Here’s Why U.S. Energy Sector Opposes Tariffs on Steel

Mark Green
Posted June 1, 2018

The decision by the Trump administration to impose tariffs on imported steel, including key allies Canada, Mexico and the European Union, is the wrong direction for U.S. energy policy. While the full effect of these tariffs on steel-intensive business—and the U.S. economy—remains to be seen, the impacts will ripple through the natural gas and oil industry, compromising energy production and posing a threat to America’s national security.

Following today’s announcement from the White House that the administration has expanded the list of countries it will subject to Sec. 232 tariffs to Mexico, Canada, and the EU, API’s President and CEO Jack Gerard released a statement reinforcing the concerns of the natural gas and oil industry:

We are deeply discouraged by the administration’s actions to impose tariffs on our three closest trading partners…and view this as a step in the wrong direction. The implementation of new tariffs will disrupt the U.S. oil and natural gas industry’s complex supply chain, compromising ongoing and future U.S. energy projects, which could weaken our national security. Additionally, Canada, Mexico and the European Union are imperative members of our Defense Industrial Base (DIB) and are top military allies – far from a threat to America’s security. ...

We hope and expect that the administration will recognize the national security benefits of the U.S. oil and natural gas industry and grant API’s member companies product exclusions from steel tariffs and quotas in the ongoing Department of Commerce process, as well as provide transparency and flexibility in the process to lessen the impact on U.S. oil and natural gas production, transportation and refining.

These developments come a week after Gerard conveyed preliminary concerns to President Trump in a letter urging the administration to permanently exempt all currently exempt countries from the tariffs, expand the list of exempted countries, and remove any associated import quotas that have already been imposed:

The American oil and natural gas industry relies on imported specialty steel due to a lack of domestic availability of the quality and quantity of products required for drilling, pipelines, LNG export facilities, refineries, and petrochemical operations. Additional Sec. 232 steel and aluminum import restrictions will have a negative effect on our industry just as we have achieved the highest level of domestic hydrocarbon (oil and natural gas and natural gas liquids, or NGLs) production since 1949 – according to EIA data. Without this specialty steel, there is the potential for ongoing and future U.S. energy projects to be severely affected or stalled, which will also harm businesses and consumers as well.

Let’s break down what this means. The big problems for the natural gas and oil industry from the administration’s tariffs on imported steel:

Will Domestic Steel Manufacture Close the Gap?

You need drill pipe to drill natural gas and oil wells and pipelines to deliver the energy resources from fields to processing plants and refineries – and it takes steel to make all that pipe.  Given that a lot of that steel comes from very specialized factories abroad, tariffs and quotas on imported steel could put a serious dent in U.S. production and pipeline projects.

It’s a big question whether domestic steelmakers will ramp up production and adjust their product to supply oil and natural gas producers who are dependent on imported specialty steel. Consider that expanding plants and upgrading current capacity to make the high-quality steel needed by our industry could cost tens of millions of dollars per facility. A couple of reasons the domestic steel producers might choose not to incur those costs:

• The cyclical nature of the natural gas and oil industry and its small part of the domestic steel market – just 3 percent.
• The fact the next administration could eliminate the tariffs, which means a steel manufacturer can’t count on a long-term increase in demand for their product that would justify the cost of plant expansions and upgrades.

Steel Delayed = Energy Delayed

An ICF report last year detailed the impacts of trade restrictions on the U.S. pipeline sector, warning of impactful delays:

“Because of this lack of substitutes, heavy reliance on imported goods and materials, the long lead time required for many items, and the fact that several of these items are not made in the U.S currently, an immediate implementation of stringent domestic content requirement for line pipe, fittings, and valves would mean that most oil and gas pipeline construction projects would be delayed or stalled.”

Steel supply restrictions could translate into delayed or stalled pipeline manufacturing and construction, which means delayed or stalled natural gas and oil transportation.

There’s already a pipeline shortage in the Permian Basin, the United States’ largest oilfield. A report by the Dallas Federal Reserve says that Permian production could exceed transport capacity between the middle of this year and mid-2019 if new pipelines aren’t brought online. A chart from the report shows projected oil production and an expected pipeline shortfall:

Layer onto that the new tariffs on steel and there’s an even bigger problem – for Texas and other parts of the country.

Restricted pipeline capacity from a producing area like the Permian Basin could have rippling energy and economic effects if companies are forced to scale back natural gas and oil production. Think jobs, cost of energy, and all kinds of economic activity associated with energy production.

Snarled Exemptions, Troublesome Quotas

We’ve recently posted about the labyrinthine federal process for obtaining an exclusion or exemption from the steel tariffs. Read the post; the process is problematic in a number of ways. Other concerns stemming from the exclusions system:

• Is the Commerce Department adequately prepared to process applications for exclusions, of which about 7,000 are now posted in the Federal Register (up from about 5,000 last week), out of the 10,500+ that received comments?
• Will Commerce verify claims the domestic steelmakers, who can weigh in on any exclusion application, that they can supply specific types of steel? Can such a claim be verified in a timely way or even at all?
• Will countries that have been granted exemptions from the steel tariffs be thwarted from supplying needed steel by quotas? Imagine the absurdity of a steel shipment arriving from Country A being turned around because Country A had reached its quota.

Potential economic impacts loom. The whole point of a tariff is to increase domestic prices so that domestic producers can compete with foreign rivals: higher costs for oil and natural gas projects. In turn, higher energy costs can ripple throughout the economy, affecting businesses and manufacturers, who’ve been helped in recent years by a thriving domestic natural gas and oil industry.

Steel Tariffs on Allies Weaken National Security

The idea that Canada, Mexico, and the European Union – all three allies and trading partners – somehow pose a potential risk to national security is illogical and unfounded. Both Canada and Mexico are intricate to the development and growth of the U.S. economy.

The potential for disruption is enormous for the natural gas and oil industry, not just with regards to cost increases, but also the ability to acquire the necessary steel products for production. Inflicting tariffs on our allies sends a bad message to the rest of the world – don’t try to negotiate trade deals with the U.S. because you could get beat up. Tariffs do nothing to improve national security but weaken it through protectionist policies that isolate the U.S. from allies and trading partners. We already have military cooperation with Canada, Mexico, and the European Union, so to impose tariffs on them under the guise of national security doesn’t make any sense. 

Furthermore, nothing in the Section 232 study found any evidence of any one of those three entities posing a national security risk to the U.S. via any of the steel imported from all of them. To the contrary, that trade improved our national security and reinforced positive diplomatic ties.

It’s hard to overstate the impacts the administration’s steel tariffs could have – may already be having – on the natural gas and oil industry, with possible effects on local, regional and national economies and our energy transportation system. Policies that erect impediments to the U.S. energy renaissance and its broad benefits is the wrong course for the United States.