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Ending Steel Tariffs Would Reduce the Cost of Energy

Real Clear Energy

President Donald Trump’s trade war is a little over a year old, so it’s a good time to review its impact -- especially since he is rattling the steel-tariffs sword once again.

The president announced in March last year that he would be imposing a 25 percent tariff on foreign-made steel and 10 percent on aluminum. While China and the European Union were the initial targets, Trump later included Canada and Mexico. Steel tariffs remain on all of them.

If U.S. companies buy foreign-made steel -- and in many cases they have to, either because U.S. steel manufacturers don’t make the specific type of steel or they don’t make enough of it -- they must pay the 25 percent tariff.

The Congressional Budget Office estimates that tariffs on all imports accrued $41 billion to the federal government in 2018.

However, when tariffs are imposed on foreign-made steel, U.S. steel manufacturers raise their prices -- because they can. And that also costs companies that buy U.S.-made steel. 

Of course, tariff revenue isn’t huge when compared to the $3.33 trillion total federal revenue for 2018. But tariffs are kind of like company layoffs. Many employees may be largely unaffected when a company cuts its workforce, but others are devastated.

Companies that use steel, whether foreign or domestic sourced, have seen their costs rise significantly. The oil and natural gas producing industry is one of those bearing the brunt of the tariffs.

Every aspect of fossil fuel production -- upstream, midstream and downstream -- uses steel, and a lot of it.

Steel is used in drilling rigs (upstream), it’s used in the pipelines (midstream) that carry crude oil and natural gas to refineries or ports for export. And it’s used in the refineries that turn crude oil into gasoline and other petroleum liquids, as well as plants that turn natural gas into liquefied natural gas for export.

The problem with many of the studies focusing on the economic impact of Trump’s tariffs is they are only looking at the first year, 2018.   

For example, midstream companies are aggressively trying to build new pipelines to transport oil and natural gas to refineries. And the president is trying to encourage that effort. He recently signed two executive orders to make it easier to build pipelines. 

“Nobody in the world can do what you folks do,” Trump said speaking at the International Union of Operating Engineers International Training and Education Center in Texas, many of whose members work on pipelines, “and we’re going to make it easier for you.”

And no doubt the president will, but he’s also making it more expensive for pipeline companies to buy the pipeline-grade steel they need for their projects.

Pipelines require a specific type of steel that is primarily made by three foreign-based companies. So far, U.S. steel manufacturers haven’t stepped up to fill the need.

U.S. energy companies import an estimated 77 percent of the steel used in pipelines, at a cost of $2.2 billion a year. This means a 25-percent tariff adds roughly $550 million to the cost of building and maintaining the nation’s energy infrastructure.

And a recent analysis from consulting firm Wood Mackenzie found that metal tariffs drove up the prices of drilling parts in one West Texas oilfield by over 30 percent.

In response to the backlash against tariffs, the administration is also considering steel quotas. But those could do even more harm to U.S. consumers and businesses. Under a quota system, steel wouldn’t just be more expensive, it could be impossible to access once the quotas are reached. 

Ironically, the president has been pushing oil-producing countries to increase production so as to keep the price of gasoline cheaper, especially now that the administration has expanded sanctions in an effort to stop all Iranian oil exports. Another way to achieve that goal is to eliminate the steel tariffs, at least on our longtime allies.