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Insight: Obama's oil tanker dilemma: Vex unions to win Pennsylvania?

By Matthew Robinson

NEW YORK (Reuters) - President Barack Obama faces a vexing decision this spring that is forcing him to weigh the pain of high gasoline prices for swing voters in Pennsylvania against the loyalty of his union base: whether to allow foreign oil tankers to carry fuel between U.S. ports.

By granting waivers to the Merchant Marine Act of 1920 -- which requires all vessels carrying products or people between U.S. ports to fly under the U.S. flag, be built in the United States and crewed mostly by U.S. citizens -- Obama might head off a spike in Northeast fuel prices this summer.

Temporary exceptions to the so-called Jones Act are among a host of measures the White House is considering in order to temper the rally in gasoline prices to their highest since last May, according to sources familiar with the discussions.

Speculation about waivers is already building in the industry. Ship owners are receiving inquiries from potential customers about the potential to hire the 56 ocean going U.S. .-flagged Jones Act tankers. Many of these ships are already chartered on other routes and the Jones Act fleet accounts for only 1 percent of the world's tanker capacity.

Waivers would dramatically increase the number of tankers that could ship surplus fuel from the Gulf Coast to the eastern seaboard, lowering transport costs and creating incentives to build up gasoline stocks ahead of the summer driving season and keep prices in check.

But what seems a relatively modest political win requires fraught political calculations: waivers would anger Obama's staunch Democrat union base and incite attacks over U.S. jobs from his Republican opponents, while likely doing very little to quickly bring down the cost of gasoline and diesel fuels.

Without the waivers, however, the U.S. Northeast -- another plank of support for Obama that includes coveted swing state Pennsylvania -- may face an unprecedented shortage of gasoline due to the closure of half of regional refineries by mid-year.

"Clearly there is a concern with taking an action that goes against deeply felt views of a well-established union which has been trying to protect jobs in the shipbuilding industry," said Ed Morse, global head of commodities research at Citigroup.

"The way to avoid a price spike is to build storage, and the Jones Act waiver is a mechanism for encouraging a storage build."

HAUNTED DECISION

Large scale waivers of the Jones Act are not unprecedented. President George W. Bush waived domestic shipping requirements briefly after Hurricane Katrina hit the Gulf Coast in 2005. Last summer, Obama granted 52 waivers for 44 crude shipments to facilitate the release of strategic oil reserves to compensate for the loss Libyan supplies during the civil war.

Last year's decision may come back to haunt him. The Jones Act has proved remarkably resilient and unions have proven vocal and influential in keeping it in place.

"Whenever someone takes on the Jones Act it is usually to their peril," said Charles Ebinger, director of the Energy Security Initiative at the Brookings Institution.

But without doing something to unclog bottlenecks in the U.S. oil system, the growing gap between East Coast gasoline prices and those in the Midwest could become a game-changer in the November presidential election -- especially if Sunoco shuts down the region's biggest refinery this summer.

Retail prices in on East Coast averaged $3.77 a gallon in the week to March 5, according to government data, 17 cents over prices in the Gulf Coast and well over 7 cent premium Northeast customers have faced on average for the past five years.

"The need to get more gasoline into that market and through New Jersey and into New York state is pretty profound," said Ebinger.

Asked about possible Jones Act waivers, a White House spokesman said on Monday: "As we have said before, we are not going to speculate on potential actions that may or may not be considered in the future."

Representatives of unions were unequivocal in their resistance.

"Waiving the Jones Act doesn't make sense due to the impact on jobs," said Dan Duncan, executive secretary treasurer of the A.F.L-C.I.O Maritime Trades Department, which represents 5 million mariners, shipbuilders, longshoreman and suppliers in the United States and Canada.

"We need to keep a strong American fleet for national security implications."

WE CAN HANDLE IT

The Jones Act was originally conceived as a way to help protect and support domestic shipbuilders, an industry that has since all but vanished. But the Maritime Administration can grant waivers, usually on a case by case basis, "to help ensure continued economic progress and stability."

Of the 56 Jones Act tankers with a capacity of more than 10,000 deadweight tons, about 35 are generally engaged in trade in U.S. waters, according to the U.S. Energy Information Administration.

