The requirement under the Jones Act that ships moving cargo between two U.S. points be built and registered in the United States and crewed by Americans has attracted attention from everyone from television stock-picker Jim Cramer to groups such as American’s for Tax Reform and the Heritage Foundation.
American Maritime Partnership (AMP), a lobbying organization for the domestic shipping industry, said the Jones Act requirements have been unfairly blamed for the rising price of gasoline, and it put American Shipper in touch with one of its board members, Eric Smith, vice president and chief commercial officer at Overseas Shipholding Group, to discuss the issue.
Smith doesn’t deny there has been an increase in charter rates for domestic ships over the past year, saying the rate for one of the dozen 46,000-deadweight-ton product tankers that were built for his company at the Aker Philadelphia Shipyard today charters for about $65,000 per day, if available, compared to a daily rate of $50,000 last year, or $40,000 two or three years ago, and $60,000 four years ago. Charterers are also likely to have several ships at different rates on charter. Aker says those tankers carry about 14 million gallons of product, so over the last year that $15,000 increase in charter costs works out to about a tenth of a cent per day.
How about the higher cost of building new tankers in U.S. shipyards? Smith said a new Jones Act ship might be four-times more expensive than one built overseas. Suppose the difference in cost was $100 million — Smith said the difference in price is actually smaller. If the ship makes 50 trips a year, or 1,500 trips over its lifetime, that amounts to less than half a penny per gallon per voyage.
The price of crude oil and taxes are the main drivers of oil prices, Smith said. He explained most of OSG’s tankers are employed to move cargo from refineries along the U.S. Gulf to Florida (about a one-week roundtrip) where there is no pipeline, or to the U.S. West Coast, where he said there is a plethora of refineries and distribution to the market, yet the cost of gasoline in California is substantially higher.
He said his company’s tankers make occasional trips to the U.S. East Coast, but added those trips are rare since almost all product gets to the Northeast via pipeline.
Getting exact figures of where petroleum products move by vessel or pipeline is a little tricky. However, the Energy Information Administration does publish figures on the movements between so-called Petroleum Administration for Defense Districts (PADDs), which can give you an idea of the relative amounts that move by pipeline and tanker. For example, in 2011, from PADD 3 (which includes Texas and Louisiana) to PADD 1 (East Coast), 924.5 million barrels moved by pipeline and 214 million barrels by tankers and barges. And just 11 million went to New England or the Mid-Atlantic states, while 203 million barrels went to the lower Atlantic states, including Florida.
(Smith noted crude movements from the Gulf of Mexico to the U.S. East Coast have not been significant for 15 years, although some movements of shale oil are beginning to occur because Delaware River refineries are not very sophisticated and need light sweet crude, like that coming from the Eagle Ford and Bakken fields.)
Smith’s main point to us is that moves of product would not occur if they were not cost effective — nobody is twisting the arms of oil companies to buy crude oil or product in the United States, and they are buying this oil and moving it in Jones Act tankers because it’s the most economical choice available to them.
While much of the international tanker industry — including that side of OSG’s business — has had a rough time of it (OSG filed for protection under Chapter 11 last year), the domestic portion is doing well. Bouchard recently ordered an articulated tug barge from VT Halter with an option for a second and Aker Philadelphia said recently it signed a letter of intent with an unidentified buyer to build two more tankers, with an option for two more.
“That tells me as a shipowner that the industry is strong, that the market is in balance, but there is recognition that there is a need over the next couple or three years to replace aging tonnage,” Smith said. – Chris Dupin
Commentary: Unfairly blaming the Jones Act?
