Crisis in energy prices, supplies could be helped with Jones Act waiver

(Photo by Joe Kovacs)

[Editor's note: This story originally was published by Real Clear Wire.]

By Christopher Guith
Real Clear Wire

While soaring gas prices have temporarily subsided thanks in part to unprecedented releases from our strategic oil stockpile, energy markets continue to show signs of historic tightness. Recognizing the fast-approaching exhaustion of planned SPR sales, Goldman Sachs now expects crude oil prices to rise more than 25% by the end of the year, to about $125 per barrel.

Another warning sign is fuel inventory data, as the volume of gasoline and diesel in storage have dipped far below typical levels for this time of year. This problem is particularly acute in the Northeast, where Bloomberg reports that diesel tanks have never been emptier heading into the fall, and are poised to shrink further when winter heating demand picks up.

The region’s circumstances shouldn’t be a surprise. Longstanding political opposition to pipelines that could connect the Northeast to energy markets has resulted in severe capacity constraints for both liquid fuels and natural gas, effectively making New York and New England an energy island where shortfalls must be met by ships instead of pipes.

Meanwhile, hurricane season presents an additional wild card. Storms don’t even have to make landfall in the U.S. or inflict major damage to cause problems—their presence in the Gulf of Mexico alone is often enough to disrupt production and refining activity.

It was this combination of critically low fuel inventories and the looming hurricane season that prompted Energy Secretary Jennifer Granholm to send letters to New England governors earlier this month urging a bevy of actions to increase storage levels. According to the Boston Globe, DOE also sent letters to seven oil companies “asking them to hold onto their stocks” to offset shortages.

It’s not entirely clear what the Biden Administration could be hinting at in these letters, but some fear that they could be a precursor to the radical step of banning energy exports—an idea that was reportedly under considerationearlier this summer.

The idea is a slap in the face to allies in Europe desperate for U.S. exports in response to Russia’s weaponization of energy on the continent. It’s also a clear violation of U.S. World Trade Organization commitments.  In fact, we have been pressing other countries to shun export restrictions on agricultural products, fertilizers, and energy.

It is also bad domestic policy. Usually when prices rise, energy companies respond by increasing production. But a spike caused by an export ban would have the reverse effect, discouraging new investment by signaling greatly reduced access to energy markets.

In fact, a recent study from the American Council for Capital Formation (ACCF) found that a ban on petroleum product exports would have devastating effects—forcing refinery closures, job losses, and ultimately, higher gas prices. Experts at IHS Markit concluded the same thing for crude oil back in November, well before Putin invaded Ukraine. A crude oil ban, IHS concluded, would cause a “shock to the market” and increase our own domestic gasoline prices. And a recent analysis from RBN Energy concluded that refined product export bans would “likely lead to additional refinery closures on the Gulf Coast…remove supplies from the international market and result in higher international prices for gasoline and diesel.”

While export bans are a bad idea, the Biden Administration does have an opportunity to deliver a short-term solution that will ease supply concerns and lower fuel costs in the Northeast: Jones Act waivers.

The century-old Jones Act restricts domestic shipping of fuels and other products to only American-made, flagged, and crewed ships. For example, the statute makes it illegal for a ship flagged from Panama to deliver gasoline or diesel from the Mississippi Gulf to Boston or New York. This matters greatly to energy markets, because Jones Act compliant ships cost far more to charter—the current premium is $4.54 per barrel.

In effect, this acts as a prohibition on domestic energy trade except in rare circumstances (and even in such instances, the premium is passed on to consumers in the form of higher prices). Due to minimal demand as a result of these high costs, there are only 43 active Jones Act compliant tankers—far fewer than what is needed to address low supplies.

Waiving the Jones Act will make the Northeast an economically attractive destination for gasoline, diesel, and heating oil shipments that currently go to overseas buyers in Europe and Latin America. The end result will be higher inventories, lower prices, and more efficient markets.

Regardless of what happens this winter, Congress and the Administration must work to deliver an effective long-term solution to growing fuel insecurity concerns. Recent refinery closures, a hostile regulatory environment and the long-term transition to electric vehicles mean that inventory shortages are likely to persist or even worsen. Waiving the Jones Act will not provide a silver bullet fix—permitting reforms, additional pipeline infrastructure and a comprehensive energy security strategy are also needed—but it will help immensely.

In the meantime, we urge the Administration to get ahead of looming challenges this fall and winter and signal its intent to waive the Jones Act now—and put aside talk of export bans. Providing secure, reliable energy supplies to our nation is simply too important to place artificial restraints on which boats are allowed to move them.

Christopher Guith is the senior vice president, policy at the U.S. Chamber of Commerce’s Global Energy Institute. 

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