by Chidem Kurdas
My previous post about government restrictions on oil and gasoline transportation drew comments saying prices are set in a world market and the effect of United States policy is negligible. Numerous economic and geopolitical forces influence the price of oil, no question. That does not change the fact that the Jones Act restraint on shipping redistributes income from consumers and some producers to politically favored groups—-my main point.
Global supply of and demand for oil are subject to various short- and long-term effects. China’s economic resurgence has caused a permanent expansion in global demand. Growth in emerging markets demand is permanent and baked into prices, according to Michael Zenker, managing director of commodities research at Barclays. In the intermediate time horizon, the slowdown in China puts downward pressure on prices. Meanwhile, fears of supply disruptions cause temporary volatility—oil futures fluctuate in response to the showdown with Iran. Ditto political gestures. Thus futures dropped earlier this week when Saudi Arabian officials reassured jittery markets that they will work to stabilize prices. Then there are seasonal patterns that come and go every year, like increased demand from summer vacationers.
Those are threads in a broad tapestry. Within that picture, the Jones Act shipping restriction works to make oil products more expensive in certain parts of the United States than otherwise would be the case. Through the ups and downs of the global market, some price premium due to the restriction remains.
If oil were cheap, this might not be noticeable. In large part because of the growth of Asian demand, oil is no longer cheap and gasoline prices are noticeably high. But another long-term development will help mitigate the upward price trend, namely growing production from the apparently immense potential in American shale formations, though subject to concerns about the environmental impact of fracking. North Dakota is producing so much oil that it has to be sold at a discount.
This is why the Jones Act is particularly damaging now—there is a lot of domestically produced oil but the transportation of the refined products to Eastern markets is costly because the law does not allow non-US tankers. Democrats have blocked attempts to repeal it.
Yes, eventually domestic shipping capacity should expand and ease the transportation bottleneck. The fundamental issue is that as long they can intervene in any market, politicians will find ways to manipulate the market so as to benefit their clients at the expense of other people. Those clients in turn pay back the politicians one way or another.
That markets move around for many reasons, that gasoline prices may go down one week and then up again the next week for unrelated causes, does not change the core political game. Mercantilist policies like the Jones Act are just one manifestation of politics as taking—in the words of Professor James Buchanan, who proposed a politics by principle to replace politics as taking (Buchanan and Roger Congleton, Politics by Principle, Not Interest.)