Protectionism isn’t always bad. But sometimes protectionist measures are so poorly designed that they hurt everyone, including the intended beneficiaries, and wind up benefiting America’s foreign competitors most of all. A glaring example of this is the Jones Act, which in terms of costs and benefits may well be the worst law in America.
This century-old law requires any ship carrying goods between two American “points” to be manufactured in America, crewed by Americans, and owned by Americans. It sounds like a policy of “America First” (which explains why it has any supporters at all, beyond those with skin in the racket) but it is quite clearly a policy of “America Last.” Compared with the staggering burdens the law imposes on the rest of society, what its dwindling beneficiaries gain is a laughable pittance.
Nowhere is this clearer than in America’s vital energy sector. The Jones Act dramatically distorts the whole pattern of energy flows across North America, in many areas cutting American consumers off from American producers and forcing both to deal with foreigners instead.
The main impact of the Jones Act on America’s energy markets arises from the law’s severe restrictions on oceangoing transport of both oil and natural gas between American ports. The law is designed to prop up the prices that shipping companies can charge by preventing foreign ships from competing on domestic routes.
But the law has a fatal design flaw: It does not prevent foreigners from competing on foreign routes. Thus, while the law certainly does result in much higher prices for American shipping companies on domestic routes, producers and consumers are perfectly free to choose exports and imports instead. As a result, demand for shipping services gets channeled abroad, onto foreign routes that are far cheaper. It is the exact opposite of protectionism.
A close look at the flows of American oil and gas makes the absurd results clear. Shipping a barrel of oil from the Gulf Coast to the northeast U.S. on a Jones Act tanker can cost $5 or $6 per barrel, while shipping the same barrel all the way up to Canada costs only about $2 per barrel. With standard American crude oil (WTI) stuck around $40 per barrel, on razor-thin margins or negative margins in an extremely volatile market, adding even $3 to ship a barrel of crude oil to New Jersey instead of Canada is prohibitively expensive.
This is reflected in the pattern of crude oil flows we’ve observed since the start of the shale boom: U.S. oil exports from the Gulf Coast to Canadian refineries are up to nearly 400,000 barrels per day, while barely 60,000 barrels per day get shipped from the Gulf Coast to America’s own refineries on the East Coast.
This disparity is particularly jaw-dropping when you realize the reason Texas is exporting so much oil to Canada: Enormous refineries have arisen in eastern Canada to serve the U.S. northeast with refined gasoline, which also moves by foreign tankers. Thus, most of the oil exported from the Gulf Coast to Canada is destined to be consumed by Americans as gasoline. The effect of the Jones Act here is merely to force America’s crude oil shipments to avoid American refineries on the East Coast and use Canadian refineries instead, while American refineries are forced to get their oil from other countries.
Let’s tally up the costs and benefits here. Canadians benefit and foreign tankers benefit, while American refineries have to pay for more expensive foreign oil, American consumers have to pay more for gasoline, and American oil producers have to go scouring the world for export markets to sell oil they could easily sell at home but for the Jones Act. According to American Shipping Company (which by the way is Norwegian-owned), oil picked up in Houston needs to be $1.50 cheaper than oil picked up in Africa to be competitive for purchase by East Coast refineries. That difference reflects the “tariff” imposed by the Jones Act on domestic oil shipments.
In 2019, according to the Energy Information Administration, the U.S. imported about 5 million barrels per day crude oil and exported almost 3 million barrels per day, all of it on foreign-built tankers. East Coast refineries processed about one million barrels of crude oil every day in 2019, but only about 60,000 barrels per day came from the Gulf Coast, while nearly 700,000 barrels per day were imported from abroad.
Nor are these the only distortions created by the Jones Act. It is written to prevent U.S. shippers from escaping its requirements by stopping at an intermediate foreign port between two U.S. points. However, U.S. regulators have ruled that if the “product” aboard a foreign ship is transformed into a “new” product at the intermediate foreign port, then the ship may sail on to a U.S. port without violating the Jones Act. As a result, at least one oil producer has resorted to stopping at a storage facilities in the Bahamas to blend its cargo of domestic oil with a significant amount of foreign oil, so that the voyage between Texas and the northeast U.S. can be made by a foreign ship. Of course, the intermediate stop for blending adds further costs, which are also passed on to consumers in the form of higher gasoline prices.
U.S. refiners are also hard-hit, and have suffered under the Jones Act regime for decades. Because the U.S. Virgin Islands were exempted from the Jones Act early on, by the 1970s the largest refinery in the U.S. was located there, implying a voyage thousands of miles out of the way between producers and consumers. According to one government study, in 1999 it cost $7.15 to ship a barrel of oil from Alaska to refineries on the Gulf Coast onboard a Jones Act vessel, but only $2.35 per barrel to ship the same barrel to the Virgin Islands onboard a foreign vessel. The fact that we had to build a refinery in the Virgin Islands instead of using our Gulf Coast refineries — just to avoid the Jones Act — is just one more example of this law’s unconscionable side effects. More recently, in 2014, refiners in the northeast sought an exemption from the Jones Act so that they could have oil shipped from Texas. But the Jones Act lobby fended off any reform.
