The conflict between Russia and Ukraine has helped send gasoline prices in Hawaii soaring, fueling calls that Hawaii be granted a Jones Act waiver for fuel imports.
On the March 14 episode of “Hawaii Together,” leading Jones Act expert and Grassroot Scholar Colin Grabow joined host Joe Kent, Grassroot Institute executive vice president, to talk about why Hawaii needs a waiver for fuel imports.
If not for the Jones Act, the argument goes, Hawaii could more easily afford to import fuels from the U.S. mainland, and thus lessen its dependence on foreign fuel sources — such as Russia, which prior to its conflict with Ukraine had been supplying a quarter to a third of Hawaii oil imports.
The Jones Act, of course, is the1920 federal law that limits competition between U.S. ports to only ships that are U.S. flagged and built, and mostly owned and crewed by Americans. It was supposed to protect America’s maritime industry and thus national security. But, according to Grabow, who also is a trade policy analyst with the Cato Institute, it hasn’t quite worked out that way — and Hawaii residents are paying the consequences.
“The national security argument plainly doesn’t make sense, as the Jones Act is literally a big reason why Hawaii has found itself dependent on Russian oil and sourcing it from there instead of the U.S. mainland,” said Grabow. “The Jones Act … just makes it more expensive for Americans to do business with each other and trade with each other. So it’s a disincentive to domestic supply chains. How is that good for national security?”
He said that after a century of government protectionism, U.S ships are the most expensive to build and operate in the world, U.S. shipyards capable of producing oceangoing commercial vessels have dwindled to less than a handful and are barely producing any Jones Act ships at all, and the federal government estimates there is a shortage of U.S. mariners in the event of a war.
“Right now there are currently 94 Jones Act ships,” he said, “and something in the neighborhood of 45 [thousand] to 50,000 ships in the world. So literally, something like [0.2%] of the ships in the world are available to Americans, and 99.8% of the ships are off-limits, essentially, so you have less competition. That’s going to mean higher prices.”
Will any of this lead to a Hawaii Jones Act waiver for fuel imports? See what Grabow and Kent answered by watching the full interview below. A complete transcript is provided.
3-14-22 Colin Grabow with Joe Kent on “Hawaii Together”
Joe Kent: Aloha and welcome to “Hawaii Together” on the ThinkTech Hawaii broadcasting network. I’m Joe Kent, executive vice president of the Grassroot Institute of Hawaii. I’m filling in for Dr. Keli’i Akina; he’s the president and CEO.
Well, the conflict in Russia and Ukraine has sent oil prices soaring, especially in Hawaii, where gas prices are among the highest in the nation. Many blame those higher prices on the Jones Act, which makes it more expensive to ship in oil from the U.S. mainland.
On March 3rd, the Grassroot Institute of Hawaii sent a letter to President Joe Biden asking him to grant Hawaii a Jones Act waiver for fuel imports. And on March 8th, U.S. Representative Ed Case also sent a waiver request to the president.
Here today, from Washington, D.C., to discuss the situation with us is Grassroot Institute Scholar and Cato Institute policy analyst Colin Grabow. Aloha, Colin.
Colin Grabow: Aloha. Thanks for having me on the program.
Kent: So, Colin, can you explain this? What is the Jones Act, first of all, and why is it an issue right now?
Grabow: The Jones Act is a 1920 law that essentially states if you want to transport cargo from one part of the United States to another part of the United States by water, that the vessel used to transport that cargo — be it a ship, a tugboat, basically, anything that floats — has to meet four conditions. That’s that the vessel has to be U.S. flagged and registered, has to be mostly owned by Americans, has to be mostly crewed by Americans, and has to be built in the United States.
So what this means is that all foreign ships, or even U.S.-flagged ships that have been built in another country — which let’s say is 99% of the ships out there — can’t be used to transport goods within the United States.
