On Wednesday March 18, 2020, crude prices fell to their lowest levels in 18 years. As companies and industries around the world are bracing for an unknown global economic slowdown brought on by COVID-19, domestic oil companies and others are already looking towards policy shifts from the U.S. federal government to help adapt to this new global reality. Even before the swath of shelter-in-place orders, prohibitions on gatherings of more than 10 people, and tightening of international borders rolled out over the past week; U.S. based shale drillers were already worried about the inability to compete on production costs as Saudi Arabia and Russia flood the market with crude. Bahri, Saudi Arabia’s tanker company has been heavily chartering vessels, and has provisionally hired 25-30 VLCCs (with delivery over the coming weeks) to supply tens of millions of barrels of crude oil to the open market. In an effort to combat the price plunge and the unknown short-term and long-term economic realities caused by a world-wide pandemic, last Friday President Trump announced a plan to purchase enough crude oil to fill the U.S.’s Strategic Petroleum Reserve “right up to the top.”
The American Exploration and Production Council (“AXPC”) has already requested a temporary waiver of the Jones Act, calling for the measure on Friday March 13, 2020. The Merchant Marine Act of 1920 (the “Jones Act”) restricts domestic coastwise trade by requiring all goods transported between U.S. ports to be carried on U.S.-flagged vessels. Operating under a U.S. flag is generally more expensive as it requires the vessel to be partially constructed in the United States, as well as to be owned and crewed by United States citizens. There is precedent for the law to be modified or its restrictions waived in times of national crisis. For example, in 2017, President Trump waived the act temporarily for Puerto Rico, allowing much needed humanitarian relief to reach the island after Hurricane Maria. Though critics later questioned the overall effectiveness of the measure.
The complete repeal of the Jones Act has historically had some vocal supporters, specifically the late Senator John McCain, who described it as an “antiquated law” that hinders free trade and raises prices for American consumers. While the Jones Act has its detractors, it also has supporters, including the U.S. maritime industry and shipbuilding interests. In response to AXPC’s request, the American Maritime Partnership rebuked the request as unfounded and unnecessary stating: “[a]t a time of American crisis and uncertainty, a waiver to the Jones Act would only open our borders and markets to foreign shipping with foreign crews that pose an added threat to the safety and security of our nation’s health.” On Thursday March 19, 2020, two Houston terminals (Barbours Cut and Bayport Container) were closed indefinitely after a worker tested positive for COVID-19.
Given the rapidly evolving landscape, Congress and/or the President may look to repeal or alter parts of the Jones Act to remain globally competitive and stimulate the U.S. economy. As AXPC warned: “[o]ur industry requires constant capital investment and, at these artificially low prices, our industry cannot work.” As of this writing, modifications and/or waivers to the Jones Act have not been officially recommended by the White House or Congress as a response to the COVID-19 outbreak (or the drop in crude prices). However, President Trump, Vice President Pence, and Secretary of the Treasury Steven Mnuchin have made clear that all options for economic stimulus are being considered. A relaxation of the Jones Act could be one of those measures on the horizon.
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