President Trump’s trade agenda could be putting the U.S. energy economy on the road to ruin from the risk of an all-out trade war with China and Europe.
The tariffs on steel and aluminum that Trump put in place “hits energy producers in two ways,” said Scott Lincicome, an international trade attorney at the Libertarian Cato Institute.
First, “it denies them critical things they need to produce energy.” Whether it’s drill bits they import from overseas, or heavier steel products for pipelines, “Energy producers need a lot of steel and aluminum to extract the various forms of fossil fuels,” he said.
The second “hit” to energy relates to the integrated markets in which oil and natural gas producers participate, said Lincicome.
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The tariffs create “new barriers in the energy market, hurting energy producers,” he said. The barriers are created in the aftermath of Trump’s tariffs, when countries retaliate against the United States by raising the cost of American produced energy exports.
“And the retaliation is directly targeting commodities,” Lincicome said. Energy companies are “getting hit in multiple places,” which “is really difficult when you’re dealing with an industry trading a globally-priced commodity.”
China is looking to impose a 25 percent tariff on energy commodities from the U.S. in response to Trump’s targeting billions of dollars in their goods. The Asian nation is currently the largest market for U.S. oil exports.
It is too early to say what effects the trade war will have on the price of gasoline or diesel. For now, the tariffs and retaliation are not expected to affect consumers at the pump, says a senior oil industry official. But it’s safe to say that it could put a damper on investment by energy companies in the United States, which would hurt production, jobs and the economy, according to analysts.
“Most macroeconomic models would say the main impact would be less trade and lower GDP growth, and therefore, lower energy demand,” said Guy Caruso, former CIA analyst and head of the Energy Information Administration under President George W. Bush, now with the Center for Strategic and International Studies.
[Related: Oil and gas chiefs: Trump’s trade agenda a ‘drag’ on economic growth]
Low demand and less economic growth means less of the oil industry’s product is being used, and that slows down investment and job creation.
“Overall, it’s bad news for the energy industry,” Caruso added. But as far as consumers being hit by higher prices at the pump, any effect would be small, he said.
“It would be pretty minimal,” he said. “We are talking pennies on the gallons.”
But adding Iran oil sanctions to the ratcheting up of a trade war, and there is a concern about fuel prices going up.
“Bigger issues on price are the sanctions on Iran,” Caruso said. Taking 1 million barrels per day of Iranian crude oil off the market, which is what is likely to happen under Trump’s sanctions regime, could have bigger effects on consumers’ wallets, perhaps “5 or 10 cents on the gallon.” But even then, he added, someone in the global oil market is going to want to make that up.
Knocking Iranian oil from 2.5 to 1.5 “is not insignificant,” but in time there would be an increased incentive for the Saudis to produce more, said Caruso. And even the United States would ramp up production from shale to meet the supply crunch.
For some Trump donors and oil executives, the trade issue and how it dovetails with the global oil market is a top concern when it comes to energy and maintaining the president’s goals under the “energy dominance” agenda.
“To me the biggest thing going on in the energy business is the trade stuff, in terms of the tariffs and the oil flows as result of the trade war, and then the infrastructure problem in the Permian” shale region in Texas, said Dan Eberhart, president and CEO of Canary, one of the largest producers of oil well equipment in the country. He is also a Trump donor and backer.
Eberhart believes the oil market is being strained, which could result in much higher oil prices than the current $70-$74 per barrel range seen now. That would drive up the cost of gasoline, diesel and jet fuel.
He isn’t alone in that outlook. The U.S. Energy Information Administration, although predicting slightly lower oil prices going into 2019, hedges its bets by noting that a lack of spare oil capacity in the market can “create conditions for possible price increases if additional supply disruptions occur or if forecast supply growth does not materialize.”
Eberhart believes U.S. shale oil production should, in ideal world, be able to deal with any sudden supply shift, but a lack of pipelines to move the oil from the well to the refinery is lacking in the United States, especially in the Permian shale region that is experiencing burgeoning growth.
That’s where Trump’s steel tariffs could hurt even more, because they can delay pipeline projects necessary to make the U.S. oil system more flexible to contend with supply disruptions or even price increases, according to industry sources.
“We’re worried that there’s not a clear end in sight,” said a senior oil industry official tracking the tariff situation closely. In the meantime, Trump is making the steel industry needs less available, while closing off China’s market for U.S. energy imports.
“When you have to pay the tariff, then you’re paying more for a critical input for the project, and you affect the overall economics of the project,” which means it drives up cost, according to the official.
“It’s unfair that the administration is changing the investment basis by imposing these import restrictions in the middle of developing a project,” the industry official added.
Another problem with the steel tariffs that “can actually delay a project that is already under way” is the quotas that the section 232 tariffs impose, the official said.
The quotas limit the amount of steel allowed to be imported in a given quarter or year. If a company cannot get what it needs from a foreign producer before the import quota is reached, then it has to wait up to a year for the quota to reset, the official explained.
The other issue is applying for tariff waivers, which has proven disappointing for the oil and natural gas industry so far. Industry officials point out that the process of getting a waiver to get around the tariffs does not have a clear basis and is not transparent.
Eberhart said he is having difficulty getting his products, which are manufactured in China, into the U.S., because the waiver process is difficult to understand and maneuver.
The oil industry official explained that it is “not clear what the basis has been for approving some [waivers] and not others.”
“The administration’s decision-making is not serving the interests of energy consumers and American businesses, as these tariffs are expected to increase the cost of sourcing steel for the oil and natural gas companies which in turn could increase the cost of energy to consumers,” said Marty Durbin, executive vice president for the American Petroleum Institute. “This is not the way to achieve the administration’s commendable goal of U.S. energy dominance.”
It’s hard to pinpoint what exactly will occur in the future, but these import restrictions, “whether they’re raising your costs through tariffs, or delaying the arrival of your products through quotas,” are changing the overall economics of projects, said an industry official.
“Overall, the effect they will have is to dampen the ability of the U.S. oil and natural gas industry to pursue the sorts of investments they would have without the import restriction,” the official continued. “You will eventually have less project development than you would have otherwise.”
