President Trump’s intention to slap stiff tariffs on American firms that buy imported steel and aluminum is going to do more than raise the cost of doing business for U.S. manufacturers, increase prices for consumers, and put millions of American jobs at risk. It is also likely to undermine the shale revolution in oil and natural gas production, and in the process benefit OPEC and Russia.
There is a terrible irony in Trump’s move to impose tariffs on American businesses. Throughout his first year in office, Trump promised to make the United States the dominant producer of oil and natural gas in the world. But his recommendation to impose tariffs on steel and aluminum ignores the reality that U.S. energy production will ultimately be a big loser from these destructive protectionist policies.
As countries around the world struggle with the huge scale of energy measures needed to grow their economies, they have turned increasingly to the United States for oil and gas. The technologies that drove the shale revolution helped drive oil and gas prices down, undercutting the ability of OPEC and Russia to influence global energy prices. In January, Energy Secretary Rick Perry characterized exports of oil and gas as a central part of the administration’s “Energy Dominance” agenda. “The United States is not just exporting energy, we’re exporting freedom,” Perry said.
Now there is concern that among the unintended consequences of Trump’s ill-conceived tariffs is that it will boomerang by driving up production costs for the nation’s oil and gas producers, which will then raise energy costs for American firms and households. Further, Trump’s misguided protectionism will invite retaliation from other countries that will understandably respond by cutting back on their imports of American oil and gas. This will have major, negative consequences for energy-producing states, including both traditional oil- and gas-producing states like Texas, North Dakota, and Louisiana and now shale-rich states like Pennsylvania and Ohio.
Beyond those certain negative outcomes, a decline in U.S. oil production will enable OPEC and Russia to raise world oil prices. In the current political environment, as trade wars with other countries loom on the horizon, a reduction in U.S. oil and gas exports would also represent a major setback in efforts to check Russia’s growing economic and political power.
For the U.S. oil and gas industry, the problem with Trump’s 25 percent tariff on imported steel arises because the industry relies heavily on imported specialty steel for many of its needs that U.S. steelmakers don’t supply. Those multiple uses include steel for drilling, production facilities onshore and offshore, pipelines, liquefied natural gas terminals, refineries, and petrochemical plants.
Take pipelines. Trump’s tariff on imported steel would raise the cost of pipelines because the steel used in making pipelines must meet rigorous technical specifications to ensure that it doesn’t corrode or fracture during a lifetime that may exceed 30 years. According to the Association of Oil Pipelines, a trade group that represents owners and operators, more than three quarters of the pipeline used in the U.S. must be imported, either in the form of finished pipe or the raw material used to fabricate it in the U.S. The ability of domestic steelmakers to supply steel to the oil and gas industry is minimal, accounting for just 3 percent of the total amount of steel required by the industry in most years.
It’s estimated that a 25 percent increase in the cost of imported pipe, fittings, and valves would raise the cost of a 280-mile pipeline — typical of those needed to carry shale oil from the Permian Basin in Texas and New Mexico to Gulf Coast ports for export — by $76 million. For the giant Dakota Access Pipeline, the cost increase could be as much as $300 million.
The shale industry is already facing pipeline bottlenecks that are hampering growth. Further obstacles to pipeline construction would slow oil production and hurt jobs in the shale fields. An increase by one quarter in the cost of building pipelines can only stall the industry’s expansion, something that would be inconsistent with the administration’s goal of continuing the energy renaissance and building a world-class infrastructure. And it’s likely to have serious negative consequences for the American economy and put millions of jobs at risk.
The new Trump tariff policy steel and aluminum may be nothing more than minor election year politicking. But it’s still a dangerously bad idea and one that is certain to seriously derail the administration’s “Energy Dominance” agenda.
Mark J. Perry (@Mark_J_Perry) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan's Flint campus.
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