Wednesday, June 23

The Jones Act and the Oil Spill

I am going to start with a disclaimer in that I am no Jones Act expert. That said…

Many of you have noticed that in the news coverage of the DEEPWATER HORIZON disaster are references to the Jones Act and allegations that Jones Act restrictions are hampering cleanup efforts. With this in mind, here is a simple summary of the points.

Jones Act Restrictions

The Jones Act was born as part of The Merchant Marine Act of 1920. From Wikipedia:

The Merchant Marine Act of 1920 (P.L. 66-261) is a United States Federal statute that regulates maritime commerce in U.S. waters and between U.S. ports.

Section 27, also known as the Jones Act, deals with cabotage (i.e., coastal shipping) and requires that all goods transported by water between U.S. ports be carried in U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. The purpose of the law is to support the U.S. merchant marine industry, but agricultural interests generally oppose it because, they contend, it raises the cost of shipping their goods, making them less competitive with foreign sources. – Wikipedia

In short, US Maritime shipping has the following requirements:

  • US Owned
  • US Flagged
  • US Built
  • Crewed by Americans

So, unless your vessel meets all of the above requirements, you are not able to ship cargo between US Ports. Looking to ship US-made BMWs from Charleston to New York by sea, then you need to ship on a Jones Act complaint vessel. And given that building a ship in the US is extremely expensive, your choices are limited.

The Effect
The Jones Act effects different parts of the US in different ways. I believe that those most effected are Hawaii, Alaska, Puerto Rico and other remote US possessions like Guam. These places are almost entirely dependent on shipping.

One group that has traditionally had issues with the Jones Act has been farmers and politicians from farming states. This is because farmers are required to use US-Flag shipping to move their cargo. They claim that US-Flag ships are too expensive and make their goods uncompetitive when it comes to the export market. Then again, the farmers are forced to use US ships because they are receiving aid from the Government in the first place. So while they complain, don’t feel like you have to shed any tears for them.

Now the Jones Act is not all prohibitive. Ships of any flag can go from one US port to another and load and discharge cargo. They just cannot discharge cargo that they loaded in another US Port. For example a foreign-built, US-Flag containership coming from Bremerhaven can load and Discharge loaded containers in New york and then proceed to Baltimore and do the same thing, provided that containers just loaded in New York are not discharged. Since moving cargo by sea is very efficient, the Government has been thinking about encouraging more of this ‘Short Sea Shipping’. Also, US Regulations permit the movement of empty containers from one US-port to another on non Jones Act vessels. Think of containers as equipment, not cargo.

The ownership requirement is a little odd. My first ship was the car carrier NOSAC RANGER; NOSAC standing for Norwegian Specialized Auto Carriers. While the owners on paper were in New Jersey, the ‘real’ owners were in Norway. Then you have MAERSK Lines of New Jersey (Denmark), Lykes Lines (Now CP ships, Canada), American President Lines (Singapore) as a couple more examples.

The one qualification that cannot be changed on a ship is the US-build requirement. If a ship was not built in a US-yard, it will most likely never operate in a Jones Act route. That said, it is always possible that part of the requirements be waived to meet shipping needs in cases where a ship that meets the requirements is not available. One big example of this is the Hawaiian Islands cruise trade. Be willing to build a US-Flag cruise ship and the Government might be willing to let you start trading using a foreign built ship. (In actual practice such deals have not worked out very well.) President Bush temporarily waived the Jones Act for a couple of weeks in the wake of Katrina.

As for the crewing requirement, just think of these jobs as being no different than train, bus and truck jobs between the same cities. It makes sense to justify reserving work moving cargo from one US port to another. Letting foreign ships and crews move cargo within the US would be like letting foreign airlines and truckers move cargo within the US. (Do not confuse this comment with the movement of NAFTA cargo from Canada and Mexico)

As it so happens, the DEEPWATER HORIZON, despite drilling off of the US Coast, was not US-Flagged. It was foreign flagged. It was US crewed and the actual drilling operations, the cause of the current crisis, were under US Government regulations and inspections, not the Flag State. Having this rig US Flag would not have effected the outcome as the US was already responsible for overseeing that drilling regulations were being followed.

The Spill
There is no doubt that this spill is massive. It is an ‘all-hands’ event. Allegations have been made that the spill cleanup has been hampered because vessels have been excluded from participating in the cleanup because they are not qualified for this work due to the Jones Act.

From what I can tell, there are two issues here. One being whether the Jones Act applies to cleanup vessels and the other being whether or not there is a shortage of vessels qualified to operate under the Jones Act.

So, does the Jones Act apply?
It certainly does. These vessels are going to have to operate in waters that are under US control. They will call US ports, go to sea and return to the US without making a foreign voyage/ calling a foreign port. I would call that domestic activity. (And do comment if you think my logic here is wrong)

Given the size of this spill, I suspect that there will be room for foreign vessels to operate in the Gulf from Mexico and from the Caribbean as part of the cleanup effort. However the impact these vessels will have on US beaches will be minimal given that they will not be able to operate close to US shores. Not that that matters though, right. They should be trying to pick up as much oil as possible no matter where it is.

So, is there a shortage of Jones Act qualified response vessels?
As mentioned earlier, it is very expensive to build a US-Flag ship. However, there are lots of smaller vessels like tugs, fishing and offshore supply vessels that can participate in the cleanup. Add to that the President’s knee-jerk reaction in killing much of the drilling in the Gulf and you now have many offshore support vessels not doing anything else who can also participate in the cleanup.

Let’s say that there is a shortage. All it takes is for the Government to lift the Jones Act for the purpose of assisting in the cleanup. Might there be some highly efficient and specialized foreign ships that would be useful in this cleanup. Sure. Do I think that the Government should assist our International friends in letting them offer up a ship or two (or ten) to the cleanup effort? Yes. I doubt that they would take any jobs away from Americans. After all, this spill is so large that there should be hundreds of vessels fighting it. (I have no idea how many are actually employed in the cleanup)

Just this morning I read this story from The Maritime Executive which denies that the Jones Act is negatively impacting the cleanup.

Some have criticized the Jones Act, which requires the use of American vessels for transportation in domestic commerce, for hindering the Gulf clean-up. Not true, said the NIC and the Coast Guard.

“In no case has the Federal On Scene Coordinator (FOSC) or Unified Area Command declined to request assistance or accept offers of assistance of foreign vessels that meet an operational need because the Jones Act was implicated,” said a June 17 NIC Fact Sheet [Note: See the pdf fact sheet here which notes that there are already 18 foreign vessels involved in the cleanup].

The NIC Fact Sheet noted that foreign vessels from many nations are already working in the Gulf. The Jones Act only applies within three miles of shore. [Note: they might want to clarify that comment] Therefore, foreign skimmers, along with American skimmers, are already at work beyond three miles. The Deepwater Horizon spill is occurring 50 miles from shore, and the vast majority of oil is beyond 3 miles. – The Maritime Executive (Click to read the entire article)

So there you have it. I am not so sure about that comment about the Jones act only applying within 3 miles of shore. While this article was meant to be a simple summary, I think that can be called an over simplification.

Feel free to comment, criticize and clarify in the comments section.

One final note. the DEEPWATER HORIZON Response site is located here.

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