Could Crude Oil Put the Jones Act Into Play?

To the credit of those who support the Jones Act, the U.S. law requiring vessels operating in the domestic trade to be built, owned and crewed by Americans, they take little for granted. An unapologetically protectionist law in a world of free trade agreements, the Jones Act is the citadel of the U.S. maritime industry, ferociously guarded by a coalition of shipyards, maritime unions and domestic carriers.

Despite powerful guardians of the law passing from the Washington scene — Sens. Ted Stevens, Fritz Hollings and Daniel Inouye to name a few — the law, politically at least, is as intact as it ever was despite the toxic political climate. But far from the marble columns of Washington, a mighty force is gathering steam that, while not directly related to the Jones Act, could one day overwhelm the sturdy coalition that has defended it through the decades.

That force isn’t political, but economic and industrial. It’s the rapid increase in U.S. crude oil production, arguably the most important economic trend in the United States today. Growth in crude production in central Texas, at the Bakken formation in North Dakota and at the Marcellus formation in Pennsylvania and Ohio has put the U.S. on an unexpected trajectory toward energy independence and a vastly more favorable balance of payments position.

U.S. crude generally has more favorable chemical characteristics than imported oil, which enables refineries to operate more efficiently, further supporting the case for expanding U.S. crude production. But oil pulled from the ground has to be moved, and this is both an opportunity and a threat for the Jones Act industry.

Crude production, when shipped by water, must be moved on Jones Act barges and tankers to U.S. refineries and from there to U.S. consumers. Also, U.S. crude cannot be exported, except to Canada based on a 1970s-era law that followed the Arab oil embargo. That means that most of the surge in U.S. crude production has to be processed and consumed in the U.S., which is placing a growing burden on U.S. freight transportation.

The volume of crude oil shipped by Class 1 railroads surged from 1.3 million barrels in 2008 to roughly 89 million barrels in 2012, according to Progressive Railroading. On the U.S. inland waterways, 114 million tons of chemicals and petroleum moved between January and August 2009, compared with 145 million tons during the same period of 2013, a 28 percent increase, Jim Kruse, director of the Center for Ports and Waterways at Texas A&M, observed on a recent Stifel Nicolaus conference call.

The challenge for the Jones Act industry is simple: Keep up with demand or face potentially unpleasant consequences. “The carriers that are in this business have recognized that they most respond to the demand because they have already invested substantial sums in Jones Act assets, and the last thing they want to do is not meet the demand, which could result in one of two things happening. The first is a call for relaxation of Jones Act restrictions, and a second is a call for relaxing the ban on U.S. crude oil exports,” said Chuck Raymond, a consultant and former CEO of the Jones Act domestic liner operator Horizon Lines.

Not surprisingly, U.S. shipyards are turning out Jones Act tankers at a furious pace. Aker Philadelphia Shipyard will deliver two product tankers to SeaRiver Maritime, the Exxon tanker unit, which followed the delivery of 14 product tankers by Kvaerner to Overseas Shipholding Group and Crowley Maritime.   Last month, Crowley signed a new contract with Kvaerner to build four more product tankers with an option for an additional four.

On the West Coast, General Dynamics’ NAASCO yard in San Diego contracted last month to build two product tankers for Seabulk Tankers, a unit of Seacor, following an order for five tankers for American Petroleum Tankers, a Blackstone company. Both NAASCO and Kvaerner have entered into technology transfer agreements with Korean shipyards to enable them to build better ships faster and more cost effectively. Separately, articulated tug and barge operators such as Crowley and Kirby have invested large sums in replacing older tonnage and expanding their fleets.

But it remains a question whether even with all of this shipbuilding the Jones Act fleet will be able to keep pace with surging demand for crude and product capacity. And if it can’t, could that realize the long-held fear of Jones Act supporters that any policy change could put the entirety of U.S. cabotage policy into play?

“If you have an amendment to the Jones Act that allows foreign-built vessels to come in, it would be logical for some people to question, ‘If it’s OK for oil, why isn’t it OK for cargo, or cruise ships in the case of Passenger Vessel Services Act?’ ” Raymond said. “I do see it as something that could be somewhat of a risk for the Jones Act liner operators, and all the people who have Jones Act assets, whether it’s tugs, ships, barges or ferries.”

Peter Tirschwell is executive vice president/chief content officer at JOC Group. Contact him at and follow him at

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