That means less competition, which drives up costs. Then also, these Jones Act ships are incredibly expensive to build and significantly more expensive to operate than their foreign counterparts. All that adds up to very high shipping costs.
Now, you ask, why is it in the news now? Well, the Jones Act is in the news lately because the United States has imposed sanctions on purchases of Russian oil. Despite being the world’s leading producer of oil, we [the U.S.] still import foreign oil to meet our energy needs.
Now, in the big picture, Russia accounts for just a few percent of our overall oil use. But for Hawaii, it’s much more significant. In fact, according to a 2020 report from the Hawaii State Energy Office, since 2010, Hawaii has imported the majority of its foreign crude from Indonesia, Libya and Russia. In fact, in 2019, over 90% of the foreign crude imported into Hawaii came from just two countries: Libya and Russia. I think Russia was 30-something percent and Libya was 15-something percent. According to Rep. Ed Case …
Kent: Now, why is that though? Why is Hawaii shipping in so much more oil from Russia than the mainland U.S.?
Grabow: Yes, that’s an interesting issue. We produce a lot of oil. We actually export oil to other countries. In fact, we send to China. But we’re importing it from Russia. In fact, in 2019, Hawaii imported none of its oil from other parts of the United States. Why is this?
I don’t think we can answer that question without talking about the Jones Act. Essentially once you factor in the cost of using Jones Act-compliant ships, it doesn’t make sense for Hawaii to buy oil from other parts of the United States. It basically becomes cost-prohibitive.
And this isn’t just my opinion. There was a 2014 report from something called the Hawaii Refinery Task Force. They noted the operator of a Hawaii refinery stating that domestic supplies of energy were not competitive, in part due to Jones Act restrictions and the cost in using Jones Act-compliant ships versus foreign flagships.
So right now we have a situation where Hawaii, they have been using a lot of Russian oil. They need to find replacements for that oil because they can’t use it anymore because of these new sanctions. And basically, they’re going to look abroad into other countries rather than buying from the United States, because the Jones Act basically puts that off the table.
Kent: This is making the price of our gas higher. We’re already seeing gas soaring. That’s due to geopolitical factors, but this just makes it higher. So is this Jones Act thing only about gas, or does it affect the price of other things in Hawaii too?
Grabow: The Jones Act, by mandating the use of ships that are very expensive to build and operate, impacts the cost of transportation. The cost of transportation impacts basically everything we use, because so much of what we use has to be transported to us from wherever it was made.
That’s especially true in the case of Hawaii, given its geographic isolation and things having to be transported from long distances. Getting shipping that is as efficient [and] as inexpensive as possible is very important for Hawaii, and the Jones Act doesn’t provide that.
Let me just add here that when you think of Jones Act making things more expensive, yes, it does mean we go to the store, things cost some percentage more. But it goes beyond just things you get at the store.
Remember, we’re talking about energy. So that means the energy you use to power your car, to heat or to cool your house — although, granted, Hawaii does have a nice climate so you don’t have to use a ton of energy all over the place.
Kent: Our air conditioning.
Grabow: Air conditioning, yes.
Kent: Hawaiian Electric has just announced that it was going to increase prices. Now, consumers are going to be hit again. Part of that is because of the higher cost of oil.
Grabow: Yeah, exactly. Exactly.
Kent: Can you explain again, in basic terms, why is the Jones Act shipping so much more expensive than shipping with ships that are built overseas?
Grabow: Well, there’s a few factors that go into that. One is just the cost of the ships themselves. As I mentioned earlier, Jones Act ships are very expensive to build, so we’re talking about energy.
Let’s look at tankers. What’s called a medium-range tanker — this is on the smaller end of the scale — one of those overseas costs about $40 million to build. In the United States, It’s a minimum of $150 million to build, so we’re talking roughly four times more for the ship.
That’s a difference of a minimum of $110 million that someone has to pay for, and consumers are going to pay for a lot of that. But then, after you get the ship itself, you have to crew it with Americans. American unionized crews command much higher wages than what you find in other countries.
