The Exchanges

Q Fascinating. So weird. Um, okay, as we talked about fuel, I mean, the other more nascent, but possibly more existential challenge posed by the Jones Act in the context of energy has to do with the emergent Industry of offshore wind. So what is the, uh, what's the deal there?

A Yes, so, um, you're right. We have, the United States is, uh, trying to launch an offshore wind industry. It's, it's pretty small, but there, uh, plans to ramp up significantly. And the Jones Act is an obstacle here, uh, not surprisingly, given that this is all taking place offshore. Um, so, for example, uh, one key vessel needed to install, um, Offshore wind turbines is a wind turbine installation vessel. This is a, a vessel that has a giant crane on it for lifting up the different turbine components and assembling them. Um, so typically the way that this works overseas is that, uh, a wind turbine installation vessel goes into port, loads up with components, uh, and then goes offshore to do the installation. Um, but in the United States, we can't Do that because we don't have any vessels, uh, wind turbine installation vessels that comply with the Jones Act. So the workaround, uh, here is, there's two possibilities. One is that, uh, you position the installation vessel, the foreign installation vessel, because they're all foreign, uh, at the installation site, and then you load the components onto a barge, and the barge goes out to where the installation vessel is, um, Because, uh, that way the, the installation vessel doesn't engage in transportation, which is the thing prohibited by the Jones Act. So, uh, and then the other, other alternative is you can just operate out of a …

AI assessment note: “we don't have any vessels, uh, wind turbine installation vessels that comply”

Q Let's talk about the Jones Act, um, starting with a history lesson. So give me the, give me the background. Why did we pass the Jones Act, when, and what was happening at the time that made it worthwhile politically?

A Yeah, so the Jones Act is formally Section XXVII of the Merchant Marine Act of 1920. Um, but it bears mentioning that, uh, laws like the Jones Act You know, the Jones Act wasn't the first time we imposed restrictive laws, uh, on shipping, and I should get into what the Jones Act is. So the Jones Act basically, uh, mandates that if you're going to, uh, transport something by water within the United States, you have to use a vessel that meets four conditions. Uh, the vessel has to be flagged and registered in the United States. It has to be at least 75% owned by American citizens. It has to be crewed by American citizens, uh, Uh, and it also has to be built, uh, in a U.S. shipyard. But again, so, um, this is passed, but this doesn't, um, mark, like, the advent of these type of restrictions. It's not as though, you know, pre-nineteen 20, you could use whatever ship you wanted, built wherever, crewed by whoever. Um, these types of restrictions go back to the country's founding. So this brings up, you know, an obvious question. Well, if these laws have always been around, what was the point of the Jones Act of 1920? Well, if you go back to the country's founding, um, these laws were put in place, uh, basically to try to ensure the United States had ships that could be relied upon in times of, uh, war, national emergency. Uh, it's worth keeping in mind that, you know, the British wer…

AI assessment note: “the Jones Act is formally Section XXVII of the Merchant Marine Act of 1920.”

Q vessel owned by Americans constructed in America, the United States of America. Um, let's sort of accelerate the history lesson. So since 1920, at that point that that was happening, as you said, it was relatively easy to comply. We had a big shipbuilding industry. There's a lot of reasons to do it militarily. What has happened since 1920 to, uh, intra-United States shipping and to the shipbuilding industry here?

A Yeah, so both have gone into pretty, um, pronounced declines. If you look at the shipbuilding industry, so back, I think, in 1922, there's a government report that said around that time, a U.S.-built ship was roughly 20% more expensive than one built abroad. Um, and, and that, that, that, You can find similar stuff from like the late 1800, placing it like 20 to 50%, somewhere in that range. Well, by the 19 thirties, it was up to a 50% premium for U.S. built ships. By the 19 fifties, a U.S. built ship was double the cost of one built abroad. By the 19 nineties, it was triple the cost of one built abroad, and today, a U.S. built container ship is somewhere around five times more expensive than one built abroad, while a tanker, which Maybe for interest to your audience with the energy angle, um, tankers about four times more expensive than one built abroad. So, for example, medium range tanker built overseas is somewhere around fifty million dollars, where you're looking at least two hundred million dollars to build one here in the United States.

AI assessment note: “both have gone into pretty, um, pronounced declines.”

