Bloomberg recently reported that President Trump is considering waiving the Jones Act requirement that demands only U.S.-flagged vessels can move natural gas from American ports to Puerto Rico and the Northeast. This potential partial reform of the nearly century-old law is a welcomed sight as it is a necessary step for the development of the liquefied natural gas (LNG) industry in the United States.
The Jones Act is a law that requires vessels moving cargo between two U.S. ports to be U.S.-built, -owned, and –crewed. The stated purpose of the law was originally to ensure that ships would be built in the U.S. in order to protect national security. But over time, the law has proven to be self-defeating, as it has shielded the U.S. maritime industry from international competition. For a more detailed discussion of the history and economic effects of the Jones Act, please consult this summary.
Although proponents of the Jones Act continue to brandish the national security argument around Washington, D.C., there’s little evidence that suggests the Jones Act does in fact promote a strong U.S. maritime industry. Since the Jones Act was enacted in 1920, the U.S.-flagged fleet has seen an unremitting decline in size. In 1960, there were 2,926 large ships in the U.S.-flagged fleet; this accounted for about 17 percent of the world fleet back then. By 2016, there were only 169 ships in the U.S.-flagged fleet; that was less than 1 percent of the total world fleet.
This decline highlights one of the major shortcomings of the Jones Act in that it demonstrates the fact that the law has undermined its original purpose. By shielding U.S. maritime industry from international competition, the Jones Act has created an uncompetitive, politicized market, defined by its high costs and entrenched firms that are unresponsive to consumer demand.
Given the bad incentives that are at play under the Jones Act, it should come as no surprise then that there isn’t a single Jones Act compliant LNG vessel in the U.S. shipping fleet. Moreover, not a single U.S. shipbuilding company has plans to construct a large LNG vessel. This is obviously a problem as the U.S. Energy Information Administration (EIA) projects U.S. natural gas production to grow 7 percent per year from 2018 to 2020, which is more than the 4 percent per year average growth rate from 2005 to 2015.
When you combine this expected growth with other aspects of our politicized economy, like the problem caused by limited natural gas pipeline access to the Northeast, it becomes evident that LNG could play a major role in the future of our energy supply chain. Unfortunately, by preventing ships that aren’t U.S.-built, -owned, and -crewed from being able to transport natural gas between U.S. ports, the Jones Act is currently standing in the way of meeting domestic needs.
Although the Jones Act does help support some American jobs in the maritime industry, the law does so at an enormous cost to everyone else in the U.S. Colin Grabow, Inu Manak, and Daniel J. Ikenson of the Cato Institute released a paper last year that does a good job of providing a qualitative assessment of the costs of the Jones Act. Additionally, in the 1990s, the U.S. International Trade Commission released several estimates of the economy-wide costs of the Jones Act; they arrived at an estimate between $656 million to $9.8 billion.
The impact of the Jones Act on LNG transportation also has foreign policy implications. In 2014, the Treasury Department issued sanctions designed to weaken Russia’s energy sector in response to the annexation of Crimea. The sanctions prevent Americans from providing financing for Russia’s largest independent producer of natural gas, but they do not prohibit the purchase of natural gas that originates from Russia. Due to the combination of a lack of pipeline access in the Northeast as well as the restrictions of the Jones Act, during a cold snap in January of 2018, a tanker carrying liquefied natural gas from a sanctioned project in Russia arrived at Boston Harbor. Regardless of whether or not those sanctions represent the ideal approach to U.S.-Russian relations, it is worth pointing out that by limiting the ability of vessels to transport natural gas between U.S. ports, the Jones Act directly contradicts the broader foreign policy goals outlined in the 2014 sanctions.
Ideally, the Trump administration would be considering eliminating the law entirely as it has far-reaching costs across our entire economy, but providing a Jones Act waiver to allow all ships to transport natural gas between ports within the United States is a great first step to reform. No doubt, the powerful Jones Act lobby will push back against this decision, but that shouldn’t prevent the Administration from pursuing reform. A Jones Act waiver for natural gas is perfectly in line with President Trump’s “energy dominance” approach and would provide a solution to the pipeline access issue that has been responsible for high electricity prices in the Northeast in recent years.