February 27, 2018

How Steel Tariffs Would Hurt Oil Production

The U.S. benefits from an oil boom, but that could be hampered by the wrong protectionist policies.

For many years the United States has been one of the world’s top oil producers, but the country is on the cusp of becoming the global leader in 2018. According to the most recent report from the International Energy Agency (IEA), America will soon vault over Saudi Arabia for second place and likely overtake Russia for the top spot before the end of the year. The report also states, “Today, having cut costs dramatically, U.S. producers are enjoying a second wave of growth so extraordinary that in 2018 their increase in liquids production could equal global demand growth.”

It’s amazing how much the fortunes of the U.S. energy market have changed just over the last few years. With the vast investments made in shale and fracking technology, the Department of Energy announced a couple of weeks ago that the nation is on pace to be a net energy exporter by 2022.

While it is remarkable that the United States will soon lead the world in oil production, most industry observers believe the boom in domestic shale production will only last over the next five to 10 years. One analyst recently wrote, “By the mid-2020s … there could be a much greater reliance on the Middle East, just as there was in the past.”

That is why it is critical for President Donald Trump’s administration not to implement policies that would hurt the oil and gas industries in the short term. A perfect example of a potential policy that would adversely affect American energy companies is the recent recommendation from the Department of Commerce to impose significant tariffs on imported steel and aluminum.

While some officials, specifically Wilbur Ross and Peter Navarro, believe that this would be a positive development it would, in reality, be devastating. Most of Trump’s cabinet, including Secretary of State Rex Tillerson and Secretary of Defense James Mattis, believe that an introduction of tariffs would have global repercussions and seriously damage relationships with partners. A major second order effect of implementing tariffs would be that the cost of drilling, building production facilities and maintaining pipelines in the United States would exponentially go up.

According to the American Petroleum Institute (API), the U.S. steel and aluminum industries don’t have the organic manufacturing capabilities needed to fulfill their needs. In a letter sent to the Commerce Department last May, the API and four other groups stated, “There are very few, and in some cases zero, U.S. companies that make steel for the parts required by large pipelines, so companies look abroad…”

That’s why it makes no sense for the Trump administration to implement tariffs. It not only doesn’t fix the problems surrounding domestic steel and aluminum production, it makes it more difficult for oil companies to do business. The president would be smart to heed the advice from Edwin J. Feulner who recently wrote, “Nobody wins a trade war. We help ourselves and each other when we stand foursquare for freedom. It’s time to trash the tariffs and update the ‘rules of the road’ for all concerned.”

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