U.S. Protectionism Gives Boost to Russian Energy Imports

By Colin Grabow of Cato.

"As outrage mounts over Russia’s invasion of Ukraine, Americans may be chagrined to learn that despite being the world’s largest oil producer and a net exporter of petroleum products, the United States turns to Russia to help meet its energy needs. Indeed, imports of Russian petroleum products have averaged over 370,000 barrels per day over the last decade, and in 2020 Russia was the third‐​largest source of U.S. petroleum imports. But why? While a number of factors explain this phenomenon, part of the answer lies in protectionist U.S. policy. More specifically, the Jones Act.

Passed in 1920, the Jones Act restricts the domestic waterborne transport of goods to vessels that are U.S.-flagged, U.S.-built and mostly U.S.-crewed and owned. But such vessels are several times more expensive to build and operate than foreign ships, resulting in very high shipping rates. So high, in fact, that after factoring in the cost of Jones Act shipping it can often make more sense to buy products from distant countries rather than other parts of the United States—including petroleum.

An explainer about the importation of Russian oil and petroleum released last week by the American Fuel & Petrochemical Manufacturers (AFPM), for example, strongly hints at the role of expensive domestic waterborne transport.

U.S. West Coast refineries rely on imports of light sweet crude oil from other countries, including Russia, because access to U.S. produced light sweet crude oil is challenged by geography, transportation and logistics [emphasis added],” AFPM states. The blunt the impact of U.S. reliance on Russian imports, the group adds that policymakers can “provide relief from…policies that make it uneconomic to transport crude oil and petroleum products domestically.

A December 2021 statement from AFPM was more explicit about the Jones Act’s impact on sourcing decisions. Noting that half of California’s crude oil needs are secured internationally, AFPM’s Chief Industry Analyst Susan Grissom blamed the state’s inability to secure domestic supplies on “a lack of pipeline and rail transportation options and cost‐​prohibitive Jones Act shipping requirements.”

Other sources also confirm the 1920 law’s distortionary role. A 2019 Reuters story, for example, highlighted a California refinery’s importation of crude oil from Nigeria instead of other parts of the United States at least partly due to the Jones Act while a 2017 report from the California Energy Commission noted that it cost 67 percent more to ship gasoline to California from the Gulf Coast than Singapore owing to the cost of Jones Act vessels and Panama Canal fees.

A 2017 Financial Times story, meanwhile, cited the Jones Act as a leading reason why East Coast refineries import foreign crude rather than turning to domestic suppliers.

When it’s cheaper for Americans to import oil and gasoline from abroad than other parts of the United States, no one should be surprised when that’s exactly what they do.

But sometimes the purchase of American energy isn’t just more expensive because of the Jones Act, but flat‐​out impossible. Despite a domestic abundance, liquefied natural gas (LNG) cannot be transported within the United States by water owing to a complete lack of LNG tankers compliant with the law (perhaps no surprise given that building such a vessel in the United States is estimated to cost over $500 million more than one constructed abroad). Instead, regions of the United States reliant on LNG tankers to meet their energy needs—New England and Puerto Rico—must source their natural gas from abroad. While such purchases are mostly from Trinidad and Tobago, recent years have seen cargoes that originated in Russia.

And so it is that a law justified on national security grounds encourages the purchase of foreign, including Russian, energy supplies over those produced within the United States.

In recent days there has been an understandable desire to punish Russia through sanctions. But changes to the Jones Act or even temporary waivers allowed for reasons of national defense should also be firmly on the table. Revisiting the law offers a unique two‐​fer that could both disincentivize the purchase of Russian energy products while offering a needed boost to the U.S. economy at a moment of increasing uncertainty."