Experts Say Steel Tariffs Will Stunt US Oil Production

HOUSTON (CN) – U.S. crude oil production is humming at more than 10 million barrels per day, putting the country on track to become the world’s top oil producer by 2019, but experts say production may be stunted by President Donald Trump’s newly imposed tariffs.

Buoyed by prices that have stabilized at around $60 per barrel, U.S. drillers have bounced back from an oil recession in which the price plummeted from over $100 per barrel in early 2014 to a low of $26 in January 2016.

International Energy Agency Director Fatih Birol said last week he expects the United States to dethrone Russia as the world’s top oil producer by the end of this year or 2019.

But in an industry in which one shale well requires an estimated 390 tons of steel, experts say the 25 percent tariff on steel imports, and 10 percent tariff on aluminum imports, which Trump imposed by executive order Thursday, will cause oil companies to shelve some projects. The government said it will start enforcing the tariffs March 23.

“Steel tariffs will raise the cost of drill pipe and the cost of new pipelines as well as the cost of new LNG [liquid natural gas] facilities, chemical and refinery expansions. The tariffs will deter some activity in the oil sector that otherwise would have occurred,” said Michael Maher, an adviser at the Center for Energy Studies at Rice University’s Baker Institute for Public Policy in Houston.

Halliburton, one of the world’s biggest oil service companies, declined Thursday to say how Trump’s tariffs would affect its business.

The Houston-based Petroleum Equipment and Services Association, comprised of more than 200 companies with 1.3 million employees, condemned the tariffs Thursday.

The association, whose members include steel and aluminum producers, said it shared the concerns of 107 Republican House members who sent Trump a letter on Wednesday, warning him that the tariffs will undermine the benefits of the huge tax cuts enacted in December, cutting the top corporate tax rate from 35 percent to 21 percent.

“As the Trump administration moves forward with implementing the tariffs, trade experts expect retaliatory actions will be taken by U.S. trading partners and this would mean lower sales for American business abroad and could impact millions of U.S. jobs, many of those in the oilfield service and supply sector,” the association said in a statement.

Like the members of Congress, the association said it wants Trump to exempt from tariffs the existing contracts of U.S. companies that purchase aluminum and steel from foreign suppliers, and to exclude products not available from U.S. suppliers.

Maher said he does not expect the steel tariffs to rock the U.S. oil industry as roughly as the oil recession that took out 200,000 energy jobs and bankrupted dozens of companies from 2014 through 2016.

“One should still expect growth, but at a somewhat slower pace with the tariffs,” Maher said. “However, steel is only one input into the oil sector and the rise in that cost alone is not likely to lead to any bankruptcies or significant layoffs in either the drilling or oil service sector.”

Despite the surge in U.S. oil production, Russia is unconcerned about losing the title of world’s top producer. Russia and oil-rich Saudi Arabia have slowed their drilling to prop up prices. Both nations depend heavily on oil to support their economies.

University of Houston energy economist Ed Hirs said that U.S. drillers’ fortunes are inextricably linked with Russia’s and Saudi Arabia’s decisions.

“I’m concerned that if the Russians and Saudis at some point decide to increase production, the U.S. producers will have a hard time remaining competitive,” Hirs said.

U.S. drillers specialize in horizontal drilling and hydraulic fracturing, or fracking, to tap oil and gas in dense shale.

Hirs said the techniques have improved so much that in the Permian Basin, a hydrocarbon-rich formation beneath West Texas and southeastern New Mexico, drillers are fracking three wells in 10 days, the time it took them to frack one well in 2014.

Together, Exxon Mobil and its subsidiary XTO Energy hold nearly 1 million acres of oil and gas leases in the Permian Basin. With the price of oil hovering around $60, Exxon is making a healthy profit in the Permian. It told the Houston Chronicle that its Permian lease development and production costs are just $15 per barrel.

By comparison, Hirs said, smaller companies’ Permian production costs range from $20 to $40 per barrel.

In early February, before Trump announced the tariff plan, the U.S. Energy Information Administration predicted that U.S. production would surpass 11 million barrels per day by late this year.

But Hirs said that even with the U.S. producing crude at record levels, the country is nowhere close to weaning itself off imports.

“We are producing 10 million barrels a day, a little more than 10 right now. And we consume about 17 to 18 million. So we are a net importer,” he said.

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