US shipping rules complicate bid to ban Russian oil and gas

As pressure builds to end the flow of Russian oil and gas into the United States, some lawmakers are pointing to a century-old shipping law as a potential hurdle.

A section of the Merchant Marine Act of 1920 — commonly referred to as the Jones Act — requires that merchandise transported by water between U.S. ports be shipped solely aboard vessels that are U.S.-built and owned and crewed mostly by Americans.

“This encourages a strong U.S. Merchant Marine for both economic security and national defense by fostering a U.S.-flag fleet that can contribute to our financial wellbeing, and act as a sealift resource for the transportation of supplies in time of contingency,” according to the U.S. Maritime Administration.

But the law, established to create a secure network of American vessels after the German navy sank U.S. ships during World War I, has long been a point of contention between backers who say it helps promote domestic shipbuilding and shipping and critics who view it as an outdated, protectionist policy that unnecessarily raises costs for consumers.

Following Russia’s invasion of Ukraine, Jones Act critics have blamed the law for why parts of the United States, such as Hawaii, import oil and gas from Russia rather than using domestic supplies.

Hawaii’s only refinery announced recently it was suspending purchases of Russian crude oil, which prompted the Grassroot Institute of Hawaii, a right-leaning nonprofit think tank, to write a letter to President Joe Biden calling for a one-year waiver of the Jones Act.

“Because of the Jones Act, it is too expensive to import oil from U.S. sources,” the group wrote. “Thus, Hawaii is almost wholly dependent on foreign sources for its oil imports, including a quarter to a third from Russia, which has made the islands especially vulnerable among U.S. states to fallout from the crisis in Ukraine.”

But the law puts significant restrictions on issuing such a waiver, said Charlie Papavizas, a partner at Winston & Strawn LLP who specializes in maritime law.

War effort

He said President Franklin Roosevelt signed an executive order allowing the waiver of navigation-related rules immediately after the attack on Pearl Harbor in 1941, in an effort to maximize flexibility for the coming war effort.

But the constitutional authority of that executive order was never tested. Congress later codified the waiver authority into law but included guardrails on how it can be used.

Relatively uncontroversial Jones Act waivers have been issued over the years, particularly in the face of natural disasters such as major hurricanes.

The shipping industry was dismayed, however, when the Obama administration released oil from the Strategic Petroleum Reserve, a cache of crude oil in a series of caves in Texas and Louisiana, with the minimum quantities set at such a level that no U.S. ship could qualify, Papavizas said.

That resulted in waivers that fueled new efforts to narrow the circumstances when waivers could be issued.

In particular, language was included in the National Defense Authorization Act that became law in 2021 when Congress overrode then-President Donald Trump’s veto.

Little noticed then, the new language says the Defense Department can waive Jones Act compliance to the extent the secretary considers necessary in the interest of national defense “to address an immediate adverse effect on military operations.”

The waivers have long been tied to national defense considerations, but the addition of the “military operations” language means it’s unlikely the kind of waiver request made by the Grassroot Institute in Hawaii can be granted. Other restrictions have been placed on waivers from non-DOD agencies, typically the Department of Homeland Security.

“It used to be a little more of an available tool,” Papavizas said of the waivers. “I don’t see how it’s much of a tool anymore in these kinds of situations.”

Congress could, of course, make changes to the law to make it easier to get a waiver. But the Jones Act has a long history of bipartisan support on Capitol Hill.

When the House Transportation and Infrastructure Committee marked up a Coast Guard bill last week, Rep. Scott Perry, R-Pa., offered an amendment to create a Jones Act exemption for ships carrying liquified natural gas, or LNG.

Perry said few LNG ships compliant with the Jones Act have been built and those available are refueling barges rather than LNG transport vessels. He called that a “damning indictment” of the argument that protecting the industry from competition incentivizes shipbuilding.

“The truth is the failure of the shipbuilding industry to meet this moment and produce affordable ships is the reason that American cities, territories and states are unable to consume … American LNG and instead are literally forced to accept foreign natural gas from Russia,” Perry said. “This absolutely completely undermines our economic security and our national security, destroying the very basis for the Jones Act itself, as it benefits our enemies at the expense of American natural gas Producers and people that want to consume it.”

Maritime history

Rep. Peter A. DeFazio, D-Ore., the chairman of the committee, pushed back, saying the United States was once a “great maritime nation” now dependent on foreign nations to transport goods, at times with incompetent crews on unsafe ships.

“We need to crew vessels with competent crews who are paid decently and have good working conditions and this amendment would move us away from the potential for someday achieving that goal,” DeFazio said.

He said major international shipping conglomerates have raised prices and gouged Americans to make record profits.

“To create further dependence upon this would be a disaster for the United States,” DeFazio said.

As bipartisan legislation to cut off U.S. imports of Russian fossil energy has gained traction, Biden administration officials have declined to endorse or oppose the idea.

On Friday, Cecilia Rouse, chair of the Council of Economic Advisers at the White House, was noncommittal on sanctioning the import of Russian oil and gas.

“We don’t import a lot of Russian oil,” Rouse told reporters. “But we are looking at options that we can take right now if we were to cut the U.S. consumption of Russian energy.”

Rep. Ed Case, D-Hawaii, has legislation that would exempt foreign-flagged ships from Jones Act requirements if they met other requirements on labor, cargo, the environment and trade. Rep. Tom McClintock, R-Calif., and Sen. Mike Lee, R-Utah, have their own bills to loosen the Jones Act.

Due to its geography, Hawaii imports oil to generate electricity. About two-thirds of its electricity comes from oil, according to federal data.

After corporate consolidation in 2020, the state has one active crude oil refinery, and while Hawii receives oil shipments from Alaska, its foreign oil imports came from Argentina, Libya and Russia in 2020, the latest year of Energy Information Administration data available.

Eliminating the Jones Act would lower fuel costs passed on to the public, curb American reliance on foreign oil and gas imports and prod the domestic shipping industry to compete with foreign vessels, Shuting Pomerleau, a climate analyst at the Niskanen Center, a libertarian think tank, said in an interview.

“The Jones Act is a textbook case of protectionism,” Pomerleau said. “I think it’s just a rational choice for U.S. consumers to choose lower-cost energy.”

Defenders of the Jones Act dispute the suggestion that it raises the costs of goods and say it holds important benefits for the United States.

“The Jones Act is critical to the military strategy of the United States, which relies on the use of U.S. flag ships and crews and the availability of a shipyard industrial base to support national defense needs,” according to trade association the American Maritime Partnership.

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