Energy Investor Monthly – December 2023

The Merchant Marine Act of 1920: It’s More Than Just “Keeping Up with the Joneses”

The Jones Act, more accurately a sub-section of the Merchant Marine Act of 1920, is a United States federal statute that provides the legal and regulatory framework for U.S. coastal trade. The Act requires that all cargo transported within and between U.S. ports be performed by U.S.-owned, built, and operated ships. This is important when it comes to the restrictions it has placed on the transportation of energy products, like oil, gasoline, NGLs, and other distillates, and the reason why, with all the global supply chain disruptions recently, many are calling for the Act to be revised or even scrapped entirely.

Introduced in Congress by Senator Wesley Jones and signed into law by President Woodrow Wilson on June 5th, 1920, the Merchant Marine Act, more commonly known as the Jones Act, replaced other protectionist maritime laws that had been in place since the first U.S. Congress in 1789. Similar to the Jones Act, these laws were enacted to protect the U.S. maritime industry by limiting domestic trade to American ships meeting specific requirements. Many of these protectionist laws extended back to England’s Navigation Acts, which, ironically, England repealed in 1849 to promote free trade.

This has also occurred, at least temporarily, here in the U.S. During WWI, laws restricting the transportation of U.S. cargo were suspended in order to assist the war effort. However, by 1920, The Jones Act reinstated and even expanded those restrictions, especially when it came to transporting energy products. It did this through a concept called “cabotage.” So, what is cabotage, and why should we care about it? Cabotage refers to the right to transport goods and passengers between ports of a defined territory, typically within a country’s borders. The Jones Act regulates cabotage in the U.S. by requiring vessels used to ship goods between U.S. ports to be built, owned, and operated in the U.S. by U.S. citizens. Since 1920, The Jones Act has been revised numerous times, expanding cabotage laws to dredging, salvage, and towing activities. More recently, in 2006, an Act that completed the codification of Title 46 was passed. It repealed the uncodified portions of the old Title 46, including the Jones Act, and consolidated them officially into the United States Code. However, today, most judges, lawyers, and members of the maritime community still refer to cabotage laws as the ‘Jones Act.’

As with most protectionist restrictions, there continues to be a robust debate about whether the Jones Act and its successor, Title 46, has been beneficial to the U.S. economy. Supporters of the current restrictions include several U.S. shipping industry groups and support from the U.S. Department of Defense and the U.S. Navy. They argue that maintaining a robust domestic shipbuilding industry – one that can be used for both civilian and military purposes – is vital for U.S. security. On the other side, detractors of the Act argue that it adds unnecessary costs to U.S. consumers and creates barriers to innovation and competition.

Regardless of one’s opinion, the Jones Act has had a significant impact on the transportation of oil and gas around the U.S. According to the latest data from the U.S. Bureau of Transportation Statics (BTS), as of 2021 (the latest year available), nearly 9% of all U.S. oil and petroleum liquids volumes were transported via Jones Act shipping carriers. Contrast this with 1938 (the earliest data available); Jones Act carriers transported nearly 40% (by weight) of total U.S. production volumes. While not entirely responsible for this change away from water-based shipping volumes, Jones Act restrictions clearly have had an impact on the shift to pipelines as the dominant method of transporting energy products in the U.S.

One of the more interesting aspects is why this shift from shipping to pipelines occurred in the first place. Throughout the early part of the 20th Century, the percentage of U.S. maritime and inland water shipping volumes remained relatively stable, growing in line with overall U.S. production until 1942. During World War II, Axis warships actively targeted U.S. shipping as they transported crude and refined products from the Gulf to the East Coast. As a result, the U.S. government built a number of interstate pipelines in an effort to protect the U.S. economy and ensure that refineries could maintain production volumes and continue to support the war effort. After the War, some of these pipelines were converted to transport natural gas. While the total volume of U.S. energy products transported by water has continued to climb, as a percentage, Jones Act carriers continue to lose market share – primarily to pipelines.

Clearly, the restrictive impact of cabotage in the current Jones Act regulations has and will continue to affect the transportation of hydrocarbons here in the U.S. By requiring that only U.S. ships be allowed to move cargo between U.S. ports, the transport of most energy products has shifted from water to pipelines. However, for the reasons discussed, there remains a need for Jones Act-compliant shipping, especially with rising global tensions. Most of the current Jones Act fleet are barges or smaller shipping vessels, moving refined products along rivers like the Ohio and the Mississippi or over shorter distances along the East and West coasts. Like the midstream energy companies we follow, these ships typically operate under long-term contracts – but have markedly less favorable economics than the pipelines that replaced them. Today, there does not appear to be political support to repeal the current Jones Act restrictions; therefore, we believe that pipelines (and rail) will continue to gain market share as the preferred means of liquid hydrocarbon transportation. This supports our positive outlook that U.S. pipeline and midstream energy infrastructure remains an excellent long-term investment opportunity.

1. Energy Statics: A supplement to the Summary of National Transportation Statistics [1973] 1973-09-01 – https://rosap.ntl.bts.gov/view/dot/10915
2. https://en.wikipedia.org/wiki/Merchant_Marine_Act_of_1920#cite_ref-1
3. https://en.wikipedia.org/wiki/Navigation_Acts
4. First Cong., sess. 1, ch. 11, §1 (1789).
5. History and Overview of U.S. Cabotage Laws – https://www.marinelink.com/news/history-overview-us-cabotage-laws-482078
6. The Essential Guide to the Jones Act, https://www.jdsupra.com/legalnews/the-essential-guide-to-the-jones-act-9539701
7. The Jones Act, explained, https://www.pbs.org/newshour/nation/jones-act-explained-waiving-means-puerto-rico

ENERGY MARKETS BY THE NUMBERS
U.S. Total Crude Oil Production and U.S. Crude Rotary Rig Count (as of December 1, 2023):

1. West Texas Intermediary (WTI) oil price was $74.07 per barrel (-7.7% m/m)
2. U.S. oil production was 13.1mm bbl/d (-0.8% m/m)
3. U.S. oil rig count was 505 (+1.8% m/m)

The U.S. Commercial Crude Oil Inventories (excluding those in the Strategic Petroleum Reserve) and Inventory Changes (As of December 1, 2023):

1. Inventory decreased by 4.6 million barrels month over month to 445.0 million barrels (1.9% below the 5- year average).
2. Total crude stockpiles, including the Strategic Petroleum Reserve (“SPR”), decreased by 4.3 million barrels month over month to 796.9 million barrels.

U.S. Imports and Exports (as of December 1, 2023):

1. U.S. crude oil 4-week average imports were 6.6 mm bbl/d, up 5.9% month over month.
2. U.S. crude oil 4-week average exports were 4.7 mm bbl/d, down 4.0% month over month.

U.S. Refinery Inputs and Utilization Rates (as of December 1, 2023):

1. U.S. crude oil refinery inputs averaged 16.2 mm bbl/d for the week ending December 1, 2023. Four-week inputs averaged 15.8 million bbl/d, 4.0% lower than the same time a year ago.
2. Refinery Utilization Rate was 90.5%, up from 85.2% for the previous month. This is lower than the same period last year, which was a 95.5% utilization rate