By Sam Norton.
Yet another “targeted waiver” of the Jones Act was granted over the weekend; this time to allow US sourced LNG to be transshipped from the Dominican Republic to Puerto Rico. Free market champions will cheer this development as one more example of the failure of the Jones Act to meet market needs at a reasonable price. Yet, anyone believing that consumers in Puerto Rico will benefit from this waiver are naïve. New England governors hoping to be the recipients of similar waivers in the weeks ahead should take note. If LNG is selling in Europe at a price five times that available in the Gulf of Mexico, any available LNG this winter will head to Europe – on tankers currently charging $500,000 per day – unless New England buyers match the price paid in Europe. There will be no hometown discount.
Jones Act vessels are more expensive to build, and more expensive to operate in compliance with domestic laws, than foreign flag vessels. This fact is frequently highlighted when international markets are at cyclical lows and transportation on foreign vessels is manifestly cheap. But, when international markets spike – as with container transport last year and currently with LNG and oil tanker trades – the voices of those advocating “free markets” often go silent. Two different business models are at work here: one built on long term contracts, the other on spot markets that are subject to extremes of volatility. Flat pricing environments are of no interest to profit seeking traders. Rather, traders love volatility which generates wide spreads and even wider profits margins. Viewed in this light, it is easy to understand why traders hate the Jones Act ecosystem and its relatively stable pricing structure. Whether consumers should feel the same is another question.
New England is short natural gas and has persistently failed to invest in long term solutions to ensure stable supplies. Environmental interests block pipeline access. Expanded storage capacity is seen as uneconomical given the sharp seasonality of demand. Long term contracts with US flag tankers are undesirable. Dependence on spot market marine deliveries has always been the easy solution. Until it isn’t. The high price of natural gas that can be expected in New England this winter is not a derivative of expensive Jones Act ships. Conversely, had natural gas utilities committed to long term contracts with US owners, exposure to the uncertainties of international supply could have been avoided. Outsourcing supply of necessities may seem a good strategy when goods flow easily at cheap prices. Not so much when markets are disrupted. As with recent examples of semiconductors and personal protective equipment, the need to sustain a domestic marine capability is best debated when the dangers of overreliance on the alternative are most clearly revealed.
Sam Norton is President and CEO of Overseas Shipholding Group (NYSE: OSG).