Nothing unnerves investors more than uncertainty. President Trump has served up a quite a bit of uncertainty in recent days with his escalating trade battle with China, dramatic NATO meeting, visit to the United Kingdom, and his meeting with Russian President Vladimir Putin in Helsinki.
No, the sky is not falling on global markets. The foundational underpinnings of the markets remain strong. But there’s no doubt that President Trump’s actions have contributed to jitters in the financial and commodity markets, and are starting to influence investment decisions.
Nowhere has this been more evident than in the energy sector, where Trump has won plaudits since taking office last January for his deregulatory agenda and pursuit of “energy dominance.” Unfortunately, the president’s tough-talk trade agenda threatens to undermine that goal, while also stoking fears of a global economic slowdown.
Trump has a point about China’s trade abuses, but the imposition of tariffs on $34 billion worth of Chinese goods, including steel and aluminum, and the additional threat to slap levies on $200 billion more has the makings of a full-blown trade war. There will be no winners in this war, just losers.
Markets will remain on the defensive until Trump’s intentions become clear. That said, headline-generating talk of tariffs and trade wars are affecting the markets all by themselves.
The international benchmark price of oil plunged 7 percent last week, its biggest drop in two years, on the Trump administration’s announcement of a list of Chinese goods that could be hit with a 10 percent tariff as early as September. Falling oil prices are usually a good thing for American consumers, but not when they reflect concerns about slowing global economic growth and faltering energy demand.
OPEC is sufficiently spooked. The oil cartel’s most recent monthly report stated that accelerated trade tensions could “negatively impact investment, capital flows and consumer spending, with a subsequent negative effect on the global oil market.” The CEOs of Exxon Mobil and Chevron have expressed similar concerns.
U.S.-based energy companies are vulnerable to economic losses in an escalating trade spat. Although the levies so far enacted by Washington and Beijing avoid hitting energy trading directly, China has threatened a 25 tariff on U.S. crude and oil products if Trump makes good on his threat to impose additional levies on Chinese goods in September.
The result could be devastating to the booming U.S. oil sector, which is producing at a record level of nearly 11 million barrels a day and is on pace to become the world’s largest oil producer, ahead of Saudi Arabia and Russia, next year. The challenge for American producers is that the domestic refining industry is at capacity, which means every incremental barrel of shale oil produced must be exported to markets outside the United States.
A trade war with China cuts on two fronts specifically for U.S. energy companies. First, if Beijing follows through with 25 percent tariffs on crude and oil products, it effectively shuts our producers out of the world’s largest and fastest-growing energy market. China will seek out cheaper alternative sources of supply, including from Iran.
China has emerged as the top consumer of crude oil from the United States. U.S. oil exports overall have surpassed 2 million barrels a day, a trade valued at $50 billion. China’s percentage of that trade is close to 500,000 barrels a day So far in 2018, China has imported more than twice as much U.S. oil as any other country in the world besides Canada.
Trump’s existing 25 percent tariff on imported steel and 10 percent tariff on aluminum imports has already increased costs across the oil industry supply chain, from drilling to installing wellheads to constructing pipelines. My company, Canary, LLC, one of the nation’s largest privately-owned oilfield services contractors, saw an almost immediate 20 percent increase in the cost of steel we use in the field when the tariffs were announced in the spring.
Canary spends roughly $10 million a year on imported steel to make wellhead and pressure control equipment, valves and other apparatus used by oil companies in the exploration and production process. The economic consequences of a trade war are a real threat to our employees just as they were starting to see the benefits of the president’s other policies supportive of our industry. Rising supply costs are making us think twice about planned investments (investments that had already been sitting on the sideline since oil prices plunged in 2014) in equipment, projects and people.
It’s not just Canary. The entire domestic oil sector is on edge, at a time when building critical export infrastructure (new pipelines, terminals and port facilities) to support rising energy exports is of paramount importance.
Increasing the costs of American energy production is bad for consumers, punishes an industry that supports 10.3 million jobs, and will hurt the country’s national security and prosperity. That’s not a path to energy dominance.
Dan K. Eberhart is CEO of Canary, LLC, the largest independent oilfield services company in the United States.
