done to Puerto Rico from Jones Act was totally inconclusive- a definite maybe indicating that Jones Act is the realm of more opinions than hard facts.

    Note that high prices of oil in US Northeast are due to prices on world oil markets, not due to the Jones Act freight (which is averaged in against much cheaper foreign ocean freights, pipeline tariffs, etc). If the guys in Egypt and Syria would calm down (maybe that’s happening) prices of prods in Northeast US would come down- even if the Jones Act market remains tight. Oilcos get the ships on period T/Cs to lock in reliable supply. Tight Jones Act market is a symptom of new oil sources in the US (Bakken, Eagle Ford, and probably others yet to come) not a causal factor.

     
  2. Simon at September 9, 2013 1:06 pm

    Brilliant Article by Melanie Wold.
    about the JA

    also see could I refer: Jones Act: Freight and Energy Markets.
    POSTED ON APRIL 21, 2013 BY THE TRADE, SHIPPING AND FINANCE WIZARD

    http://jacquessimon506.wordpress.com/2013/04/21/jones-act-the-impacts-on-freight-and-energy-markets/

     

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