Tariffs on 'Foreign Oil' Would Weaken U.S. Energy Industry
As the coronavirus pandemic engulfs the nation, Rahm Emanuel, former Chicago mayor and advisor to President Barack Obama revived his infamous phrase: “Never let a crisis to go to waste.” True to form, some politicians in Washington are using the current turmoil to toss aside free market principles in favor of protectionist trade policies, specifically tariffs on imported crude oil. Even in the best of economic conditions tariffs are, to put it bluntly, a lousy idea. With the economic impact of the coronavirus reverberating from Wall Street to Main Street, tariffs can only make life worse.
The market was already on shaky ground, with the coronavirus racing across the globe, when OPEC+ leaders Saudi Arabia and Russia failed to reach an agreement on oil production cuts. As both nations threatened to ramp up production, the oil markets went off the rails: West Texas Intermediate crude and Brent crude (an international benchmark) plunged to historic price lows not seen in thirty years.
From outward appearances, Russia and Saudi Arabia look to be battling only each other in the price war, but some analysts believe Russian President Vladimir Putin has motives aimed squarely at the United States. Helima Croft, head of global commodities strategy at RBC, noted, “We fear that it could be a [protracted] struggle, as Russia’s strategy seems to be targeting not simply US shale companies— but the coercive sanctions policy that American energy abundance has enabled.”
The emergence of the United States as a global energy superpower changed the dynamics of a market long dominated by other nations. The push to increase global energy supplies in the face of lower short-term demand is a direct reaction to this new paradigm. While coronavirus has reduced demand for oil and the Russia-Saudi Arabia price war has destabilized markets, the long-term industry outlook remains strong. When recovery inevitably comes, the world will demand more energy, including fossil fuels.
The fact remains that the oil and natural gas industry is one of America’s most resilient, demonstrating time and again a unique ability to weather uncertain markets. All the more reason for Washington to refrain from enacting protectionist trade measures such as the ones Senators Jim Inhofe, Roger Wicker, and seven other Republican senators proposed in a letter to Commerce Secretary Wilbur Ross. Senator Inhofe specifically asked Secretary Ross to impose tariffs on imported crude oil using Section 232 of the Trade Expansion Act of 1962, the law which authorizes President Trump to restrict trade based on national security reasons. The President invoked this law in 2018 when he increased tariffs on steel and aluminum imports.
Even under the extraordinary market upheaval we are experiencing, tariffs are not the answer, no matter how tempting. History shows that free market policies provide greater stability and growth for the market and the nation. Hasty reactions like those being proposed will not have their intended effect, but will damage American companies and harm consumers.
Tariffs—as they always do regardless of which industry affected—would raise costs for US refineries that rely on some oil imports. The increased costs would add uncertainty for global supply chains and lead to higher gas prices for Americans who are already struggling to cope with the pandemic.
Poor policy ideas aren’t confined to Washington. Deep in the heart of oil country, Ryan Sitton, a Commissioner on the Texas Railroad Commission (which regulates the state’s oil production), proposed “pro-rationing” schedules that would compel the state’s firms to cut production. In exchange, he argues, Russia and Saudi Arabia would do likewise.
Setting aside the fact that a production quota system could take years to implement, imposing such quotas on Texas crude oil would penalize the more efficient and lower cost producers while supporting those that are less efficient. Quotas would also add significant wellhead monitoring costs on oil producers who are already struggling in an unpredictable environment. Additionally, quotas will be notoriously slow to react to future demand or supply shocks. And this is no guarantee that Russia and Saudi Arabia will play game. While not perfect, free market incentives will adjust the markets faster and more efficiently than a fresh layer of government controls.
There are no winners in an oil price war, a lesson that Russia and Saudi Arabia will soon rediscover. And Washington should remember the increased costs of recent tariffs on other industries. Washington and Texas should show patience and let the free markets continue to be the best arbiter of supply and demand. Americans and the economy are under a tremendous strain in these unprecedented times. Let’s not make things worse by launching a new trade war.
