Republican presidential candidate Donald Trump said at a campaign rally that he would lower energy costs for American households and secure the country’s status as an “energy superpower” through a combination of deregulation of the domestic oil and gas industry and protectionist trade policies. I promised.
“My goal is to cut energy costs in half within my first 12 months in office,” President Trump said at a rally in Michigan in August. “We can do it!”
However, some in the industry are skeptical. While the U.S. president can certainly encourage domestic oil and gas production through a variety of policy tools such as regulations and executive orders, he cannot sway the market balance enough to meaningfully move prices in either direction. Rarely. U.S. oil production is currently at an all-time high as fuel exports continue to set new records. So even if environmental regulations are eased or leases for oil drilling are encouraged, it probably won’t change much for Americans at filling stations.
But President Trump’s proposal to overhaul long-standing U.S. trade policy by indiscriminately raising import tariffs to protect U.S. manufacturing jobs would reduce the millions of barrels the country trades every day. poses a very real risk of locking up oil and constantly raising energy costs for all Americans and citizens. industry. Long-term imposition of tariffs on fuels critical to the U.S. economy could undermine national security, reduce business dynamism, and reduce the number of markets in which U.S. companies can compete and profit. As President Trump continues to develop his vision for the economy and the nation, it is worth revisiting the potential impact of “magnomics” on America’s energy security, resilience, and affordability.
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Trade wars never bode well for energy markets. Oil is an international commodity and relies on the flexibility of international markets to ensure efficient supply allocation and transparent pricing. The United States, which overtook Saudi Arabia and Russia to become the world’s top oil producer in 2018, has become a net exporter of oil and petroleum products with a daily production of more than 13 million barrels of crude oil, benefiting from free trade. . This strengthened the country’s energy security, reduced the trade deficit, and boosted economic growth. U.S. oil exports have helped cushion the blow from global supply disruptions caused by Russia’s invasion of Ukraine and provide allies with enough supplies to withstand further aggression or pressure from President Vladimir Putin. However, even though the energy outlook has improved significantly, the United States still imports approximately 6.5 million barrels of oil daily from global markets. This strange contradiction has caused confusion among those unfamiliar with the complexities of the U.S. energy market. First, major gasoline-consuming states such as Florida and New England lack refining and pipeline infrastructure to connect with the rest of the country, so they must rely on fuel imports to meet demand. Must be. Refineries in the Gulf Coast region, on the other hand, are aimed at processing heavier, sour crude grades commonly found in countries such as Canada, Saudi Arabia and Mexico, compared to the lighter, sweeter crudes produced domestically. Hydraulic fracturing has unlocked U.S. shale production capacity, but ironically, shale is the wrong kind of oil for U.S. refineries. Much of the new oil we produce must be exported. Because, due to these suitability issues, it is neither economical nor logical to maintain it for domestic consumption.
While much of President Trump’s policy agenda remains vague, in one area he is completely clear. That means they want to significantly increase tariffs. He initially said he would raise tariffs to 10% on all imported goods, but recently suggested tariffs could rise to 20% and then 60% on all products made in China. . If implemented, the new drastic measures would mark the highest tariffs since the 1930s, when global trade shrank due to protectionist policies enacted by the United States and pressure from European countries to respond with retaliatory tariffs. If such a scenario were repeated today, it would cause significant damage to the U.S. oil and gas industry. Tariffs of this magnitude stand to cover a significant portion, if not all, of the oil that U.S. refineries import from the world market. Refineries that rely on imported oil will have to pay new import taxes or invest millions of dollars to upgrade their infrastructure to efficiently process the type of crude produced domestically. be. In either case, the additional costs will be passed on to consumers in the form of higher prices for gasoline and diesel.
Furthermore, since the price of domestically produced crude oil tends to rise at the same rate as imported crude oil, an increase in tariffs on imported crude oil is likely to cause the price of domestically produced crude oil to rise as well. What matters in terms of price is the total demand for oil, not the proportion of imports. U.S. oil producers have little incentive to reduce production costs when competing with high-priced imported crude oil. The longer tariffs last, the more likely these costs will be permanently embedded. Some industry insiders argue that the Trump administration could lessen the blow to U.S. consumers by completely exempting oil trade from import tariffs and negotiating bilateral agreements instead. However, the risk of a chaotic breakdown in trade negotiations continues to weigh on global oil markets, which is likely to encourage shadow trading and lead to price volatility.
If other countries retaliate by imposing their own trade barriers, as they did during President Trump’s first term, it essentially amounts to a global trade tax, reducing the attractiveness of U.S. oil exports to foreign buyers. It will drop immediately. If the United States were to impose a 60% retaliatory tariff on oil exports to China, oil trade between the two countries, the world’s largest oil consumers, would virtually disappear. Additionally, there will be various costs associated with higher import duties, such as higher overall inflation levels and higher prices for manufacturing equipment used in oil drilling, pipelines, and transportation. An example of this was seen in 2018 when the White House imposed a 25% tariff on imported steel and aluminum, causing U.S. producers to immediately pass on the associated costs to consumers. Gasoline prices during the summer driving season soared to the highest price in four years.
U.S. oil producers may welcome President Trump’s deregulatory policies, but they will not be enough to deliver on his promise to lower energy costs on a sustainable basis. Deregulation and permitting reform, including more aggressive leasing programs and lower emissions limits, will help squeeze out surplus production from the industry, but the impact on downstream prices will be modest. Rather, the focus of the debate should be on the drastic extension of President Trump’s protectionist trade policies, which are currently being discussed as he prepares for a second term. Oil tariffs are bad policy. These tariffs will impose significant costs on U.S. consumers, businesses, and the economy as a whole. Although this loss is not insignificant, the actual cost of oil tariffs may be greater than estimated in this column. Without affordable and stable energy supplies, modern nations cannot achieve sustainable economic growth. Furthermore, we would be endangering the collective national security of our country and our allies. But judging by the hyped rhetoric, it doesn’t seem like Donald Trump is going to change his mind about tariffs anytime soon.
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