But it also goes beyond that. … If you put your ship under the U.S. flag, it means, for example, if you want to repair your ship, you repair it in a foreign shipyard, you’re hit with a 50% tax. So this is another cost that American ships have to bear that other foreign shipping does not. So you add all these things together, and the end result is very expensive shipping
Kent: Well, … so … they’re more expensive to build, they’re more expensive to man, but there are also fewer of them too. And doesn’t that also raise costs?
Grabow: Well, that’s right. Right now there are currently 94 Jones Act ships, and something in the neighborhood of 45 [thousand] to 50,000 ships in the world. So literally, something like [0.2%] of the ships in the world are available to Americans, and 99.8% of the ships are off-limits, essentially, so you have less competition. That’s going to mean higher prices.
Kent: What about for oil? How many of those ships are… the type of ships that would ship oil to Hawaii?
Grabow: Right now there are, I believe, 56 tankers in the Jones Act fleet, oceangoing ships. But of those 56, the majority of those are used to transport refined products. We’re talking about gasoline, jet fuel, things like that.
There are only, I believe, 11 ships in the Jones Act fleet that are dedicated to transporting oil. Those are mostly used to transport oil from Alaska to refineries on the West Coast. Now, somebody might think, “Well, why don’t you just take some of those tankers that are used for refined products and just fill them with oil?”
You can do that. The only issue is that [if] you fill a ship full of crude oil, then you want to switch it back to carrying refined products like gasoline, well, you’ve got to scrub that crude oil out. And that’s not easy, that involves some costs. Also, again, those ships tend to be smaller, and so you fill a smaller vessel with crude, it’s not as efficient, so it leads to higher costs as well.
Kent: I see. Well, President Biden banned the import of Russian oil last week. And … even before that, Par Pacific Holdings, which owns Hawaii’s only oil refinery, had said it would stop importing Russian oil as soon as the last tankers under contract make it to Hawaii.
So how will those actions affect Hawaii, of the banning of Russian oil imports? How will they in fact affect the entire U.S., including Guam and Puerto Rico?
Grabow: Well, as I mentioned earlier, Hawaii is in a situation right now where it’s been using Russian crude for something between a quarter and a third of its oil needs. Now, that’s off the table, and it has to look for something else to replace that with. When Hawaii looks around the world, it basically has to say, “Well, the U.S. is off the table. We can’t really use that. The Jones Act makes that prohibitively expensive.”
So when you have fewer options, it’s less likely that Hawaii will get the best bargain, will get the best deal on its energy supplies.
You mentioned Puerto Rico and Guam. I can’t speak to Guam as much, I’m not as familiar [with it], but I know that last year, for example, Puerto Rico, they’re kind of in the same situation. Depending on the month last year, their sourcing from Russia was anything from, I believe, 10% to 30% of its petroleum needs came from Russia. Which is kind of absurd when we think about the fact that Puerto Rico is next door, it’s much closer to the U.S. mainland than Hawaii is, and the U.S. is an energy superpower. Again, like Hawaii, it is basically cost-prohibitive, so they have to turn to foreign sources.
I have to stop and just remark about the fact that it would be easier and cheaper for Puerto Rico to get energy from the U.S. mainland if it wasn’t part of the United States. Being part of the United States actually makes it more difficult and more expensive to get energy despite being part of the same country. It’s just a very absurd situation that, of course, Hawaii also finds itself in.
Kent: When you think about the Jones Act, it often is like looking at economics upside down. Some things don’t seem to make sense. What has been the reaction of pro-Jones Act groups to the waiver requests, and what are they saying? And how would you respond?
Grabow: So, last week, a group called the American Maritime Partnership, which is essentially a group that represents companies like Matson and Pasha, which operates ships going to Hawaii — they lobby for the Jones Act; that’s what the AMP does; that’s literally all they do; they just exist to try to keep the Jones Act in place — they sent a letter, unsurprisingly, to the Biden administration opposing any waiver of the Jones Act, stating that such waivers are unnecessary, because currently, there are Jones Act-compliant tankers available for transport of oil and fuel, and waivers would just outsource jobs and undermine national security.
