Repeal the Jones Act

[Updated January 26 to correct a typo and add information about “United Kingdom – Continent.”]

Puerto Rico residents should agree. Having recovered from the double whammy of hurricanes Maria and Irma in 2017, the island was hit by Fiona, a category 1 storm a few months ago. Despite its low rating, the storm dumped 31 inches of rain in some areas. Power was out for 928,000 residents. A whopping 760,000 households had either no water service or experienced severe interruptions.

Puerto Rico’s electricity situation is made much worse by the Jones Act. The island has many diesel power generators. But they need fuel to run. A tanker full of the stuff was moored off the coast. But it wasn’t allowed to dock. The reason? It was a foreign-owned ship operating under a foreign flag. The tanker had picked up the fuel on the U.S. mainland intending to deliver it to the island. The Jones Act said it couldn’t. Amazingly, it took Biden administration bureaucrats a full week to issue a narrow waiver. This rule applies only to that one ship.

What Is the Jones Act?

In a nutshell, the Jones Act says if you want to move freight by ship between two U.S. ports you have to use a U.S.-flagged ship. There are not very many of those. Writing at Cato.org Colin Grabow gives us some history:

Passed in 1920, the Jones Act restricts domestic shipping to vessels that are U.S.-flagged, built, owned, and crewed. But such ships are significantly more costly to build and operate than their international counterparts. They’re few in number too. Of the thousands of tanker ships that ply the high seas the U.S. Maritime Administration lists just 56 that comply with the law, only a subset of which can move fuel to New England (eleven of the 56 are large tankers designed for the transportation of Alaskan crude oil, one is dedicated to transporting molten sulfur, one was recently chartered by the U.S. military making it unavailable for commercial use, and another has been scrapped). The added expense and difficulty of utilizing such vessels has such distorting effects that it can make more sense to ship U.S. fuels abroad than to other parts of the United States.

So we need to repeal the Jones Act to save Puerto Rico. Along the way, U.S. consumers, businesses, and governments will benefit from lower prices. But the insanity just begins here.

An Entertaining Historical Footnote

Wanted poster Repeal the Jones Act

This is parody! (Click for larger image)

When was the last time a bunch of economists were accused of treason? Would you believe 2020? From Haley Byrd Wilt at The Dispatch:

In March 2020, a maritime shipping advisory panel offered a simple suggestion to the government: Charge all past and current members of two libertarian think tanks with treason.

The Cato Institute, among other think tanks, published plenty of papers decrying the Jones Act throughout the protectionism-friendly Trump administration. And by early 2020, at least some members of the International Shipping panel of the Maritime Transportation System National Advisory Committee thought consequences were in order.

After a March 21, 2020 meeting, the international shipping subcommittee sent draft recommendations to the Transportation Department’s Maritime Administration, according to a document the Cato Institute recently obtained from the government. The document, reviewed by The Dispatch, broadly discusses the problems of an aging U.S. fleet and insufficient shipping capacity.

Nestled among bullet points recommending policy changes to fix those problems is one labeled, “Unequivocal support of the Jones Act.”

Beneath it: “Charge all past and present members of the Cato and Mercatus Institutes with treason. The President inform the Heritage Institute that he will personally disavow them if they continue to advocate against the Jones Act.”

The treason idea didn’t make it into the advisory committee’s final recommendations thatyear. (And no libertarians have been charged with treason on account of criticizing the JonesAct—yet.)

You read that correctly.  An agency of the U.S. government wanted to charge a bunch of researchers with treason.  This is incredible.  At best, it’s a clear violation of the First Amendment.  It would also have a chilling effect on any economist who criticizes any government policy.

Ms. Wilt published her piece on October 18, 2022.  Why the delay?

More than two years later, Cato learned about the document through a Freedom of Information Act request. It is unclear whether the recommendation was serious, a joke, or isolated wishful thinking from one or two subcommittee members. Two members of the advisory panel at the time told The Dispatch they don’t remember discussing treason charges. One, who asked to remain anonymous, laughed when he heard the recommendation and said it was “totally new” to him. The other, maritime attorney Lindsey Brock of Florida, theorized it was tongue-in-cheek.

Any members of that group who still work for the government should be sent to mandatory Bill of Rights training.

Enough of the digression.  Let’s get back to diesel fuel and Puerto Rico.

How Diesel Gets to Puerto Rico Today

We want to get fuel to Puerto Rico. But there are no ships available that are allowed to travel from, say, refineries on the Texas Gulf Coast to the island. Here’s what happens instead. As reported by the Wall Street Journal, Gulf Coast oil is exported to Amsterdam and Rotterdam. 

In turn, Reuters reported that at least 11 ships loaded with distillate were headed to the U.S. northeast from Europe. Five are FROM ROTTERDAM! (One ship was loaded in Turkey.) For all we know, these distillates are made from the same oil we exported to them.