Q bare minimum, because of the restrictions we're placing here, there's going to be enough of a U.S. shipbuilding industry and, and shipping industry to serve our own domestic needs. There will have to be. Um, is that not true? Or I guess we didn't get to the other side of the equation. We talked about the shipbuilding part of it. What about shipping? Like, how much are we doing now?

A You bring up a great point. So I think on the surface, that, that makes a lot of If you just look at the geography of the United States, you would think, yeah, this is a country that requires a lot of ships, um, for no other reason than, say, we have places where it's really only economical to ship, uh, with, with, you know, waterborne transport, um, you know, thinking the non-contiguous states and territories, Hawaii, Alaska, Puerto Rico, Guam, um, but in addition to that, we also have, you know, thousands of miles of coastline. We have the Great Lakes, um, We have, uh, the Mississippi River and other important river systems. You would think that this is, um, just geographically lend itself to a lot of water transportation, but basically what's happened is we've made water transport so expensive and uncompetitive in this country that, uh, we've shifted towards other modes of transport, um, you know, trucking, rail, pipeline. Uh, if you look at The data, something like only two percent of freight in the United States is transported by ships. You add in barges, that's like another four percent. So we're well under 10% for water transport in the U.S. So I think it's a combination of A, that our shipping has become very uncompetitive, and then also, you know, we have the development of the interstate highway system. Uh, our railroads are some of the best in the world. So some of t…

AI assessment note: “only two percent of freight in the United States is transported by ships”

Q I mean, I think you're alluding to the constituency in support of it, which is probably whatever remains of the U.S. shipbuilding industry. But given that this thing has been in place since 1920, and given the dynamics you described around what's happened to the industry and all the ways in which it has changed our Our shipping, um, why haven't we repealed it? Or at least significantly changed it.

A Right, right. I think that's, perhaps the bigger puzzle here is not only we haven't repealed it, but it's basically been left in place, um, without any, uh, significant modifications. So why is this? And I think it's a classic case of dispersed costs and concentrated benefits. So we have organizations like, unsurprisingly, the Shipbuilders Council of America that, that love the Jones Act that endorse it and go to their website and they have a section devoted to the Jones Act and why we, it's, it's a great law, um, Um, and then, of course, the people that operate ships, um, they also favor keeping it. The people that work on these ships, on these vessels, uh, they support the Jones Act. Uh, so you have, you know, numerous organizations out there, like the American Maritime Partnership, which is here in Washington, D.C. Uh, you have the American Waterway Operators. These are guys that, you know, work on inland waters on, on tugs and barges. You have the Offshore Marine Service Association that works out in the Gulf of Mexico. Uh, You have the Lake Carrier Association for the Great Lakes shipping, and on and on, and they're out there every day, you know, making the case for the Jones Act, for why we need it, and you don't really have, because it's pretty obvious why. This, for them, they consider this as an existential issue. This is, um, this, this is the ballgame right here, um,…

AI assessment note: “I think it's a classic case of dispersed costs and concentrated benefits.”

Q the impacts on energy, which is the main reason I wanted to have this conversation of the Jones Act and all the surrounding policies. Um, let's talk about fuel. I mean, you mentioned sending fuel to places that don't have pipelines. So like high level, what is the impacts on the world of, of fuel supply, thanks to all the rules that we've imposed about shipping in the United States?

A Yeah, so the Jones Act makes it, um, often, usually, more attractive to send, uh, U.S. oil to, to foreign countries than other parts of the United States. So, for example, uh, East Coast refineries, say, in the Mid-Atlantic, uh, they import more oil from places like, uh, Libya or the Middle East or Nigeria than they do from Texas, from the Gulf Coast. Uh, and then, So we have this bizarre situation where, um, the Gulf Coast is exporting their oil to, say, Latin America, uh, and the refined products, um, uh, internationally, and instead of other parts of the United States, and then those other parts of the United States, say the East Coast, they will import oil from Africa or the Middle East, um, or they'll get the refined products from, from Europe, um, Uh, instead of other parts of the United States, because once you factor in the cost of transportation, it doesn't make sense to buy American. So they can come from thousands of miles further away, and yet economically, there's still, it still has a logic to it because of the transportation costs involved.