To me, this argument kind of misses the point. The issue isn’t so much that there aren’t any tankers to be had. It’s just that they’re so expensive that they make the prices of U.S. oil and fuel cost prohibitive.
I’ll point out, by the way, that former Coast Guard Admiral Paul Zukunft, … wrote an op-ed in the Star-Advertiser last week, praising the Jones Act. Well, just a couple of days after publishing that op-ed, he was also quoted, also in the Star-Advertiser, saying that a Jones Act exemption for Hawaii, so that they could buy U.S. fuel, well, that might be sensible. So it seems that not even some pro-Jones Act folks are not completely buying the argument that the American Maritime Partnership is offering.
Kent: That’s interesting. And the Jones Act has been waived in the past, for national defense or emergencies or shortages. Is that correct?
Grabow: It has. We do have past examples. Most recently was last year, during the Colonial Pipeline outage. That pipeline was shut down, that runs along the East Coast. There was a need to find alternative methods of moving fuel to where it’s needed.
There were two waivers issued. Now, these were not broad waivers; these were for specific ships. Basically companies applied for permission and said, “Please, can we use a foreign ship to move this fuel from the Gulf Coast up to different points along the East Coast, to where it is needed?” And for two ships, there were waivers granted.
Before that, back in 2017, there was a 10-day waiver of the Jones Act issued for anyone transporting goods to Puerto Rico. This was in the immediate aftermath of Hurricane Maria that hit in September of 2017.
Before that, you find other examples of natural disasters. There’s some hurricanes that hit Texas that same year. Hurricane Sandy that hit the New York, New Jersey area about a decade ago.
Kent: It’s often waived, and so chances may be positive for a waiver now. But we have a viewer question that came in. He asks, “The process to request a Jones Act waiver supposedly takes a long time. Did either the Grassroot Institute or Representative Case invoke this process? Or is there some procedure available to bypass all of this?” So what’s the best way to get a waiver request through?
Grabow: There are two ways of getting a waiver. One way is, if the secretary of defense requests a waiver for the Jones Act, it’s automatically granted. The issue with that path is that it has to be according to the law in direct support of military operations, so that’s a pretty high bar to clear.
The other path to getting a waiver is someone such as the Grassroot Institute or anybody can request a waiver and say, “I want to move this from point A to point B; I need a foreign ship to do it.”
Well, two things. It has to be on national security grounds. You have to prove that this supports national security, and also the U.S. Maritime Administration does a survey of all the ships out there. And they have to conclude that you’re right, there are no American ships capable of doing this. You have to meet those two criteria in order to secure a waiver through that route.
Kent: I see. But there’s also the option of Congress doing something, or the president doing something, is that right?
Grabow: Congress can, yes. Congress, if they pass a waiver, yes, there is no national security standard that has to be met. Congress can do whatever it wants and can have the waiver as broad as it wants.
Unfortunately, the president can’t issue a waiver. The President can request, can kindly ask the Secretary of Defense to ask for a waiver, but the President himself does not have that authority.
So again, the two methods are the secretary of defense, which is part of the executive branch, and then also other people can request a waiver, provided that there are no ships available, and it’s in the interest of national security.
Kent: I see. I want to also ask about some more objections that we’ve heard to waivers and this whole process. One objection is: Wouldn’t waivers only benefit the oil companies? You get a Jones Act waiver, it’s easier to ship oil around, but are we really going to see that at the pump?
Grabow: Well, I think that there are many factors that affect the cost of gas and what you pay at the pump. Transportation is one of them. In a competitive market, I have to think that lower costs translate down to the consumer, because if you just try to keep those profits for yourself, someone else is going to come in and undercut you.
