Could Oil Tariffs Save American Producers?
Oil tariffs may soon be coming from the Trump administration. On Saturday, US President Donald Trump said tariffs are one of the options he is considering to rescue the American oil industry that has seen its revenues free-fall.
“I am a big believer in our great energy business, and we’re going to take care of our energy business,” Trump said at a press briefing on Saturday. “And if I have to do tariffs on oil coming from outside, or if I have to do something to protect — or thousands and tens of thousands of energy workers, and our great companies that produce all these jobs — I’ll do whatever I have to do.”
Tariffs are not the first option Trump has tried. According to his tweets, he spoke with Saudi Crown Prince Mohammed bin Salman (MbS) and felt confident they would negotiate a production and price truce. Trump also claimed MbS spoke with Russian President Vladimir Putin and he too was onboard with the idea. That was last week. The next day, both nations denied such a deal was in the works. However, Saudi Arabia called an OPEC meeting, which has since been postponed, in an attempt to mitigate the oil glut.
During Saturday’s press briefing, Trump railed not only against Saudi Arabia and Russia, who have directly pushed the global oil supply to an extreme amount of reserves, but OPEC as well.
Trump: ‘They Are Going to be Destroyed’
When asked about the situation, Trump said,” Well, OPEC can do whatever — look, I’ve been against OPEC all my life, because what is it? It’s an illegal — you could call it a cartel, you could call it a monopoly. You have a lot of different names for it. But it broke down very violently. Very violently.
“So I don’t care about OPEC. I really don’t. I couldn’t care less about OPEC.”
The problem, if OPEC doesn’t work it out as Trump said it would, would be resolved regardless. Trump believes the American oil industry can outlast Russia and Saudi Arabia who are “going to be destroyed” if they don’t find a solution.
Trump has a long history of criticizing OPEC’s role in determining global oil prices. In 2012, he said it was “robbing our country blind.” Since taking office, he has accused the cartel of manipulating supplies to artificially raise global prices. If Trump has a credible record of any merit by which to hang his hat on, it is that under his administration the American oil industry became the largest producer in the world. Although the feat was achieved with massive rollbacks in environmental protections, it established the US as a dominant player in the industry, one worthy of Russia sinking oil prices to take it down.
Another Tit-for-Tat Game?
Saudi Arabia and Russia can produce oil at lower production costs, however, and Middle Eastern crude is heavier, which American refineries need. Placing tariffs on imported oil may help some domestic producers, but it could hurt others.
The American Petroleum Institute and American Fuel & Petrochemical Manufacturers penned a letter to Trump on Wednesday to that effect. Furthermore, although low prices hurt American oil companies, they are great for buyers, including businesses abroad that prefer lighter American crude.
Although the worldwide demand has plummeted due to COVID-19, eventually the virus will run its course and the world will be back to needing oil, especially as Asian factories ramp up production once again. Low prices and high supply can be mitigated after the pandemic passes, but trade wars are much harder to overcome.
Consider the tit-for-tat trade war between Beijing and Washington. It still hasn’t officially ended, only on pause due to the coronavirus. While the comparison is not perfect, Saudi Arabia isn’t a major trading partner with America like China, it could have other consequences. The oil-rich kingdom can easily exert its will on OPEC in its entirety. If Trump leverages tariffs against it, the entire whole could take reactionary measures. These could include tariffs on American goods and diplomatic breakdowns.
Saudi Arabia is a strong military ally and one of the top-spenders on US weapons. These defense contracts would be prime targets for retaliation.
While Trump may be talking tariffs, that may be all it is: talk. In order to impose them without Congressional approval, he would need to justify them as a matter of national security. He has done this before with Canadian steel so it would not be unordinary for him to try it again with oil.
This year, 140 American energy producers are at risk of filing for bankruptcy, Rystad Energy reported, if the price remains at $20 a barrel. Another 260 would file in 2021. The condition of US energy markets has not been this dire since the Great Depression.
While Trump mentioned tariffs as an option, they are not universally desired and far from the only option. Saudi Arabia and Russia could cut their production levels and let prices float back up, as Trump hopes will happen. The US government could bail out oil companies as it is doing with other industries affected by Covid-19, although the average American may not support the idea of using tax dollars to do so.
Trump met with industry executives on Friday, but no developments came from the meeting. With the OPEC+ emergency meeting postponed, Trump appears to be leaving the first move up to Saudi Arabia and Russia.