Jones Act

Stupid Federal Shipping Regulations Will Prevent Alaskans From Buying Alaskan Natural Gas

The Jones Act isn't saving American shipbuilders, but it's driving up prices for Americans.

|

A newly announced plan to tap into natural gas reserves in northern Alaska promises to produce 4 million tons of liquid natural gas (LNG) annually over the next 20 years. Yet not a single drop of that will go to Americans, thanks to a nonsensical federal shipping regulation.

ExxonMobile and Qilak LNG, an Alaska-based subsidiary of a Dubai-based energy firm, announced plans last month to extract natural gas from the state's far northern reaches, along the coast of the Arctic Ocean. Because there are no pipelines serving that remote region, the two companies say they will export the gas via icebreaking ships equipped to carry LNG. Shipping LNG from northern Alaska across the Bering Strait to markets in Asia will be 40 percent less expensive than building a pipeline across the state.

But thanks to the Jones Act, a 1920s federal law regulating American shipping, Alaskans (and Americans in general) won't get to use a single drop of the 80 million tons of LNG expected to be extracted. No icebreaking LNG-carrying vessels currently meet the Jones Act's stringent requirements to serve American ports.

Under the terms of the law, ships carrying goods from one American port to another must be American-built and American-flagged, and must have a crew that's at least 75 percent American. It will be perfectly legal for non-American vessels to pick-up LNG from the new production facilities in northern Alaska, but not if they stop at any other American ports to offload even a portion of their cargo.

There's nothing wrong with exporting that energy, of course, but it seems ridiculous to cut off Alaskans from the benefits of resources found in their own backyards. That's doubly true considering that Alaskans pay higher than average energy prices—a fact that itself is partly attributable to the Jones Act.

It's not just Alaska. All remote parts of the United States that do not have access to natural gas pipelines suffer because of the Jones Act. Puerto Rico imports natural gas from Russia because it is illegal to ship natural gas from Texas or Louisiana to the island in a non-Jones-Act-compliant vessel. The same thing happened recently in New England, when Russian natural gas had to be imported by ship when pipeline capacity was insufficient to meet demand.

The Jones Act "evidently creates large cost inefficiencies by protecting the shipbuilding industry—a tiny economic sector in the U.S.—at the expense of other U.S. industries with enormous economic potential," researchers for the Organization for Economic Cooperation and Development concluded in a report released earlier this year. Abolishing the Jones Act would lower the cost of shipping between U.S. ports by as much as 50 percent, the report concluded. That would boost the American economy by $135 billion, three times the size of the U.S. shipbuilding industry.

In the meantime, the artificially higher shipping costs created by the Jones Act have direct consequences for the people who live in places like Puerto Rico or Alaska. The median income in Puerto Rico is less than half of what it is in the poorest U.S. state, but the cost of living there is higher than the U.S. average. The numbers for Alaska are less dramatic, but similar.

For all those costs, the Jones Act doesn't seem to deliver much in the way of benefits.

The number of ships that meet the Jones Act's requirements for operating between American ports has shrunk from 193 in 2000 to just 99 in 2018. It costs more than three times as much to build a cargo ship in America as it does in some other countries, according to a 2017 report from the Cato Institute, and American shipping companies respond to that incentive by buying foreign-built ships. That means there are fewer ships capable of serving American ports. Fewer ships mean higher prices.

Indeed, the large shipyard in Philadelphia—which has twice been bailed out by taxpayers—currently has no orders for new ships. The most recent vessel built there, a $209 million cargo ship that will shuttle goods between the West Coast and Hawaii, is six times smaller and yet $50 million more expensive than the world's largest cargo ship.

"Denied the benefits of foreign competition, this sector has failed to innovate and reduce costs, in turn depressing demand for its offerings," wrote Cato Institute trade scholars Colin Grabow and Inu Manak earlier this year.

No wonder there aren't any LNG carriers that meet the Jones Act's requirements. If you create legal barriers that artificially raise the cost of doing business in one place, investments and jobs are naturally going to flow somewhere else.