So I don’t think that … maybe you can find short-term examples of that, but in the longer term, I think in a competitive marketplace, the lower cost ultimately translates into lower prices that benefit consumers.
Kent: Right. The market has a way of getting profits actually to the consumer, in a way, as long as there’s enough competition.
What about the Strategic Petroleum Reserve? We’ve heard a lot about Biden releasing the strategic … 30 million barrels from the Strategic Petroleum Reserve. Would we need a Jones Act waiver for that?
Grabow: There have been waivers in the past for the Strategic Petroleum Reserve and for the transportation of that petroleum to where it’s needed. I think it’s unlikely we’ll get one this time, because again, last I checked, there were a few Jones Act tankers available, and I think that the Biden administration, which is strongly supportive of the Jones Act, the last thing they’re going to do is waive it unless they absolutely have to, unless there’s no alternative. And I don’t think we’ve quite reached that point yet. I just haven’t seen any indication from the administration indicating an interest in waiving the Jones Act for that purpose.
Kent: Another question from a viewer: What about the President granting a waiver through executive order?
Grabow: I am not familiar with that, any waiver being granted by executive order. As far as I know, the only two waivers you can obtain are through the two methods or paths that I mentioned earlier. I’m not aware of that ever occurring.
Kent: I see. I did some research into whether the President has ever done an executive order to waive the Jones Act, and it seems like something may have been done during Pearl Harbor. But I’ll have to look at that more. In any case, what would you say about the national . . . .
Grabow: No, I was just going to say: Of course, we ended up suspending the Jones Act during World War II.
Kent: I see. Yes. What about the national defense argument, now that we’re on this topic? What about those that say, “But We need the Jones Act for national defense.” We’ve got a conflict in Russia and Ukraine; some say that we need the Jones Act more than ever now.
Grabow: Yes, we do hear those kinds of arguments. I think if we look at the issue just strictly in the context of energy — because that’s what we’re talking about right now with the Jones Act — the national security argument plainly doesn’t make sense, as the Jones Act is literally a big reason why Hawaii has found itself dependent on Russian oil and sourcing it from there instead of the U.S. mainland.
Let’s remember, the Jones Act is basically a tax on domestic commerce. You import something from abroad, it’s not subject to the Jones Act. It just makes it more expensive for Americans to do business with each other and trade with each other. So it’s a disincentive to domestic supply chains. How is that good for national security?
But in fairness to Jones Act supporters, we should look at the argument more broadly. Supporters simply argue that the Jones Act means the United States has robust shipping because you can only use American ships. And it means we have lots of shipbuilding because their ships have to be built in the United States. And it means that we have mariners in time of war that can crew ships for sealift purposes.
Well, that’s the theory, but I don’t think it holds up to scrutiny. U.S. shipbuilding is so expensive and uncompetitive — you know, I mentioned earlier $40 million for a tanker versus $150 million for a tanker — there isn’t so much demand for it.
Last year, there were literally zero Jones Act oceangoing ships delivered. In the entire country, there are only two ships under construction. These are two ships for Pasha. They were supposed to be delivered in 2020, but still haven’t been delivered yet.
Then, there aren’t also that many Jones Act ships out there — just 94, as I mentioned earlier.
And in wartime, it would be difficult to use those ships, because if you take those ships and the military uses them, who’s going to transport goods to Hawaii or Puerto Rico or other parts of the United States?
And then, as far as mariners, there was a 2017 government study that concluded we’re about 1,800 mariners short, in a best-case scenario, to crew our ships in time of war.
It turns out that forcing U.S. ship operators to pay four or five times more for new ships is a pretty poor way of trying to promote the domestic maritime industry.
But let’s settle that aside for a minute. Beyond not working, the Jones Act just isn’t fair in a national security context. If the idea is to provide national security for all Americans, they should be paid for by all Americans.
Right now, we have a very small percentage of Americans — those who live in Hawaii, Alaska, Puerto Rico, Guam — they’re paying a wildly disproportionate part of the bill to keep these U.S. ships, mariners and shipyards in operation.
