“Forced use of higher-cost U.S.-flag vessels has benefitted domestic water carrier firms, shipbuilding companies, and associated labor. This advantage, however, has been diluted because inflated shipping costs has reduced the attractiveness of barge and tanker transport compared to other alternatives.”
The current debate over legalization of oil exports is intertwined with cabotage (water vessel) protectionism. The previous two posts (Part I; Part II) examined the history of oil-export regulation by the federal government; this post surveys water-vessel restrictions from Washington, D.C., that directly or indirectly impact the oil trade.
In 1808 and 1817, the United States passed legislation reserving coastwise and intercoastal trade to U.S.-built and registered vessels. [1] Section 27 of the Merchant Marine Act of 1920, commonly known as the Jones Act, reaffirmed this policy and extended it to the noncontiguous U.S. by declaring:
No merchandise shall be transported by water . . . between points in the United States . . . in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States. [2]
Public Resolution 17 on March 26, 1934, expanded the U.S.-flag requirement to any shipper receiving a loan from the Reconstruction Finance Corporation or receiving any other government assistance. [3]
On August 26, 1954, the Merchant Marine Act was amended pursuant to this resolution to require at least one-half of government cargos to be moved by private U.S.-flag ships. [4] This became particularly important with the Strategic Petroleum Reserve (SPR), which received imported oil by tanker. Although not adhered to early in the program, an agreement between the Department of Energy and Department of Transportation regarding SPR gave lucrative preference to American bottoms. [5]
1970s Laws
Two other petroleum-related cabotage laws were passed in the 1970s.
A provision in the Trans-Alaska Pipeline Authorization Act of 1973 banned exports of Alaskan oil unless strict conditions were met. [6] This special-interest coup single handedly pushed water carriers past oil pipelines as the leading transportation source as measured in ton miles by 1980. [7]
The logical scenario would have been to export oil by tanker to Japan and import more oil from traditional sources into the East Coast. But maritime interest groups pushed to “domesticate” Alaskan supply to require transport from Valdez in U.S. flag vessels.
The National Maritime Council reported that as of October 1, 1982, 75 U.S. flag ships aggregating over 6.3 million deadweight tons were transporting crude through the Panama Canal to Gulf Coast and even East Coast refiners. [8]
A third protectionist element of petroleum transport by water came with an Interior Department appropriations bill in 1979 that gave a 50 percent entitlements benefit for oil shipped by U.S.-flag tankers to refineries located in the U.S. Virgin Islands. This political element raised acquisition costs and distorted the refinery equalization program.
A continuous effort has been made since the early 1970s by the maritime lobby to require a percentage of oil imports to be transported on American tankers. In 1972, a 50 percent cargo preference proposal was defeated in the House; in 1974, President Ford vetoed a 20 percent proposal (with escalations to 30 percent by mid-1977); and in 1977, a 4.5 to 9.5 percent minimum requirement was again defeated in the House. Concern over the rising cost of oil imports prevented passage. Protectionist attempts continued in the 1980s. [9]
Industry Winners vs. Consumers (Concentrated Benefits; Diffused Costs)
Forced use of higher-cost U.S.-flag vessels has benefitted domestic water carrier firms, shipbuilding companies, and associated labor. This advantage, however, has been diluted because inflated shipping costs has reduced the attractiveness of barge and tanker transport compared to other alternatives.
Railroads and, to a lesser extent, trucking have benefitted. [10] With petroleum, trunk pipelines have benefitted on certain routes. [11] In fact, many have argued that protective maritime legislation weakened the industry on net and point to historic declines in the U.S.-flag fleet for substantiation. [12]
United States consumers have been saddled with unnecessary oil product costs. Economist Richard Mancke estimated that cabotage regulation of oil products shipped by tanker from Texas-Louisiana refining centers cost East Coast consumers over $100 million per year in the early 1970s. [13]
The total differential between lower-cost foreign-flag vessels and U.S.-flag vessels from the Jones Act, including Alaskan oil and SPR oil in addition to coastwise transport, would bring Mancke’s sum to much higher levels for subsequent years.
[1] Wytze Gorter, United States Shipping Policy (New York: Harper and Brothers, 1956), p. 131.
[2] Public Law 261, 41 Stat. 988 (1920).
[3] 48 Stat. 500 (1934). This would later apply to Import/Export Bank loans.
[4] Public Law 664, 68 Stat. 832 (1954).
[6] See the appendix to chapter 13, pp. .
[7] See Table 16.2 above, pp. .
[8] Press Release, National Maritime Council (December 21, 1982), p. 2.
[9] A plan to require 5 percent of imports and exports to be carried by U.S. built and registered vessels, with the amounts rising one percent a year until reaching 20 percent, titled the Competitive Shipping and Shipbuilding Act of 1983, was defeated. With under 5 percent of cargoes currently on U.S. ships, the bill was estimated to cost consumers $10 billion per year and was opposed by the American Petroleum Institute. OGJ, July 11, 1983, p. 43.
The decline in market share by U.S.-flag ships in oceanborne trade from the World War II era (in thousand long tons) can be seen below:
Year Cargo – Percent Year Cargo – Percent
1940 23,204 31% 1965 27,361 8%
1945 61,736 69% 1970 26,527 6%
1950 49,914 43% 1975 31,347 5%
1955 47,094 24% 1980 28,199 4%
1960 30,968 11% 1983 36,711 6%
Source: U.S. Maritime Administration
[10] See the discussion in Gorter, United States Shipping Policy, pp. 133-34.
[11] Wolbert, U.S. Oil Pipelines, p. 134.
[12] Richard Mancke, The Failure of U.S. Energy Policy (New York: Columbia University Press, 1974), p. 123.
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Note: This post is adapted from Robert Bradley, Oil, Gas, and Government: The U.S. Experience (1996), pp. 1000–1002 .