A new study makes a ‘conservative estimate’ of the millions that American consumers end up paying because of the protectionist statute.
Almost $800 million per year in costs for consumers of petroleum products alone, according to a new paper.
The Jones Act was passed in 1920 and is one of the strictest protectionist laws on the books. It says ships carrying freight between U.S. ports must be built, owned, and crewed by Americans, and they must be flagged in the U.S. Few ships meet those requirements (in the case of LNG tankers, zero ships meet those requirements), so American consumers pay higher costs for a variety of goods.
Those costs are especially notable in the petroleum industry. Most refining in the U.S. is done near the Gulf Coast. It would be very convenient to load gasoline, jet fuel, diesel, and other refined products onto ships and transport them to the East Coast, which is home to a significant portion of the U.S. population. But the Jones Act makes that difficult, so the East Coast frequently imports fuels from abroad that cost more than what U.S.-made fuels would cost.
Ryan Kellogg of the University of Chicago and Richard Sweeney of Boston College calculated the costs of the Jones Act on East Coast petroleum markets in a new National Bureau of Economic Research working paper. They only look at the East Coast because transporting petroleum products by water to other regions would be less practical. They use data from 2018 and 2019.
They found that repealing the Jones Act would increase consumer surplus by $769 million per year. That means consumers are currently paying $769 million per year for petroleum products that they wouldn’t have to pay if it weren’t for the Jones Act.
Most of the gains would come in the Southeast, the region closest to the Gulf Coast. They found that repealing the Jones Act would almost completely replace petroleum-product imports for West Virginia, Virginia, North Carolina, South Carolina, Georgia, and Florida. The average price of gasoline in those states would decrease by 76 cents per barrel.
For the entire East Coast, they found that if the Jones Act didn’t exist, U.S. gasoline would replace 36 percent of imports, and average prices would decrease by 63 cents per barrel. Imports of jet fuel and diesel would essentially disappear entirely.
Note that this is a case of protectionism in one industry (water transportation) creating demand for imports in another industry (petroleum products). This is one example of how protectionism often doesn’t have straightforward effects on the trade deficit.
Without the Jones Act, the average price of gasoline in Gulf Coast states would increase by 30 cents per barrel, the paper found. Because of the Jones Act, a bunch of gasoline is essentially trapped there, where it is refined. The increased ease of transportation would reduce that supply somewhat, causing the price increase. But the much larger gains for gasoline consumers from Maine to Florida more than compensate for the smaller increase in Gulf Coast states.
Repealing the Jones Act would allow the law of one price to operate more smoothly. Gasoline is a homogeneous good, which means it should have the same price anywhere in a perfectly competitive market. Obviously, the real world diverges from theory, but transportation costs are one of the top reasons for regional price disparities in gasoline. The Jones Act and regulations preventing more pipeline construction contribute to higher transportation costs between regions.
Kellogg and Sweeney write that their paper likely represents a conservative estimate of the gains in consumer surplus in petroleum markets if the Jones Act were repealed. Their paper assumes supply and demand for petroleum products is perfectly inelastic. In real life, the lower prices would likely increase demand, and easier market access would likely incentivize higher supply. They also don’t consider gains from greater efficiency that would result from water transportation replacing rail-transported petroleum products from other parts of the United States.
Despite their findings, Kellogg and Sweeney are pessimistic about Jones Act abolition. They write that it is a classic case of dispersed costs and concentrated benefits. Divided over the roughly 120 million residents of East Coast states, the benefits of repeal would only come out to about $6 per person per year. The Jones Act carriers who benefit from the law are much more apt to notice its absence, which keeps politicians afraid of repeal.