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Inside, confidential and off the record


The Jones Act must end

The Jones Act must eventually be ended. It is an anachronism from the Depression, ....


Beginning with a legislative change that took place in December of 2015, the US trade of crude and products exports to countries other than Canada were enabled.

This was long, long overdue as US crude production ramped up sharply as the Bakken in North Dakota, the Permian Basin in west Texas, along with the SCOOP in Oklahoma came on line hard and continuously.

The problem is, two fold, however; firstly there are no real viable pipelines that link the oil fields of North Dakota, Texas and Oklahoma with the East coast refineries, and secondly, the Jones Act remains in effect, requiring that any and all goods and services that start and end their transports within the US have to be carried by ships built solely in the US and must be crewed by US crews only.

This was put into effect at the protectionist behest of the Teamsters and US shippers years ago; it made no sense then and it makes lesser
sense now.

For example, crude oil from any of these central US sites makes its way to the Gulf of Mexico and is loaded on tankers there that carry that crude oil to Europe and even to Africa because there are so few Jones Act capable tankers available to carry that crude to the US East coast refineries. Instead, crude oil from Africa...
primarily Nigeria and Angola... makes its way to Philadelphia, Pennsylvania or Newark, New Jersey.

This is economic nonsense of the first order. According to the good people at Clipper Data, back in 2015 the US was shipping 50,000 bpd from the Gulf of Mexico to the east coast refineries; it fell to 25,000 bpd last year and is barely above 10,000 bpd today. At the same time, US exports from the Gulf of Mexico to foreign countries other than Canada have risen from about 100,000 bpd in 2015 to nearly 325,000 bpd presently. Further, at the same time the US refineries on the East Coast are bringing in nearly 1.0 million bpd from Nigeria and Angola up from 0.5 million bpd two years ago... godsends to these two west African nations who are all but too happy to have this relationship continue, but economic nonsense otherwise.

The cost of shipping crude oil from the Gulf to the East Coast using Jones' Act compliant ships is about three to four times that of using foreign shippers. Indeed the President of OSG, Mr. Sam Norton recently noted that Jones Act [compliant shipping] is more expensive. Everybody knows that. If there were not a Jones Act then there probably would be more movements of crude oil from Texas to Philadelphia.

Mr. Norton is kind; he should have said that if there were no Jones Act there is no doubt but that there would be more exports of crude oil from the US Gulf of
Mexico to the US East Coast. This has transportation problem is perhaps the single reason why WTI has fallen to such as steep discount to nearby Brent: it has to in order to remain even tacitly competitive with Brent.

Earlier this year, nearby WTI sold on average about $2.50/barrel discount to nearby Brent. Recently, that spread had widened to $7 and is stabilizing at or near $6.00/barrel presently and at $7/barrel discount it is almost economic to ship cru de from the Gulf to the East Coast refineries as WTI is then sufficiently
"cheap" to be competitive.

The Jones Act must eventually be ended. It is an anachronism from the Depression, that is defended by trade protectionists such as the Teamster's still
and US ship owners, and sadly it apparently has the support of the American public and of the President so its demise is like Mark Twain's death, greatly exaggerated… but highly unlikely. But go it should if economic wisdom were actually to prevail. Hope can be held out.

Dennis Gartman / The Gartman Letter / October 20, 2017

Link to the original article

ISSUES.... 10/ 23/ 2017 - Send Us Your Issues

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