Despite Exemptions, Tariffs Will Undermine American Energy Production

While the previous administration’s tariffs initially exempted crude oil and some energy-related minerals, these exclusions won’t shield the American energy sector from significant harm. Even with some tariffs rolled back, current levels remain historically high, and investigations into critical minerals persist. These trade barriers will negatively impact American energy production across the board, from resource extraction and refining to electricity generation and transmission.

Steel Tariffs Drive Up Costs for Energy Extraction

Crude oil and rare minerals aren’t the only imported necessities for the energy industry. Pipelines, crucial for transporting petroleum products, are primarily made of steel. Recent surveys within the oil and gas sector highlight that steel tariffs (at 25 percent under Section 232) are already increasing costs and deterring production expansion.

These tariffs are inflating the price of both standard and specialized steel products vital for complex oil and gas extraction processes. For instance, offshore drilling rigs in the Gulf of Mexico require non-recycled steel, a type in which the US steel industry doesn’t specialize. Consequently, these operations often rely on imported specialty pipes, with Japan being a major supplier, particularly for seamless stainless steel tubing and casing pipe.

Tariffs Hinder Investment in Energy Infrastructure

The impact of tariffs extends beyond raw materials, hitting essential capital equipment across the energy ecosystem. For oil and gas extraction, tariffs increase the cost of heavy machinery used in American oilfields. This burden is amplified further down the supply chain, affecting critical equipment for oil refineries and natural gas processing plants, such as air and gas compressors. Notably, Italy is a key manufacturer of specific compressors used in liquid natural gas (LNG) liquefaction.

Beyond oil and gas, tariffs on capital goods will also impede electric power generation. To meet growing electricity demand, American producers have increasingly imported equipment. Energy analysis firms indicate that a significant majority of critical transmission and distribution equipment used in the US was imported recently. Mexico and China are major sources for overall US imports of electricity generation, transmission, distribution, and storage equipment.

Gas turbines offer another illustration. Despite the US being a leading global producer and net exporter of gas turbines, rising demand has led to delivery delays. Imported turbines could bridge this gap while domestic production expands. However, tariffs increase the cost of these imports, potentially delaying the construction of new electricity supply.

Retaliatory Tariffs Threaten American Energy Exports

While the US may have initially avoided tariffs on crude oil, other nations may not follow suit. Petroleum products constitute a significant portion of American exports, especially to the European Union. Measures that harm the market for US oil products abroad will inevitably damage American production. Furthermore, retaliatory tariffs imposed by countries like China on US exports, including oil and gas, directly undermine American energy producers. Even before recent increases, previous retaliatory actions had already significantly disrupted American LNG exports to China.

Beyond tariffs, China’s ability to restrict exports of critical materials, such as rare earth minerals essential for various energy technologies, poses another significant threat.

Macroeconomic Slowdown: The Biggest Risk

While industry-specific tariff effects are concerning, a broader macroeconomic slowdown presents the most significant danger to American oil and gas production. The energy sector is cyclical; economic downturns lead to decreased energy demand, forcing companies to reduce production.

Ironically, a global recession could lead to lower gas prices, potentially offsetting the price increases caused by tariffs on capital inputs. However, relying on a negative demand shock to lower prices is detrimental. Price decreases driven by positive supply-side factors, like increased production or technological advancements, are beneficial. Price drops resulting from a contracting economy signal deeper problems.

The Bottom Line

The previous administration’s “energy dominance” agenda aimed to boost US energy production and lower costs. However, its tariff policies directly contradict this goal. American energy producers rely on a complex global supply chain. Imposing taxes on essential business inputs and risking an economic slowdown driven by uncertainty will harm, not help, American energy production. American drillers use imported steel, refiners utilize foreign-made compressors, and power grids rely on international components. Raising costs through tariffs undermines the very energy dominance the policy intends to achieve.