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Market Extra: What is the Jones Act? And why might waiving it help ease East Coast gas ‘supply crunch’?

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The Biden administration is considering a temporary waiver of the Jones Act, a key U.S. shipping law, to offset a “supply crunch” in gasoline sparked by the recent cyberattack against the largest fuel pipeline system in the U.S.

The move would allow foreign tanker ships to carry petroleum products up the Eastern Seaboard from the Gulf Coast, as some gas stations in the Southeast begin running out of fuel.

It follows the weekend shutdown of the 5,500-mile Colonial Pipeline, which was hit by a ransomware attack, throwing a wrench in a crucial artery for U.S. energy markets and the supplier of about 45% of fuel consumed by the East Coast.

What is the Jones Act?

The Jones Act dates back to 1920 and governs the rules around shipping and trade in the U.S. and its island territories, with an aim of protecting American business from foreign competition.

The law has been waived several times in the past, specifically in response to crises like hurricanes along the Gulf Coast and other events, said Jason Bordoff, co-founding dean of the Columbia Climate School.

The U.S. government waived it in November 2012, after Hurricane Sandy slammed the East Coast, causing power outages and fuel shortages.

“A Jones Act waiver would help move additional fuel supplies from the U.S. Gulf Coast to the Eastern Seaboard by allowing the use of non-U.S.-flagged vessels, which are cheaper and more plentiful, to transport the gasoline and diesel,” Bordoff told MarketWatch.

“Markets will be comforted to know the Biden administration stands ready to waive the Jones Act if needed, but at the same time, the fact that the administration is beginning to contemplate a waiver several days into the crisis may undermine confidence in the markets about how quickly Colonial can really restart the pipeline.”

What to watch for next

As a first step, the Biden administration on Wednesday said the U.S. Department of Transportation has now wrapped up its assessment of whether enough U.S. ships were available to carry petroleum products from the Gulf to the East Coast.

The White House also said the Department of Homeland Security “stands ready” to review any waiver requests from companies looking to tap foreign vessels to help alleviate shortages.

The U.S. also lifted some restrictions on rules around fuel transport on federal railroads and highway to help offset supply concerns.

Read: Here’s what the Colonial Pipeline cyberattack means for energy markets

Meanwhile, Alpharetta, Ga.-based Colonial said it hoped to “substantially” restore operational service by the end of the week, stoking optimism that the supply disruption might be short-lived.

“My best guess is that they are going to slowly bring this system back online,” said Robert Cattanach, a partner who specializes in cybersecurity at law firm Dorsey & Whitney.

“We’re likely going to know how bad things are on restoring the pipeline in a couple of days,” he said. “While this is going on, on a parallel track, the Jones Act process is playing out.”

Financial markets have been optimistic about the potentially short-lived supply disruption. Crude oil prices were higher Wednesday amid an upbeat demand outlooks, with West Texas Intermediate crude for June delivery
CL00,
+0.95%

 
CLM21,
+0.95%

up nearly 1.6% at midday around $66.33 a barrel on the New York Mercantile Exchange.

Matthew Parry, head of long-term analysis at Energy Aspect, said the Jones Act rules would be waived only “in the event of an extensive outage,” in emailed comments to MarketWatch. “However, the risk that the government takes these steps to ease a spike in fuel prices should not be ignored.” 

Read Next: Gas prices are ticking up after the Colonial Pipeline ransomware attack — here’s where drivers will be most affected

The next cyberattack?

It’s never good when hackers looking for a payday manage to take down a major U.S. pipeline offline, but the response by financial markets so far has been measured.

Stocks were headed lower again Wednesday, with the Dow Jones Industrial Average
DJIA,
-1.25%

and S&P 500 index
SPX,
-1.54%

down at least 1%, and the Nasdaq Composite
COMP,
-2.21%

2% lower, with pressure being attributed to fears about climbing inflation.

The Biden administration on Monday called on government agencies to work together help address the Colonial Pipeline attack, while also putting into motion efforts to thwart a potential fuel crisis at the start of the U.S. summer driving season, the first of its kind since strict COVID-19 restrictions began to be lifted.

“On the preparations side for pipelines, I don’t think this is a horrible wake-up call,” said Cattanach, the cybersecurity expert. “In some ways, the mitigation system is working as it’s supposed to.”

“But where I do think it’s a call for action is that this isn’t going to be the last ransomware attack,” he said. “Our systems are not hardened enough, and I’m not sure they ever will be hardened enough so people can’t get in.”

“You can’t eliminate that risk entirely.”

NewsWatch: U.S. inflation soars in April to 13-year high, CPI shows, and reveals fresh stress on the economy

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