So refiners are forced to import foreign oil that is significantly more expensive than oil from Texas, or have it shipped by rail from inside the U.S., which is far more expensive than shipping by sea, and all of those costs are passed on to consumers in the form of higher gasoline prices. Worse, America’s East Coast refineries are tailor-made for the light “sweet” crude oil that America is now producing in abundance, and are less efficient when refining other kinds. Meanwhile, refineries in nearby countries, chiefly Canada, are processing hundreds of thousands of barrels per day to produce gasoline destined for the U.S. market, all of which could be refined more cheaply in the U.S. but for the Jones Act. Thus the Jones Act helps foreign refineries steal market share from American refiners while passing those higher costs onto American consumers in the form of higher gasoline prices.
The Jones Act even distorts intermediate steps in the supply chain for oil and gas. For example, large oil tankers commonly transfer oil offshore to smaller tankers capable of harbor navigation, a practice known as “lightering.” Incredibly, under pressure from the Jones Act lobby, federal regulators have ruled that the larger tanker, when anchored within three miles of shore, becomes a “U.S. point” for purposes of the Jones Act, such that the lighter vessel must comply with the Jones Act. Most lightering areas in the Gulf of Mexico are 60 to 80 miles offshore, while many of those in the northeastern U.S. are within the three-mile territorial limit. As a result of this simple distinction, it is generally legal to “lighter” onto foreign ships in the Gulf of Mexico, but not off the northeast coast.
The situation for natural gas is even worse, particularly for New England. Here there are no U.S. interests for the Jones Act to “protect” because there are no Liquified Natural Gas (LNG) tankers in the Jones Act fleet at all. The U.S. doesn’t make LNG tankers. But that doesn’t stop the Jones Act lobby from making common cause with the radical environmentalist groups that have blocked natural gas pipeline construction from Pennsylvania across New York State to Massachusetts. Thus, this strange alliance has succeeded in cutting New England off from U.S. natural gas almost entirely.
As a result, Massachusetts alone imports about 40 billion cubic feet of LNG every year, the majority from Trinidad and Tobago, with France and Nigeria also contributing. In 2018, Massachusetts even received a shipment of LNG from Russia, despite the fact that U.S. has sanctions on Russian LNG, and despite the fact that Germany’s willingness to import Russian natural gas has become a major irritant in the German government’s relations with the Trump administration. Here the Jones Act is actually undermining some of President Trump’s key national-security priorities.
U.S. producers of natural gas also suffer. In 2019, the U.S. exported nearly two trillion cubic feet of LNG, at an average price of $5.00 per billion cubic feet (Bcf). Here the chief beneficiaries of the Jones Act include South Korea, Japan, and China, for which the Jones Act in effect subsidizes exports of LNG by restricting its domestic trade. Thus this supposed “America First” policy forces New England to import virtually all the natural gas it uses for electricity, home heating, and cooking from Canada and Trinidad, while U.S. producers drown in an ocean of natural gas they can’t move to market, and which they are forced to waste at the well-head — with significant environmental impacts.
Meanwhile, Puerto Rico, with its market of more than three million American citizens, is forced to import virtually of its energy — coal, oil, gasoline, jet fuel, and natural gas — from foreign countries. American energy producers would be delighted to supply Puerto Rico . . . if only the Jones Act would let them.
Even U.S. offshore energy production — both fossil and renewable — faces devasting losses from the Jones Act. Virtually all offshore oil and gas-drilling platforms and most offshore production platforms, as well as offshore wind farms, are considered “U.S. points” for the purposes of the Jones Act. That means that both construction and operation for these platforms must often rely on foreign ships operating from foreign ports instead of American ports.
For example, the specialized ships used to install offshore wind towers are not made in America. Instead, wind-farm developers must use installation vessels from foreign countries, which in turn means that they also import the turbines and other equipment they need from those countries, despite the fact that the U.S. is among the world’s top producers of wind turbine equipment. Hence the Jones Act in effect prohibits American workers from any role in the manufacture or installation of America’s offshore windfarms. “America First,” eh?
In these ways and more, the Jones Act hurts American workers and American consumers — and not just economically. The increased reliance on foreign sources of energy makes America’s national security more vulnerable. The increased reliance on trucks and railways to transport energy is significantly worse for the environment. Even the Trump administration’s goal of American energy dominance is undermined by the Jones Act.
By eliminating the supply of foreign tankers available to move oil between U.S. ports, and by reducing U.S. shipbuilding capacity to just a few shipyards, the Jones Act has left many U.S. producers and refiners with no option but to export and import instead of doing business with each other.
And all for what? In the oceangoing transport sector, the Jones Act’s beneficiaries are a dwindling handful of decrepit shipyards on the verge of bankruptcy, labor unions whose membership would expand dramatically if we could only free the whole sector from the law’s false “protection,” and the lobbyists and venal politicians who cash in on this policy of “America Last.” Mend it or end it.