Thanks to a maritime law from the 1920s America's oil boom is fueling a building boom for U.S. shipyards. However, while that law has created an upsurge in the shipping industry, it has refiners fuming because it's adding cost and putting some at a competitive disadvantage to foreign competitors.
The law is called the Merchant Marine Act, but it's more commonly known as the Jones Act. It requires that all goods transported by water between American ports must be carried in U.S. flagged ships, be constructed in the United States, and be owned and crewed by U.S. citizens or permanent residents. Think of it as the ultimate buy American law. Its impact is still being felt nearly a century after passage.
Because of the law, U.S. shipyards are constructing 10 supertankers and have another 15 under contract. That's a huge building boom especially when considering that there are only 75 similar ships in the nation right now.
There is only one reason why this nearly 100-year-old law is even being discussed these days. The U.S. oil production boom has dramatically altered the landscape for how crude oil is transported. With U.S. pipeline infrastructure already filled to the brim, refining companies are turning to ships to move oil out of congested areas like the Gulf Coast in order to offset foreign crude imports along the East Coast. However, in order to do that refiners need to comply with the Jones Act.
Refiner Phillips 66 (NYSE:PSX) for example, has already purchased two Jones Act ships as part of its strategy to move cheaper crude oil to its refineries. The slide below details the great lengths the company has gone through to improve its margins.
I would like to point out that the Jones Act tanker pictured on the slide is delivering crude oil from the Eagle Ford shale in Texas. Phillips 66 ships crude from Eagle Ford to its Bayway refinery in New Jersey in an effort to push more expensive Brent-priced crude out to boost profits.
The problem refiners have with the Jones Act, other than the increased costs of buying American, is that some are using a loophole of sorts to send U.S. crude oil further north to Canadian refineries using foreign-flagged vessels.More detail on this loophole?In fact, crude oil exports to Canada are now riding a 13-year high and are double the rate seen last year. Some of this is from rail shipments, but more oil is being moved through U.S. ports to Canada.
Valero Energy Corporation (NYSE:VLO) is one of the refiners taking advantage of this situation. The company is using lower-cost foreign-flagged vessels to ship Eagle Ford crude to its refinery in Quebec. The map on the following slide shows just how much of an economical advantage this is for the Valero.