Monday, March 19, 2012

Ancient Freight by Water Act Affects US Gas Prices and Makes Headlines

Protectionist or Ensuring Jobs and National Security?
Shipping News Feature

US – Once again the restrictions of the ‘Jones Act’, passed by the US Government as the Merchant Marine Act almost a century ago and seen by supporters as a vital national security measure and opponents as simple protectionism, is making headlines. Designed to exclusively provide work only for US citizens and permanent residents on ships owned, flagged and operated by Americans, critics have always pointed out how these parameters inflate the cost of moving any inland water borne freight around the country.

The latest comments come as a result of a report last month from the US Energy Information Administration (USEIA) regarding the reduction in the refining of petroleum products in the North Eastern United States, particularly ultra low sulphur diesel (ULSD) which is so vital in maintaining better emissions from a plethora of sources. The report makes clear that with a scarcity of pipeline availability most incremental volumes would arrive by water. The report goes on:

“Direct waterborne movement from the Gulf Coast would be by Jones Act tanker, and thus the price of ULSD would be influenced by Jones Act tanker rates, which seem to run two-to-three times foreign flag ship rates. But since Jones Act tankers are not readily available, actual transportation costs might have to be considerably higher than current rates to bid scarce vessels away from their current business.

“This vessel scarcity implies some additional ULSD may come from foreign sources, such as India, and these import volumes would then possibly set the Northeast price. To obtain such foreign supplies, buyers would bid them away from other markets such as Europe. This would require paying a price that is at least as high as European ULSD plus the additional transportation cost from Europe to New York Harbor.”

As last year’s European wholesale ULSD prices ranged from parity to $0.15 above the NY price with an annual average that equated to a 5 cents per gallon uplift plus transport costs ex Europe between $0.05 and $0.09/gallon the bottom line would be an increased price for consumers.

The clear condemnation of the increased prices levied under conditions of the act has resulted in a swift response from the American Maritime Partnership (AMP), a body which represents the owners and crews of the 40,000 US vessels which trade under the Act in the domestic maritime sector. The AMP has written an open letter to the USEIA stating that the conclusions the report draws with regard to the availability of Jones Act registered carriers is incorrect saying the report:

“…understates the American tank vessel capacity by more than 50%. The report addressed only American tankers but not all tank vessels, including tank barges, which are a primary means of transporting petroleum products in the U.S. We believe that once all Jones Act tank vessel capacity is considered, EIA will find that there is ample American vessel capacity to address changes in petroleum product markets as result of northeast refinery closures.”

It is noticeable however that the letter does not try to defend the initial point made by the USEIA that US tanker rates are two or three times higher than the foreign flagged vessels engaged in similar trades. The AMP says that the report has led to “a series of media stories and has impacted the public policy debate,” without actually pointing out any that are factually incorrect.

Photo: Courtesy of AP Moller Maersk which formed subsidiary Maersk Line Ltd. specifically to enable it to register a US flagged fleet now numbering over 30 vessels including four tankers plus container and multi-purpose ships.