Energy Musings - January 6, 2025
The introduction of the SHIPS Act last month is the first acknowledgement of the risk our shrinking and aging commercial maritime fleet posses for our national defense and economic growth.
SHIPS for America Act Rings Alarm Bells
On December 19, a bipartisan group of Congressmen introduced the Shipbuilding and Harbor Infrastructure for Posterity and Security (SHIPS) for America Act. Senators Mark Kelly (D-Ariz.) and Todd Young (R-Ind.), along with Representatives John Garamendi (D-Calif.) and Trent Kelly (R-Miss.), collaborated in drafting the 344-page bill. The proposed legislation attempts to address critical issues impacting America’s national security and our economy’s ability to function in today’s politically charged world. Will it be enough to make a difference? Will it even be enacted?
SHIPS is designed to address some of the most critical challenges facing the United States maritime industry as it deals with growing geopolitical tensions, reduced shipbuilding capacity, a shrinking commercial shipping fleet, fewer mariners to staff American flag vessels, and decreased U.S. military support capabilities. These issues carry significant implications for our national defense. Furthermore, it elevates the risk to our nation from our almost total dependence on foreigners to deliver the goods and materials necessary for operating our economy.
With lofty goals, the draft legislation highlights the typical Congressional response to an issue – establishing new officials and boards to set and monitor the issues while providing more money and subsidies. This response is not a record of government success. Before judging the bill, we should assess the maritime issues and the proposed remedies.
In explaining the rationale for the legislation, the bill states: “Strategic sealift, made up of Government and commercial vessels and mariners, is a critical capability for executing the maritime defense strategy and the wartime and peacetime economy of the United States.”
The role of the U.S. commercial fleet in helping the Defense Department defend the country and our interests has been demonstrated numerous times in our history. Our ability to continue this joint military and commercial maritime defense strategy is questioned by aging fleets and fewer trained seamen.
The bill outlines the current state of our commercial maritime industry within the global economy and compares it to our primary adversary, China. The bill notes that the global maritime economy is between $3-$6 trillion annually. However, U.S.-flagged vessels carry less than 2% of this trade as measured by commercial cargo weight. The U.S. commercial fleet consists of fewer than 200 oceangoing vessels, of which only about 80 are engaged in this global trade. Our small commercial fleet contrasts with more than 5,500 Chinese-flagged vessels active in global trade.
One of the keys to America’s long history of peace is that we have friendly neighbors to our north and south, and oceans on our east and west coasts. Our geography is why the U.S. has not been attacked by sea since the early 1800s when the British and French used sails for power.
To reverse our shrinking maritime resources, the proposed bill will establish an organization to provide greater oversight and accountability. The bill would create the position of Maritime Security Advisor, a Special Advisor to the President. It would also create a Maritime Security Board providing maritime oversight and accountability.
Typical of intragovernmental committees, many members will represent various maritime interests throughout the government. Here is the list from the bill.
The Board shall be comprised of the following individuals and representatives:
1. Maritime Security Advisor.
2. Maritime Administrator.
3. Commandant of the Coast Guard.
4. Secretary of the Navy.
5. Commander of the United States Transportation Command.
6. Chair of the Federal Maritime Commission.
7. Assistant Secretary of the Army for Civil Works.
8. Commander of the Military Sealift Command.
9. Commander of Naval Sea Systems Command.
10. Chief United States delegate to the International Maritime Organization.
11. Under Secretary of Commerce for Oceans and Atmosphere.
12. Commissioner for Customs and Border Protection.
13. Director of the Office of Management and Budget, or their designee.
14. Secretary of Transportation, or their designee.
15. Secretary of Homeland Security, or their designee.
16. Secretary of State, or their designee.
17. Secretary of Labor, or their designee.
18. Secretary of Agriculture, or their designee.
19. Secretary of Commerce, or their designee.
20. Secretary of the Treasury, or their designee.
21. Administrator of the Environmental Protection Agency, or their designee.
22. United States Trade Representative, or their designee.
23. Administrator of the United States Agency for International Development, or their designee.
From the Department of Defense—
1. Secretary of Defense, or their designee.
2. A representative of the Army, as appointed by the Secretary of Defense.
3. A representative of the Air Force, as appointed by the Secretary of Defense.
4. A representative of the Navy, as appointed by the Secretary of Defense.
The Director of the Office of Management and Budget (13) through the Administrator of the United States Agency for International Development, plus the Department of Defense appointees are non-voting members of the Maritime Security Board.
The list of board members is long, with 27 total positions. However, it confirms the breadth of the governmental organizations and agencies with maritime interests that should be involved in industry oversight and accountability. When assembled, it will make for a nice photo op. However, with such a structure, one can be assured that the Maritime Security Advisor will need a lot of staff and likely possess substantial policy power.
Besides creating the advisor and board roles, the legislation would create a Maritime Security Trust Fund. It would reinvest industry fees into maritime security programs and infrastructure. We know the industry pays the Federal Maritime Commission and MARAD fees for routine activity and permits. The description of those fees suggests they help offset the organizations’ costs. We do not know how much money is collected annually from the maritime industry or where it goes. Does it support the current maritime governmental organizations, or does the money flow into the U.S. Treasury for general purposes?
A key goal of the SHIPS Act is to grow the U.S.-flag international fleet by 250 ships within 10 years. That would more than double the current fleet, assuming no retirements or accidents reducing its size. Growth of this magnitude will be a challenge since there are only about 20 domestic shipyards today, down from 80 at the end of World War II. During that war, the U.S. was producing ships in six weeks. This massive shipbuilding capacity (think Rosie the Riveter) enabled the U.S. and its allies to defeat German, Italian, and Japanese foes.
The shipbuilding effort will be supported by a 25% investment tax credit for shipyard improvements. Furthermore, it would transform the Title XI Federal Ship Financing Program into a revolving fund and create a Shipbuilding Financial Incentives program to support innovation in shipbuilding and repair.
Other legislative goals include streamlining the U.S. Coast Guard’s regulatory process, which often impedes the growth of the commercial fleet and adds to the cost of new ships. An inducement for building new ships is that the bill mandates government-funded cargo to be transported on U.S.-flag vessels. Also, a portion of goods imported from China must be moved by U.S.-flag vessels by 2029. A guaranteed market for new ships is a step forward in convincing shipowners to build them and shipyard owners to expand their capacity for building them.
The SHIPS Act is an essential first step in reviving the domestic shipping industry and reestablishing the U.S. maritime powerhouse that has helped us execute our defense strategy. Without such steps, the U.S. will depend more on foreign shipyards and shipowners to deliver the goods needed for our economy. China, South Korea, and Japan dominate the global shipbuilding industry. The U.S. builds almost no new oceangoing vessels.
Today’s global shipbuilding capacity has declined 30-40% from its 2011 peak in new vessel tonnage deliveries. Our research on the impact of the net zero energy emissions push on global shipping will be published by the National Center for Energy Analytics. It shows that the massive volume of critical minerals needed for the global energy transition will require 30-50% more new tonnage delivered in the mid-2030s than at the maritime industry’s last new building peak in 2011. Given the decline in global shipyard capacity, the world will need to add as much as 60-90% more vessel tonnage capacity than it has today. The lack of shipping capacity may be the downfall of the energy transition effort.