ENB Pub Note: There are three critical things for the new administration to embrace on their path to lower energy costs. 1: Cut and fix the nuclear and oil and gas regulations that cost consumers billions annually. 2: Waive or get the Jones Act repealed so that LNG tankers could get US LNG to US ports. 3: Shut down the EPA’s requirement for ethanol. I have a report in process on the number of positive things that would come from the elimination of ethanol for consumers.
When we were in the Trump administration at the Council of Economic Advisers, a polar vortex struck New England. Our staff estimated that the cold forced Americans to spend hundreds of millions of dollars more on natural gas from other countries. How could the U.S. be a net exporter of gas and also a hostage to foreign countries like Russia in a cold winter?
The answer, we found, is the Merchant Marine Act of 1920, also known as the Jones Act, which requires that ships operating between ports in the U.S. be constructed in the U.S. No ships capable of transporting liquid natural gas were built in the U.S., so New England, reliant on shipping for its energy because of the absence of pipelines, couldn’t buy gas from U.S. suppliers. Foreign vessels can bring gas from Trinidad to Boston, but not from any U.S. port.
There is a special exemption to the law: The Defense Department can issue a waiver and allow foreign-built ships to operate in U.S. waters for national-security reasons, thus releasing New England from foreign influence. Pentagon officials were sympathetic to granting the waiver at the time, but when word spread to Congress after a positive White House meeting about the waiver, a political maelstrom ensued. The shipping lobby gives millions of dollars to politicians of both parties. It was made clear to us that a waiver would start a war between the legislative and executive branches and that all other administrative initiatives would grind to a halt. The waiver was never granted.
Today, an actual war has helped push energy prices sky high and has again highlighted the puzzling dependence of parts of America on Russian energy. American consumers are paying record-high prices at the pump, with the prospect of still-higher prices expected. Desperation caused by high and rising prices spawned a variety of ideas like suspending collection of the federal gasoline tax. While well-intentioned, this wouldn’t provide much relief and could undermine infrastructure funding. And energy prices are only the tip of the iceberg of an inflationary spiral that is as serious as anything experienced since the 1970s.
We believe the Biden administration is serious in its desire to combat inflation. It should take advantage of the Defense Department waiver option, and allow inexpensive and efficient foreign shippers to operate in U.S. waters. In difficult times, Americans come together, and it seems unlikely that politicians who defeated our action would try to do so again. The Jones Act leads shippers to pay higher rates that get passed on to consumers. It even leads U.S. buyers to source oil and petroleum products from countries like Russia.
Because of the Jones Act, almost all freight in the U.S. moves over land, even though shipping on water should be far cheaper, more environmentally friendly and less destructive of infrastructure. The corrupt American shipping regulations, ostensibly in place to protect American shippers, have strangled the economy by moving the transport of goods to roads and railroads. The Jones-capable ocean fleet has withered to only 95 ships. While at the CEA, we found that the U.S. trails other developed countries and imposes large costs on itself by profoundly underutilizing water transport.
Hawaii, a state that knows a thing or two about reliance on marine shipping, has asked for a temporary waiver of the Jones Act. Hawaii was buying as much as a third of its oil from Russia, mostly to avoid the costs of the Jones Act. The recent executive order to block Russian oil imports means that now Hawaiians will disproportionately bear the cost of efforts to deprive Russia of export revenue. The U.S. Virgin Islands has a permanent Jones Act waiver, and Hawaiian leaders would like their residents to enjoy the same benefits. So would those in the Northeast and Puerto Rico.
The benefits of relaxing cabotage (shipping between U.S. ports) restrictions would be enormous, and not limited to energy industries. Offering lower-cost shipping would help the U.S. steel industry compete and assist virtually any industry that makes something heavy or that is best shipped in a container.
President Biden should also be attracted to another benefit of relaxing Jones Act standards for one of his policy priorities. Offshore wind projects are currently delayed for want of the specialized ships needed to install and maintain turbines. While some ships are planned, more capacity is needed to achieve the aggressive goals for this sector, and tapping into the global fleet would help accelerate projects and reduce costs. Relaxing the Jones Act would also give the U.S. considerable leverage in trade negotiations, as foreign trading partners have regularly complained about its protectionist effects.
The Jones Act might have been well-intentioned, but its perverse effects are indisputable. It has utterly failed to preserve the U.S. shipping industry. Given the havoc wrecked by Vladimir Putin’s invasion of Ukraine, which makes the national-defense argument for a waiver all too real, the administration has a golden opportunity to bypass an outdated law that disrupts supply chains.
Mr. Fitzgerald is an associate professor of business economics at Texas Tech University and was chief international economist at the Council of Economic Advisers, 2017-18. Mr. Hassett is a distinguished visiting fellow at the Hoover Institution and was chairman of the council, 2017-19.
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