Sen. Mike Lee (R–Utah) has introduced a bill to repeal the Jones Act, and President Donald Trump once even offered tepid support for the idea—but that was before lawmakers from shipbuilding states convinced him it was a bad idea.

The end result of this ludicrous pile of protectionism is that Alaskan natural gas will be sent to Asia while Alaskans pay to import their fuel from Russia and elsewhere. Global trade is a wonderful thing, but prohibiting Americans from buying American-produced natural gas just because it wasn't delivered in an American-built ship makes little sense.

NEXT: Are Iranian-Americans Presumptively "Socially Disadvantaged"?

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Oh, fine, we’ll let you ship it on Boeing airliners, they’ve got a whole idled fleet of planes they need to put into service and just think of the jobs it’ll create!

    1. Are these the planes that sometimes crash nose-first into the ground or does Boeing have a second fleet of idle planes lying around?

  2. So… this is a bit more gray than it’s being portrayed. Non-US built ships are held to much… MUCH lower standards. How they’re built/sealed/designed/manned/operated are completely different.

    I can say with great confidence I wouldn’t want a loaded foreign built LNG ship in a major US port/city. There are some exceptions, but they are few.

    1. (Serious questions, not being snarky.) How about the crewing requirement? Are US crews themselves more able, or are they all about the same?

      1. We have a large amount of ex-navy and ex-coast guard, similar to pilots, that have logged ridiculous hours through the military.

        Our Coast Guard is far tougher on any ship during inspection than most countries.

        I’d be willing to put a lot of money on US crews being more able, qualified and trained on average and in number than most of your average seaman. I’d attribute it to access to military jobs, access to equipment & technology and access to education.

        1. Oh… and a ton of regulatory capture by some pretty heavy hitting US maritime companies. Modern built US Supply Vessels are pretty ridiculous with how much technology they have. Is it needed…. for the class certification it is. To do it’s intended purpose? No.

          But it raises the bar high enough that most mom and pop outfits can’t afford to keep up with the regulations for building new or just plain re-certifying old stock.

          1. Hard as it is for a hardcore freemarketer to say, it sounds as if it’s a bit greyer than portrayed. Thx for the info.

            1. Just google the number of LNG ships that blow up in the middle of foreign ports. Or just shipping accidents in general. (Don’t look up the several US Navy collisions that have occurred in the last few years, those were just the result of the new woke Navy allowing women to take the helm and have nothing to do with ship safety in general.)

        2. People I know that have dealt with both US and foreign crews have said the exact opposite.

          But really this is beside the point. Allowing foreign-flagged ships to transport goods within the United States wouldn’t be that big of a change from the status quo. Foreign-flagged ships are already plentiful in US ports and even travel between US ports picking up and dropping off cargo (coming from and going to foreign destinations). What they cannot do is pick up cargo in one US port and drop it off in another.

    2. Sounds like it would benefit from repealing the act and adding separate regulation/industry guidelines for transporting CNG and other materials. Or just repeal and trust in the market to not put gasoline next to an open flame BBQ.

    3. Except the Jones act doesn’t prevent foreign ships from sailing in to US ports, it only prevents them from unloading cargo if said cargo was picked up at another US port. A foreign ship loaded with foreign LNG can unload at any US port. A foreign ship with American LNG can dock at any US port to refuel, unload other cargo, or load additional cargo

      1. Yeah. The Jones Act is indefensible.

        1. > Yeah. The Jones Act is indefensible.
          American shipbuilders seem to do a good job of defending it.

    4. If that were intent of the standard, Cy, then non-US built ships wouldn’t be allowed into US ports even for foreign shipments. Yet that is not the case. As the article above describes, non-US built ships have free access to our ports to make and/or take deliveries. It happens all the time, including already in Alaska. The only restriction on those ships is that their next port of call must be a foreign port. And that makes no sense.

      Re your hypothesis below about the prior service of US merchant marine crew, I am aware of neither evidence nor logical reason that would lead you to believe that non-US crew lack prior service in their own militaries.

