President Trump sent shockwaves through financial markets on Thursday when he vowed to slap harsh tariffs on steel and aluminum imports next week.
The plan calls for 25 percent tariff on imported steel from all countries, plus a 10 percent tariff on aluminum. The announcement sent the Dow Jones Industrial Average down more than 400 points on Thursday, with the losses continuing into early trading on Friday.
The tariffs on imported steel would affect a wide array of industries, from aerospace to auto manufacturing, chemicals, soft drinks and more.
The costs will hit the U.S. in many ways. First, obviously, is the higher cost of steel and aluminum inputs into a wide array of products. Second, there will likely be retaliatory measures from countries around the world. "We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk," said Jean-Claude Juncker, president of the European Commission. He promised "countermeasures against the U.S. to balance the situation."
Canada, China and a long line of other countries also threatened responses. Some analysts fear the move will spark a trade war and undermine the entire global free-trade system, and those concerns were clearly driving the global selloff on Thursday.
The blowback in the financial markets dragged down energy stocks along with everything else. Oil futures lost about of 5 percent this week, dropping to a two-week low.
For oil and gas specifically, the move is also very unwelcome. The energy industry isn't just concerned about the short-term fluctuations in the stock markets. A wide range of industry trade groups panned the move, warning that tariffs would kill jobs and potentially cancel projects. For instance, Reuters reported that a source familiar with ExxonMobil's deliberations said that the tariffs could deter the oil major from adding a third distillation unit at its Beaumont, TX refinery, which is reportedly under consideration.
Steel and aluminum tariffs would hike the cost of all sorts of operations in the energy industry, including the construction of pipelines, refineries, processing facilities and shale drilling. The American Petroleum Institute says that the industry relies very heavily on specialty steel that the U.S. does not manufacture.
"The real question is whether the U.S. steel industry has the capacity to supply every pipeline project in the United States," said Libby Toudouze, portfolio manager at Cushing Asset Management, according to CNBC. "Let's say in 2017, 2018 we need 300 miles of pipeline, and the U.S. steel companies' maximum capacity could crank out 100 miles of pipe. It's not reasonable for us to hold up the 200 miles of pipeline because the U.S. guys can't scale to get there," she said.
To be sure, not everyone sees this as an emergency for the energy industry. The majority of the cost of a pipeline project comes from labor, Matt Sallee, senior managing director at Tortoise, told CNBC. And any project already underway would have already purchased the steel for the project. In future projects, to be sure, costs will go up because of the Trump tariffs. But, pipeline companies will simply have to raise their rates for shipments, Sallee says. "It's a headwind, but not a major change in the story," he said.
Nevertheless, the dark cloud of trade disputes came on top of a rather downbeat week for energy. The EIA reported an increase in both crude oil and gasoline inventories this week, and the uptick in refined products came even as refinery runs declined once again. Meanwhile, U.S. oil production continued to edge up.
To top it all off, the new head of the U.S. Federal Reserve expressed optimism about the trajectory of the U.S. economy, which, while a good thing, raised fears of more interest rate hikes. That, in turn, pushed up the dollar and pushed down oil prices.
All of these factors are combining to drag down crude benchmarks. "The market is not showing any obvious signs of turning around the mood. We are being driven by the pick-up in U.S. inventories and in general terms the market went a bit too far too soon," said Ric Spooner, chief market analyst at CMC Markets, according to CNBC. "Then we have the volatility in the U.S. dollar and the implications of the tariff news to factor in," he said.
By Nick Cunningham of Oilprice.com
More Top Reads From Oilprice.com:
Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More