You know, that’s not right. If we need ships and mariners for national security to pay for by direct subsidies, funded by all Americans from our taxes, we shouldn’t just have a very small percentage of Americans foot the bill, if this is really all about national security.
Kent: We had another comment come in: The American Maritime Partnership, in its statement to the president, also said a waiver would benefit only oil traders, not the American consumer. We might have covered that, but what do you think about that statement?
Grabow: Again, I think that in a very, very, very short term, that might be true. You can think of scenarios where you have a high price of oil and someone can get a foreign ship and then take advantage of lower costs and pocket that difference. Plus, as more and more people enter that market and try to take advantage of it, you’re going to see that premium decrease. Again, a competitive marketplace ultimately is going to drive down prices, and consumers will benefit.
Kent: U.S. Representative Ed Case of Hawaii has asked the president for a waiver, as well as the Grassroot Institute. What are the chances do you think that the Jones Act would actually be waived for fuel imports?
Grabow: Right now I’ll be surprised if it happens. The Biden administration, as I mentioned previously, they strongly support, [and]there’s a lot of support at Congress, including from the other three members of Hawaii’s congressional delegation.
I think it would be a more powerful signal if Hawaii’s congressional delegation in unison made this request, but, unfortunately, Ed Case is kind of a lone wolf on this issue — or the Lone Ranger, I should say.
Unfortunately, I think the power of special interests will triumph over what’s best for Americans, and the residents of Hawaii, in particular.
Kent: That was quite a whirlwind romp through the Jones Act landscape right now, but I wanted to make sure our viewers knew who you were. So now at the end of the program, I want to just talk a little bit about your background.
Again, Colin is a Grassroots Scholar and a Cato Institute policy analyst. What’s your background and interest in the Jones Act too?
Grabow: I started at Cato in September of 2017. That is when Hurricane Maria hit Puerto Rico. In fact, I believe the first op-ed I ever wrote for Cato was about the Jones Act in the wake of Hurricane Maria and the need to lift it, so we could get relief to Puerto Rico as quickly as possible. And when you first read about the Jones Act, it seems like a pretty straightforward law. Ships have to meet those four conditions, and that’s it.
But when you really start to dig deeper into the law and really try to make sense of it, and assess, does this law make sense? Is this a good law? It just takes you down this rabbit hole, that it’s fascinating, it’s disturbing just how badly Americans have been led astray and some of the poor arguments behind it.
So here I am, years later, and I’m still looking at the Jones Act and looking at all the different ways that it hurts this country.
Kent: It’s definitely a rabbit hole type of policy issue. What would you want our viewers to walk away with from this discussion?
Grabow: I just want them to walk away with perhaps a few lessons. One here is we’re talking about the Jones Act because Hawaii is importing, or has been importing, so much Russian oil. But if this crisis didn’t come up, I think most people in Hawaii, certainly most Americans — I assume not even most people in Hawaii — would be aware of that fact. We’re aware of that fact because it’s in the spotlight.
It’s good to step back for a minute and think about all the other ways that the Jones Act impacts life in Hawaii and hurts the residents of Hawaii. Again, it’s the things you buy in the store, it’s the energy that powers your home, powers your car, it’s the price of jet fuel at the airport. All these things come together. The businesses in Hawaii are less competitive.
I know the Grassroot Institute of Hawaii has given the example before of Kōloa Rum. They get hurt by the Jones Act because they have to import bottles and labels, and things like that, from the mainland. They have to pay more. If they want to ship it back to the mainland, they got to pay more too. That means they’re less competitive. That means fewer jobs. It hurts Americans in a myriad of ways.
Kent: Bottom line, it makes Hawaii’s cost of living more expensive. So thanks so much to Colin Grabow, Grassroot Institute Scholar and Cato Institute policy analyst. And thank you for watching “Hawaii Together.”