Why New England?

Grabow’s article is actually about the lack of home heating oil and diesel fuel for the northeast part of the U.S. (Despite decades of trying to persuade users of home heating oil to switch to natural gas, many stick to heating oil.) As of November 14, 2022, distillate inventories were around 21.8 million barrels, the lowest level in a decade. Because of this, home heating oil set a new record price at $5.48 per gallon in the northeast. Diesel was $5.47 per gallon, near the record. As my regular readers will know, there is no actual shortage of either of these products. But their increasing scarcity has driven up the price. Thankfully, the U.S. has resisted calls for price controls on various distillates.

However, leave it to Governor Gavin Newsom (D-CA) to fix that “problem.” He wants to impose an excess profits tax on oil companies, refiners, and just about anything else he can think of. Oopsie. Gov. Newsom apparently forgot that California requires approval by 2/3 of the voters for new taxes. Now he has apparently switched to calling it a “penalty.” Good luck with that. Our governor is an idiot.

Reminder: when you increase taxes on any activity, you tend to get less of that activity. Like drilling for and refining oil. Because gas and diesel prices aren’t already high enough in California.

Peter Zeihan Weighs In

Mr. Zeihan runs the eponymous website Zeihan on Geopolitics. He has an interesting take on the relationship between water transport and economic development. Here’s an excerpt.

Now, moving things by water is less than 1/10, the cost of moving to Milan, you can move things at bulk, you can move things at speed over large distances, it really is the way to go. However, the United States adopted a law about a century ago called The Jones Act … And what it does is it makes it illegal to ship any cargo between two American ports on any vessel that is not American crude, captained, built and owned. And what this has done is reduced the amount of traffic that we use our waterways for, by in excess of 90% over the course of the ensuing century. And so now we pretty much move about half of our products, almost two thirds of our products by truck, and then the remainder is a mix of everything else. Trucks being the most expensive way to move things over distance by far.

Transcript via https://Otter.ai

Mr. Zeihan claims water transport costs 1/10 as much as surface freight. If anything, that estimate is too high. Shipping containers keep getting larger, as do ships. But remember, we’re talking about oil and related liquids. That means tankers, not container ships. (Interested in innovation? If you can figure out how to “containerize” liquids, you can retire really, really early.)

A Case Study of Cost Increases

Using data from a variety of sources, I estimate that the Jones Act costs diesel generator operators between $5.95 and $7.38 per hour of operation. This is my best estimate of the increased cost for shipping oil from the U.S. Gulf Coast to Rotterdam and shipping distillates from UK Continental to the U.S. Atlantic Coast. [Clarification added January 26.]  The EiA replied to my inquiry with an explanation of UKC (United Kingdom – Continental).  UKC includes the UK and parts of continental northwestern Europe. The official boundaries are Gibraltar to Hamburg, which includes United Kingdom and the North Sea ports. The rate is mostly centered on ARA (Amsterdam-Rotterdam-Antwerp). UKC to the U.S. Atlantic Coast measures the trip from the refineries in the Netherlands to the market on the Atlantic Coast. (Don’t like my estimates? Click here to download my Excel workbook complete with links to sources.)

Oil can be shipped in a “dirty tanker.” But distillates must be shipped in “clean tankers.” The latter are, naturally, more expensive. Shipping costs for the oil come to $0.09 per gallon. Costs for distillates is $0.16 per gallon. Small amounts, but they add up rapidly when you consider operating a diesel generator.

For this exercise, I used a 400kw 500kva John Deere diesel generator set. The source was GenPowerUSA.

Engine Picture from John Deere diesel generator specs Repeal the Jones Act

(click for larger image)

The complete spec sheet for the Deere engine component is shown at the end of this article. Here’s the summary. The standard tank capacity is 200 gallons. That’s the “integral” tank, the one built into the engine. But you can add external storage. GenPowerUSA offers 500-, 750-, and 1,000-gallon external tanks as add-ons. The operating levels are 75% and 100% of capacity. The 200-gallon tank will last 8 hours at 75% and 7 hours at 100%. The 1,000-gallon tank will run the engine for 41 hours at 75% and 34 hours at 100%. Again, all this is in the Excel workbook.

These costs will be passed directly to electricity consumers. If you’re recovering from a natural disaster, a higher price for power doesn’t sound very good. But here we are.

Conclusion

After studying this for a few months, I can reach one conclusion. The Federal government hates you, me, and every other consumer. The government especially hates residents of Puerto Rico, the U.S. Virgin Islands, and the Hawai’ian islands. Each of those entities imports 100% of the petroleum products they use. Every gallon of any petroleum product they consumer – directly or indirectly – hits them in the purse.

As promised, the complete John Deere spec sheet.

John Deere diesel generator engine specs Repeal the Jones Act

(click for larger image)

 

Share if you feel like it

About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.