    5. Remember that LNG-loaded ship that exploded at a U.S. port in the past 50 years? Yeah, me either.

    6. That seems like a problem for targeted regulation, then, not a blanket ban. If safety is the concern, then require safety, not protectionism.

    7. This is nonsense. They are not built to a lower standard at all. There are IMO regulations and classification societies that make sure of this. Foreign-built LNG ships already come into US ports all the time (hell, 99% of ships that enter US ports are foreign-built — there are only around 100 US-built commercial ships in existence). Indeed, they are the *only* LNG ships that enter US ports as US shipyards haven’t built an LNG carrier since 1980 (during the 1970s 16 LNG ships were built, and three of them built at the Avondale yard in Louisiana had a fatal flaw in them that resulted in them being declared constructive losses). In fact, a 2015 GAO study looked at the possibility of constructing LNG carriers in the United States and one US shipyard admitted they would have to bring over 250-300 South Korean workers to teach them howto do it and perform quality control.

  3. Sen. Mike Lee (R–Utah) has introduced a bill to repeal the Jones Act, and President Donald Trump once even offered tepid support for the idea—but that was before lawmakers from shipbuilding states convinced him it was a bad idea.

    I think I remember something about swamps and draining. Must have been a dream.

    1. Well, I have an unconfirmed report from unnamed sources that have actually read about the white house, that Trump has filed all the necessary paperwork to drain the swamp, and is just waiting to hear back from the EPA.

      1. Unfortunately the swamp is considered a vital part of the waters of the United States.

    2. Once Trump got in the swamp, he realized that he wanted more of it.

  4. Shipping LNG from northern Alaska across the Bering Strait to markets in Asia will be 40 percent less expensive than building a pipeline across the state.

    Not to defend the Jones Act too vociferously, but do we have an over/under on the amount of that 40% that’s actual parts and labor to meet specifications and how much of that 40% is bulldozing hippies and eminent domain litigation?

  5. “Stupid Federal Shipping Regulations Will Prevent Alaskans From Buying Alaskan Natural Gas.”

    Well, that’s just tough shit.
    If the Alaskans want more natural gas, then they can eat more cans of beans.
    After all, government regulations weren’t made for the benefit of the masses.

  6. Boehm…

    DOW Jones highest lever ever!
    27,674.80 as of 11/7/2019 at 5:44pm

    Markets imploding!

  7. we need something to reduce the trade deficit with china…though exxon keeps all the profits

    1. so only if you work for exxon-mobil or get a campaign finance donation do you benefit

  8. so only if you work for exxon-mobil or get a campaign finance donation do you benefit

  9. Alaskan natural gas

    Moose farts?

  10. Just off load it in a Canadian port with access to a pipeline. It is not that difficult.

  11. But it doesn’t just protect the shipbuilding industry in the U.S. It also acts as a subsidy to trucking and rail. So in addition to increasing costs it also increases traffic & pollution as well as extending commute time.

  12. The contentions here melt away like day old cotton candy when facts related to natural gas/LNG cost and freight economics are considered. Natural gas was $2.22/Mcf in August and is broadly available in U.S. by pipeline, which is most efficient freight mode. U.S. LNG export price was $5.13/Mcf in August and that is before big freight costs. While varying by destination, shipping costs adds 40% to typical LNG movement. The difference in product value results from multi-billion plants to liquefy natural gas.

    Even with no Jones Act, LNG would never move from Alaska to the continental U.S. based on simple cost economics as the delivered cost would be geometrically more than natural gas. The Jones Act doesn’t add a dime to domestic gas distribution. Related to contention Alaska LNG would move to offshore Puerto Rico, it is 6,098 nautical miles from Kenai to San Juan, or 11x the 575 distance from Trinidad where PR got 100% of its 2018 LNG. Freight economics will always favor Trinidad.

    The broader OECD claims don’t hold up. The assumed 50% rate reduction ignores majority of costs unaffected by flag. Real data supports only a 10% reduction. Expanding that into $135B impact (500x rate reduction) is unsupportable hyperbole. Reason dictates that you know the facts before writing. “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” John Adams, 1770

Please to post comments