Keep Oil Tariffs Out of the Policy Pipeline

Oil tankers docked at the port of Tuxpan, Mexico, April 22, 2020. (Oscar Martinez/Reuters)
Oil tariffs will transfer wealth from American consumers to energy producers.

It has been a rough year for the oil industry, as evidenced by the recent wave of historically weak earnings reports. The pandemic obliterated demand for a whole range of petroleum products, from gasoline to jet fuel. Any year in which your benchmark product has a negative price, as oil did for one day last spring, is going to be bad. Conditions in the natural-gas market have not been much better.

Recently, prices have crawled back into the more favorable ranges, aided by OPEC coordination to bring supply in line with still-weak demand. Natural-gas prices have rallied with late-arriving winter.

Even with the recent rally in oil prices, the future of the industry is uncertain. Last week, I listened to an industry executive articulate why companies like his were turning to the federal government for assistance in the form of oil-import tariffs. The push to restrict energy imports is a moonshot bet that somehow “Buy American” can be contorted into a policy to help domestic producers. The proposal is premised on faulty economics and a narrow policy gestalt.

The industry is stuck with a less optimistic outlook than it might have hoped for. Bullish forecasts for the coming months have been jarred by a slow vaccine rollout and initial moves by the Biden administration to deliver on climate campaign priorities. Optimists point to pent-up travel demand that will be uncorked as soon as vaccinations take effect and argue that the economy will roar back. Pessimists wonder if we have finally crossed the threshold of peak oil demand, which would leave producers fighting over a shrinking market. Joe Biden’s promises of climate action add to the trepidation.

One early Biden action was to cancel the permit for the Keystone XL pipeline, which would deliver oil from Alberta to Nebraska, and from there eventually to refineries on the Gulf Coast. Completing the pipeline would shift oil from rail transport to the objectively safer pipeline mode of transport. That said, a select group of U.S. producers saluted President Biden’s cancellation of the Keystone XL permit, thinking that the absence of the pipeline would keep Canadian crude off the trains it currently uses to access U.S. Gulf Coast refineries. And now those producers want to double down with import tariffs.

This is nothing new. Harold Hamm advocated for oil tariffs during the Trump administration. North Dakota, where Hamm’s Continental Resources is an important producer, has had low prices for years relative to national benchmarks (Keystone XL would have helped by providing another way for North Dakota oil to get to market, reducing the price differential between crude produced there and elsewhere). Yet even the tariff-happy Trump administration could not stomach oil tariffs. It has been just over five years since the antiquated crude-oil export ban was scrapped. Yet here come West Texas oil producers asking for import barriers — maybe they don’t recall their advocacy of free trade a few years ago.

The oil-tariff idea has deeper roots, going back to the Suez Crisis during the Eisenhower administration. While those may seem like halcyon days for the U.S. oil industry, tariffs did not change the trajectory of long-term decline in domestic production. All the more ironic to revive this policy now, with the U.S. a net energy exporter for the first time in 75 years. Nonetheless, some producers are preparing to mount an effort to impose a tariff on oil imports under Section 232 of the Trade Expansion Act of 1962, the same authority that the Trump administration used to put tariffs on imported steel and aluminum.

Tariffs create problems. One is that the costs largely fall on our own consumers. The second is that, to the extent they affect foreign interests, they often hit friends and allies. In the case of oil, that means Canada, Mexico, and other neighbors. Since the beginning of 2020, over 85 percent of U.S. oil imports came from the Western Hemisphere, overwhelmingly from Canada and Mexico. What about Saudi Arabia and Venezuela? What about Russia? What about the other member states in OPEC? Actually, we really don’t import much oil from any of those places — the average over the past year is about 12 percent of total oil imports from all OPEC members. That might seem like a lot of oil to a single producer, but the global oil market is large and complex. The option to buy and sell on the global market provides American firms flexibility and is likely to help domestic prices on balance.

It has been a rough year for the oil industry, but things are looking slightly better, even as clouds remain on the policy and economic horizons. The path to recovery does not wend through protectionism, certainly not when the United States is producing more energy than it can consume. Oil producers petitioning the new administration for tariffs are among the most desperate in the country, and they should prepare for disappointment.

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