Ship owners, wary of the impact of waivers on their business, insist the industry has enough Jones Act-approved tankers to handle a change in trade flows to move product from the giant U.S. Gulf Coast refining hub -- which currently is exporting record volumes of fuel to Latin America -- to the East Coast, which last year imported roughly a fifth of its gasoline from Europe.

"It would take some shuffling around but I think there is some tonnage that could meet that demand," said Michael Roberts, senior vice president at Crowley Maritime Corporation.

Florida-based Crowley owns 17 U.S.-flagged articulated barges, some of which can carry nearly as much oil as the handymax tankers in the U.S. fleet and can also be used for intercoastal trips. The country's 44 barges are not included in the EIA tanker numbers.

"If they waive the Jones Act to move product from the Gulf to the East Coast that would really knock the stuffing out of the confidence to invest in American vessels," said Roberts.

The cost of chartering a U.S.-flagged tanker to take a 38,000-tonne cargo of gasoline from Houston to New York Harbor would be roughly $4 per barrel; the theoretical cost of a foreign-flagged tanker to make the same journey would be about $2 per barrel, according to shipbrokers.

The difference in the rates would only shave a handful of pennies off the price of gasoline for consumers. But if waivers were granted soon, the higher availability of cheaper shipping could encourage stock building to pad the East Coast supply.

EAST COAST BLUES

While the East Coast has been dependent on imported fuel for years, the region is more vulnerable than ever before.

Benchmark Brent crude oil prices, the main component in determining the price of gasoline, have surged 18 percent to their highest since 2008 this year as tensions between the West and Tehran and a range of tough new sanctions aimed at curbing the OPEC nation's nuclear program stoked fears of a disruption.

U.S. pump prices, now $3.76 a gallon, could climb to near $5 during the summer, analysts say.

The East Coast has traditionally been supplied through the local refineries, imports, as well as shipments from the Gulf Coast through the Colonial Pipeline, the only major line that pumps fuel from the Gulf to the Eastern seaboard.

Within months, Sunoco's 335,000 barrel per day (bpd) Philadelphia plant could also be closed, which represents 24 percent of the region's refining capacity and supplies about a tenth of the roughly 1.5 million bpd of gasoline consumed in the Northeast. The deadline for Sunoco to sell the plant is July.

In addition, refinery shutdowns that have hit Europe and the Caribbean have also limited the Atlantic Basin fuel supply. While Europe can still make up for some needs, the Northeast would still likely have to pull from refiners in distant India with spare product, which might not arrive in time to prevent price surges.

Stocks in the Northeast are currently at 61.5 million barrels, nearly 3.8 million barrels over the 5-year average for early March, EIA data showed.

"You can only move so much through the Colonial Pipeline," said Jan Stuart, oil analyst at Credit Suisse. "If you get a Jones Act waiver, you can get that product into the Harbor."

A major new 125,000 barrel per day (bpd) expansion of the line between Greensboro, North Carolina, and Linden, New Jersey announced on Monday will eventually help improve supply, but the first phase won't be ready until mid-2013.

HARD TO DIVERT

At the moment, none of the Jones Act fleet are plying the Gulf-Atlantic route, shippers say. Most currently sail from the Gulf Coast to the Southeast to deliver refined products, with a smaller number working the West Coast market. These ships could have to be redeployed to make the route, Roberts said.

But the EIA noted in a recent report that Jones Act ships are often chartered months in advance, leaving only a handful available on a short-term basis should a shortage arise.

"Oil companies have domestic tonnage on longer-term time charter contracts, while the more traditional trading companies rely on the volatility of the market and the availability of spot domestic tonnage," said Morten Arntzen, CEO of Overseas Shipholding Group, the largest owner of Jones Act vessels.

All of OSG's 12 tankers are currently under long-term charter, although they also own 10 articulated barges which are available on a spot basis.

Analysts said that while unions could in the end back off over temporary waivers, there are no easy options for Obama to control prices quickly.

"I don't know that the union would make that big a fight because they wouldn't want to antagonize other democratic constituencies that would favor lower prices but I don't think it is going to lower prices very much," said Ebinger.

"The president is really tied on what options he has."

(Reporting by Matthew Robinson; additional reporting by Janet McGurty, Bruce Nichols, Jeff Mason in Washington and Jonathan Saul in London; Editing by Alden Bentley)

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