AI assessment note: “makes it, um, often, usually, more attractive to send, uh, U.S. oil to, to foreign countries”

Q you say, okay, we're going to seed shipbuilding, um, or, or at least some portions of this industry, um, but in exchange, we'll stop sort of perverting trade flows and probably save a bunch of money for Americans on various things, including fuel. Am I right that those are kind of the two really high level Options at the table, and how do you think about the trade-offs between them?

A Yeah, I think those are both, uh, solutions that have been put forward. So obviously, I'm, you know, more in the, I'm definitely in the Jones Act repeal camp. I think the most straightforward, um, logical approach is to get rid of this law. But yes, other people have said, well, you know, I think the better approach would be just to fix U.S. shipbuilding. So yeah, they get those volumes, so they can get competitive, and then this is less of an imposition. Um, The problem with that, in my opinion, is that past efforts at that, because this has been tried before, it hasn't worked out that well. Um, so for example, from 1936 until 1981 or so, uh, we had what were called construction differential subsidies. These were subsidies for U.S. built ships up to half the cost of the ship versus what it would cost to build abroad. Now, these were ships only that were used in Foreign trade. These were not Jones Act ships. Um, so if you wanted to operate internationally, you could get one of these, uh, subsidized ships to encourage people from buying from U.S. uh, shipyards instead of foreign ones. But, um, again, even then, U.S. shipyards never got close to being competitive. Uh, they were still, um, I mean, as evidenced by the fact we, we needed these, these subsidies, and they were discarded early in the Reagan administration because they were not, um, making U.S. Shipbuilding competitive.…

AI assessment note: “I'm definitely in the Jones Act repeal camp. I think the most straightforward, logical approach”

Q right, so final question for you. Clearly, you have a view on this, and you'd like to see this repealed or significantly changed, but it also seems politically to be challenging, and that is, um, buttressed by the fact that it has been on the books for over a century and has survived this long. Are you just shouting into the wind about this, or do you see a path?

A I do think that there is a path forward. Um, traditionally, the Jones Act, it's, um, It's an irritant, right? It's, it's like a, it's annoying, but, um, people, people, but not, not, not to the extent that it prompts, uh, congressional action. But I think we're in an interesting moment right now where, uh, there's an increasing recognition of the shortcomings of the U.S. maritime industry. So part of this is driven by the sense of a growing competition with China and the fact that any conflict with China would be, uh, have a strong, um, maritime element to it. Take place in the maritime domain, just given the, the distances, and the, the Asia Pacific, and, you know, shipping is obviously required, uh, in a scenario like that. Um, but it's also cropping up in things like the Baltimore bridge collapse of a couple weeks ago. Uh, the fact that, you know, numerous observers have pointed out that we don't really have the capabilities to, uh, to, to do the salvage stuff. That, for example, foreigners have much bigger, um, cranes and more capable vessels for doing that kind of work than we do. So it's, it's starting to crop up more and more, and I think as people probe and ask questions, they go, well, why can't, why is our, our maritime industry in such a mess? Why is it so uncompetitive? I think you can't really have that conversation without, um, examining the Jones Act, without the…

AI assessment note: “I do think that there is a path forward.”

Q Is it material costs? Is it labor? Is it lack of capacity? Is it all those things?

A Yeah, that's a pretty logical question because, you know, we can build lots of things pretty competitively. Uh, airplane, you know, commercial aircraft, we're an aerospace leader. Uh, we have a pretty big auto industry. So why is it when it comes to ships that Americans are so uncompetitive? Um, and shipbuilding is a lot about, uh, economies of scale. So, um, you know, you consume huge amounts of steel, uh, all kinds of inputs that go into these things. And you need, um, there's big capital investments. You have, um, the way ships are built today, for example, you have, they're basically assembled in blocks. It's kind of like, you know, Legos. Uh, you take big blocks, and you lift them into, and, and, and you put them all together. Well, you need big, huge cranes to lift these big, heavy blocks into place. Well, you buy one of those huge cranes, and, you know, if you're spreading that, that cost over, say, you're building 50 ships a year, well, that's one thing. Well, American shipyards typically build Two ships a year? Something like that? So you're spreading, you know, capital costs. Um, for example, when American shipyards, they go to buy, uh, steel. Well, you know, if you're building 50 ships, you know, the steel plant's gonna quote you one price, where if you, you know, buy enough steel for two ships, you're gonna get a different price. Same thing with the engines, all the…

AI assessment note: “shipbuilding is a lot about, uh, economies of scale.”