By Merrill Matthews
President Donald Trump’s decision to impose a 25% tariff on imported steel from multiple countries will raise consumer prices for lots of products. And one of them is gasoline.
The fracking boom has allowed energy companies to drill in places that had never been considered viable or profitable. Once production begins, the crude oil and natural gas have to be transported from the well to the refinery, a phase referred to as “midstream.” That’s where the current challenge begins; there was no energy infrastructure in many of the newly discovered shale oil and gas plays.
A pipeline is the least costly and most efficient way to transport oil and gas to the refinery or to a storage hub. But it takes time and money to build pipelines. In the interim, inland drillers often turn to railcars, while construction crews get to work laying the pipelines. That’s one place Trump’s tariffs are going to take a toll.
Oil and gas pipelines require a very special kind of steel, most of which is imported because U.S. companies don’t make it.
In a report released for the energy industry a year ago ICF, a Virginia-based global consulting firm, took a broad-ranging look at pipeline issues, including the impact of trade restrictions.
According to the report, 77% of the highly specialized steel used in pipelines is imported. And it’s not a simple problem to fix because the report claims that domestic manufacturers lack the ability to make the size or quality of steel needed for these pipelines.
For example, the steel needed for 26-inch diameter “line pipe”—the term for the segments of pipe—is only made in three foreign countries.
That steel has to be imported, so there is no option but paying the tariff.
Of course, domestic manufacturers might try to enter the market, but while pipeline steel is important to the energy industry, it’s a relatively small part of the steel market. Plus, demand for line pipe can vary significantly from year to year. Thus, it has just been easier and cheaper to import the specialized line pipe companies needed.
ICF estimates that the market value of that imported line pipe was between $3.40 billion and $5.82 billion in 2015-16. Tacking on a 25% tariff for future purchases could raise that figure to between $4.25 billion and $7.27 billion. That additional cost will be passed along, eventually reaching consumers in the form of higher gasoline and electricity prices.
Those figures are based on past usage; but there is a growing need for even more line pipe. The International Energy Agency (IEA) suggests that the United States could provide 80% of the increase in world crude oil production over the next three years. That increase would require a lot more pipeline capacity to get that oil to market — pipeline that would be 25% more expensive under the Trump steel tariffs.
Of course, line pipe is only one component in the process. The oil and gas industry uses steel in many ways. Steel tariffs, and the higher prices paid for domestic steel when tariffs are imposed on foreign steel, will have a widespread impact on energy prices.
The president thinks gasoline prices are too high and is pushing OPEC, the oil producing cartel, to increase crude oil production so that gasoline prices will fall. Good, but imposing steel tariffs will have just the opposite effect, forcing consumers to pay more for electricity and to fill their tanks.
Merrill Matthews is a resident scholar with the Institute for Policy Innovation.