How the Jones Act exacerbates the US diesel shortage

Senator Wesley Jones, who represented Washington state in the US Congress for 33 years until his death in 1932, was a stalwart advocate of his constituents’ interests and a strong proponent of Prohibition. But his name lives on principally because of the legislation he sponsored, which is still having a profound impact on American energy today.

The Merchant Marine Act of 1920, popularly known as the Jones Act, requires all cargo shipped between US ports to use vessels that are built, owned and registered in the US, and have US crews. Still in force after several revisions, most recently in 2006, it is one of the main factors underpinning the price of diesel in the US. As a result, it is playing a key role in keeping upward pressure on inflation and increasing the risk the risk of a sharp economic slowdown next year.

As discussed in Energy Pulse back in May, refining margins have soared to record levels this year. Prices have been much stronger for refined products than for crude, as a result of a global refining capacity shortage and disruption caused by widespread "self-sanctioning" as many countries stopped buying from Russia. The effect has been particularly marked for diesel.

As crude prices have declined since the summer, the average on-highway cost price of diesel has fallen only slowly, dropping 7% since mid-June to $5.317 a gallon last week.

US diesel prices are underpinned by the low level of inventories. US stocks of distillate fuel oil, which includes diesel, were about 106 million barrels in the first week of November, which is their lowest level on record for this time of year, in data that go back to 1982.

However Mark Williams, Wood Mackenzie’s research director for short-term oils, says the aggregate US data give an over-simplified picture of what is happening in the market. The real shortage of diesel is regionally specific to the northeastern US, and in particular to New York Harbor.

In most of the PADD (Petroleum Administration for Defense District) regions monitored by the EIA, distillate fuel oil stocks are broadly in line with their previous five-year ranges for this time of year. In PADDs 2-4, they are at or close to the lower end of the range, and in PADD 5, which includes the west coast, Alaska and Hawaii, they are actually above it. It is only in PADD 1, the east coast, and in particular PADD 1B, the Central Atlantic region from New York to Maryland, that inventories are well below their previous five-year range.

Those low levels of inventories in PADD 1B have an outsize impact on the market, because the area includes New York Harbor, the delivery point for the diesel futures traded on Nymex.

The obvious solution to those regional imbalances would be to increase shipments of diesel from the other PADDs to New York. But because of the Jones Act, shipping fuel from one US port to another can be more expensive than sending it to Europe, which does not require US vessels and crews.

Europe is looking for diesel from all over the world, including the US, because its companies have decided to stop buying refined products from Russia, which had been an important supplier. If US buyers want to bring diesel cargoes to New York, they have to pay prices that are more attractive than the levels available in Europe.

As a response to distillate shortages, the Biden administration is reportedly considering requiring fuel suppliers to hold minimum amounts in their inventories over the winter. In principle, the idea could have some merit, if implemented at the right time. It would bring the US more into line with European countries, which often mandate that fuel suppliers hold specified volumes of refined products to help meet the International Energy Agency’s strategic oil reserves requirements. The UK and Switzerland, for example, have no publicly-owned oil reserves.

Compared to the US policy of holding crude in the Strategic Petroleum Reserve, the UK model can make it easier to relieve shortages if a crisis hits oil refining, rather than upstream production. But introducing new inventory requirements for the US fuels industry at a time when supplies are already tight would be likely to make the immediate problem worse, not better.

Wood Mackenzie’s Williams argues that there is a better way the administration could help relieve the diesel shortage in New York Harbor and put downward pressure on prices. “The quickest way to ease the situation would be to waive the Jones Act for a month or two,” he says. “If we could move more barrels around the US by sea, that would make a real difference.”

The administration has the power to issue waivers to the requirements of the Jones Act, but a change in the law in 2020 restricted its ability to use that authority. When the Department of Homeland Security issued waivers in September to allow emergency deliveries of diesel fuel and LNG to Puerto Rico in the aftermath of Hurricane Fiona, the move was criticised by some members of Congress.

Issuing waivers to ease the economic problems caused by high diesel prices would also be politically controversial. But if distillate inventories in New York Harbor continue to fall below normal levels through the winter, and prices stay high, the administration may eventually feel compelled to bite the bullet.

Being criticised by defenders of the Jones Act for issuing waivers could be better than being criticised by fuel consumers for doing nothing.

In brief

The COP27 climate talks in Sharm El Sheikh ended with what the UN described as “a breakthrough agreement” to provide financing for countries suffering from loss and damage caused by global warming.

A handful of Republican lawmakers are reportedly working with Senator Joe Manchin of West Virginia on possible bipartisan reform of US permitting law to make it easier to develop infrastructure projects including pipelines and power transmission in the US. Permitting reform has been one of Senator Manchin’s key objectives, but an attempt to pass legislation in September foundered after opposition from more than 70 Democrats in the House of Representatives.

Equitrans Midstream has blocked a leak at the Rager Mountain natural gas storage facility in Pennsylvania. The well had been estimated to be leaking 100 million cubic feet of gas a day.

Enel, the Italian power and renewables group, plans to build what would be one of the largest solar PV factories in the US. It is aiming eventually to scale up to producing 6 gigawatts per year of high-performance PV modules and cells, and employ 1,500 people, at a site to be chosen by the end of 2022. The company said the incentives in the Inflation Reduction Act, signed into law in August, had been “a catalyst” for its decision to invest in manufacturing capacity in the US.

General Motors has also been moving to secure capacity in its North American supply chain. It announced a deal with Vale to buy nickel sulphate for electric vehicle batteries from a proposed plant in Becancour, Quebec. Tanya Skilton, GM’s director of purchasing for electric vehicle critical materials, said recently the company expected sourcing of battery raw materials to be “a race, a zero-sum game and resources are a finite limit.”

GM also said it expected its EV operations to start making a profit in 2025.

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Neivan Boroujerdi and Glenn Morrall — A last dance for UK upstream exploration?

Bruna Angel, Andrew Brown and Salmon Aidan Lee — Bottle battle: the fight for recycled plastic supply is on

Frauke Kracke, Joanna Klitzke and Nan Ransohoff — Carbon removal knowledge gaps

Noah Smith — Battery-powered appliances!

Quote of the week

“Without any binding commitments to rapidly and immediately reduce greenhouse gases, the world stands no chance to deliver on the 1.5 °C limit, and by doing so minimising risks of uprooting the life supporting systems we all depend on and endangering countless human lives.” — Greta Thunberg, the Swedish climate activist, gave her reaction to the end of the COP27 climate summit. Thunberg had chosen not to attend the summit, saying she thought the COP conferences were “not really working”, and were being used by world leaders as opportunities for “greenwashing”.

Chart of the week

This comes from Wood Mackenzie’s recent report, Latin America Levelized Cost of Electricity (LCOE) 2022. It shows expected costs for all the principal generation technologies and battery storage out to 2050. There is a lot of detail here — and much more in the full report — but a few points that are particularly noteworthy include the rapid decline in the cost of storage, the emergence of onshore wind as lower-cost than gas for generation in every country in the region from 2033 onwards, and the continued long-term decline in solar costs, driven by improvements in technology. Leila Garcia da Fonseca, our research manager for Latin America power and renewables, commented: “We expect the attractiveness of conventional sources to lessen over time as ESG mandates grow. With limited opportunity for innovation, prospects for significant cost reductions for hydro and thermal plants are limited.”