With Alvaro Bedoya’s confirmation as a third and tiebreaking vote at the Federal Trade Commission (FTC), various initiatives will soon roar to life. Among Senate Majority Leader Chuck Schumer’s (D-N.Y.) motivations for bringing a vote on Bedoya’s nomination is reenergizing a pending FTC investigation into “price gouging” by oil companies.
What the commission’s new majority needs to recognize, however, is that price gouging is not the issue at the heart of high gas prices. The Biden administration’s new regulatory disincentives to oil production and refining deserve some blame, as does its failure to call for the waiver of the longstanding, anticompetitive Jones Act.
The Jones Act eliminates all foreign competition in the domestic, water-borne shipping market, allowing U.S. shipping companies to legally monopolize the shipping industry without any threat of competitive recourse.
Passed in 1920, it requires any cargo shipped by water between two domestic ports to be ferried by ships that are U.S.-built, owned, operated, flagged and crewed. With these restrictions in place, the price of shipping gas to many parts of the country is significantly higher than it should be, leading many states in the northeast and territories like Puerto Rico to get their oil from abroad.
The price of shipping a barrel of oil from the Gulf Coast to the east coast of Canada is around $2. It costs about the same amount to ship that barrel to Europe. However, it costs over triple the amount ($6) to ship a barrel of oil to the northeastern United States. Even though the distance to Canada and Europe is greater, Jones Act requirements jack up the price significantly, leading to higher prices at the pump.
Ferrying oil directly between Alaska and California on a Jones Act ship can cost up to six times as much as the same journey on a foreign flagged ship, but the latter is illegal. Additionally, shipping oil between the Alaska’s oil-rich North Slope and the Gulf Coast is over three times as expensive as shipping oil between the North Slope and the Virgin Islands, even though the trip to the Gulf takes half as long.
In other cases, it’s impossible for certain consumers to get their gas from the United States. There currently exist no Jones Act compliant ships able to ferry natural gas by water. This means that places like Puerto Rico are required to purchase foreign natural gas, regardless of the abundance of U.S.-produced natural gas on the mainland.
This is becoming a pattern. Gas stations up and down the East Coast were left empty or with rapidly inflated prices last year after the shutdown of the Colonial Pipeline. In response, European ships were provisionally chartered. While the administration claimed an “all-hands-on-deck” approach to solving the short-lived crisis, oil from Europe was more readily available and less expensive than American oil because of Jones Act restrictions.
While the Jones Act’s original purpose was to create a robust, thriving maritime industry, the 100 years since have proven otherwise. Jones Act ships are significantly more expensive, less innovative and less efficient. The cost of building a Jones Act ship is four times that of a comparable ship from Norway, Korea or China. Thanks to Jones Act monopolies in the domestic manufacturing and shipping industries, there is little incentive to reduce costs or improve technological standards.
This leads to a disconnect in Biden administration and FTC policy. In a July 2021 executive order, President Biden tasked the federal government with increasing competition in the U.S. economy. FTC Chair Lina Khan has also vowed to take on “any illegal conduct” leading to higher gas prices. The problem is that monopolization is a perfectly legal byproduct of the Jones Act, and no mention is made of the federal government’s own role in distorted energy markets.
The administration and FTC’s blind spot for competition-distorting federal regulations is causing serious harm to the nation’s pocketbook. Blaming and investigating the oil companies for high gas prices thus is a political red herring. Calling for suspension of the gas tax, proposals to send money directly to consumers and releasing oil from the strategic reserves are only temporary measures to ease the pain. As long as supply chains for oil remain distorted, American consumers will perpetually face weak supply and high prices at the pump.
The current high prices will pass, but the underlying pressures on the economy will probably remain, and the likelihood of an economic shock sending prices skyrocketing again is high. At the very least, waiving Jones Act requirements for oil and gas products will bring more competition to shipping markets, lowering prices for consumers. Better yet, doing away with a bad policy in its entirety will unlock and make permanent cost-reducing supply chain efficiencies, just as President Biden has said that he wants.
Alden Abbott is a senior research fellow with the Mercatus Center at George Mason University and a former general counsel with the Federal Trade Commission. Andrew Mercado is an adjunct professor with the Antonin Scalia Law School. They are coauthors of an upcoming study on international shipping markets and the Jones Act.