The Impact of Tariffs on the Energy Sector

The American energy sector has really taken off in the past few years. The discovery of “fracking” or hydraulic fracturing has completely changed the dynamics of the oil and gas industry. The end result has been a historic boom in the oil and gas industry. For the first time in many decades, America has become self-sufficient in the production of oil. Also, countries like Saudi Arabia are no longer able to dominate America since America is no longer dependent on these nations for its oil import. At the present moment, America produces more than 10 million barrels of oil per day. It is expected to overtake the production of Russia and become the largest producer of oil in the world.

Trump and the Oil Industry

Up until now, the Trump presidency was a godsend for the oil and gas industry. This industry has always been highly regulated because of the huge environmental impact that it has. However, of late, Donald Trump made the United States exit the Paris Accord. As a result, a lot of regulations that earlier applied to the oil and gas industry no longer apply. Fewer regulations mean less cost. It is this less cost that has made the United States more competitive in the international market. The oil producing and exploring nations have been put in jeopardy ever since Donald Trump exited the Paris Accord. There are many critics who suggest that the steel and aluminum lobby was funded by the Gulf States to induce Trump to impose duties on foreign made steel and aluminum. Clearly, the American steel and aluminum industry is the direct beneficiary of this action. However, the Gulf States are the real beneficiaries even though their benefits are not visible to the average person.

It is difficult to believe that Donald Trump would want to hurt the oil and gas industry knowingly. Oil and gas sector have always been on his mental map to “Make America Great Again”. Hence, he seems to have inadvertently placed a huge roadblock on the path of the oil industry.

The Impact on Oil Industry

  • The American oil and gas industry is an extensive user of steel. At the present moment, most of this steel is imported because it is cheaper to import steel. At the present moment, America exports less than one fifth of the amount of steel that it exports in any given year. Hence, the livelihood of millions of Americans who work in the oil and gas sector is at risk because of the tariffs on imported steel and aluminum. Donald Trump’s actions will end up creating few jobs in the steel industry. However, they are likely to lead to massive layoffs in the oil and gas sector. These policies are just disturbing the balance of free trade. The basic principle of free trade is that countries should produce whatever they can produce most effectively. It seems like America is not very effective in the production of steel. However, the government is trying to force consumers to buy American steel. This is disturbing the cost structure of many industries.
  • The amount of steel used in oil and gas sector is not trivial. This industry requires heavy expenditure on infrastructure and most of the infrastructure is made out of steel. Equipment used for drilling, pipelines, terminals and even entire refineries are made out of steel. If the 25% duty levied by Donald Trump is taken into account, the prices of oil will shoot up considerably. This is because the cost of building an average refinery will go up by $80 million.

    Oil is used for transportation of all goods in general. Hence, a rise in the price of oil will lead to a rise in the price of all goods. Donald Trump’s actions may end up inadvertently causing price inflation in the economy. This is the reason why people from the oil and gas lobby are trying to convince Donald Trump to repeal his tariffs or change their nature. The very existence of American oil and gas industry can be threatened as a result of these tariffs.

  • Experts are of the opinion that steel tariffs are a wrong move. This is because if Donald Trump believes that China is the real enemy and wants to fight a trade war, he needs allies. At the present moment, these tariffs are negatively affecting many countries. It is for this reason that countries from the European Union who used to be staunch supporters of American policies have also started criticizing America.
  • The oil and gas industry uses several types of specialized steel which are not even available in the United States. Hence imposing tariffs will only affect the American consumer who will end up paying more for their gasoline. Even if these tariffs had to be imposed, it should have been done in a planned manner. America would need more time to prepare itself for a trade war. At the present moment, it is likely that American oil and gas industry may be derailed from its path. Had it been allowed to continue on its path, it would have certainly become the largest producer of oil in the world by 2021.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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