President Donald Trump has announced that the construction of the highly controversial oil pipelines must use American steel companies as their source to complete the projects.
His plan, however, is much more than aggressive language to appeal to his base. Prior statements from the President have hinted at this mandate, but it is now solidified. The President charged the Department of Commerce with the task of enacting a plan that requires any company manufacturing a pipeline within the borders of the United States to do so using American-made materials and equipment.
The Department of Commerce is yet to comment or report on the requirement that Trump has demanded, but the President has reaffirmed his directive, saying the companies behind both the Keystone XL and the Dakota Access pipelines are going to "have to buy" pipes that are made from raw U.S. steel. Speaking to United States Steel CEO, Trump commented, "And you're going to be doing pipelines now, you know that, right?"
This piece of regulation creates a problem for TransCanada, the manufacturer of the Keystone XL pipeline. The Canadian company has already built the majority of the pipeline. If any of the pipe that was created by TransCanada was stored outside of the United States - and indeed some of it was - then it will have to be replaced in accordance with Trump's new regulation. This is creating an increased demand for pipelines in the U.S., and Trump's comment to United States Steel has led to speculation on whether the U.S. company will be participating in the project. Related: Energy Minister Novak: Russia Cuts More Oil Output In February
The official legislation from the executive order signed by the President reads that the companies constructing pipelines that cross into the United States must use U.S. steel "to the maximum extent possible and to the extent permitted by law." The World Trade Organization actually has regulations concerning this very issue. Governments currently m U.S.t treat imported materials and products in the same fashion that they would treat domestically produced materials and products. Taking this at face value, it is possible that the parts of the pipe already built and stored outside of the U.S. will be treated as domestic product, and will be not have to be replaced, as originally implied by Trump's order.
How this new requirement will affect the Dakota Access pipeline is also unclear. As it stands, the pipeline is almost completed, with only a small portion remaining. Will Energy Transfer Partners - the manufacturer of the pipeline - be forced to derive the steal and piping from a U.S. company, even if it has purchase orders with a foreign firm? The plans currently in circulation cite April 1st as the date at which the pipe will be ready to ship oil. The new Trump requirement may very well deter the pipeline from this quickly approaching completion date.
Critics of Trump's new requirement are demanding an explanation as to why the President feels it is appropriate to interfere with the free markets. This simple executive order could potentially set a precedent by which the government can tell private corporations what to do and how to allocate funds. Some critics have even suggested that the order could incite retaliation from foreign trade partners who expected to participate in these pipelines. Moreover, limited the potential number of suppliers for these pipes will raise the prices substantially, and affords monopoly power to those lucky enough to be accepted.
By Michael McDonald for Oilprice.com
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Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance… More
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