The Many Distortions of the Jones Act

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Protectionism isn’t always bad. But sometimes protectionist measures are so poorly designed that they hurt everyone, including the intended the 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.

Read the full article at National Review.