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The Negative Effects of High Import Tariffs on U.S. Oil

by Krystal

At his campaign rallies, Republican presidential nominee Donald Trump promises to lower energy costs for American families and restore the nation’s status as an “energy superpower.” He plans to achieve this through deregulation of the domestic oil and gas industry and protectionist trade policies.

“My goal will be to cut your energy costs in half within 12 months after taking office,” Trump said during a rally in Michigan in August. “We can do that!”

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However, some industry experts express skepticism. While U.S. presidents can encourage domestic oil and gas production through various policies, they typically have limited ability to influence market conditions that would significantly alter prices. Currently, U.S. oil production is at an all-time high, with fuel exports hitting record levels. Even if environmental regulations are relaxed or drilling leases are expedited, these changes may not lower prices at the gas pump for consumers.

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Trump’s proposal to overhaul U.S. trade policy by raising import tariffs could disrupt the daily trade of millions of barrels of oil. This change poses a real risk of raising energy costs for American consumers and the industry. Long-term tariffs on essential fuels could undermine national security, stifle business growth, and limit the markets where U.S. companies can compete profitably. As Trump formulates his economic vision, it is crucial to consider the potential consequences of his proposed “MAGAnomics” for U.S. energy security and affordability.

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Trade wars typically harm energy markets. Oil is a global commodity, relying on flexible international markets for efficient supply and transparent pricing. Since surpassing Saudi Arabia and Russia as the world’s leading oil producer in 2018, the U.S. has benefitted from free trade, becoming a net exporter of oil with a daily output exceeding 13 million barrels. This has enhanced energy security, improved the trade deficit, and spurred economic growth. U.S. petroleum exports have helped mitigate disruptions caused by Russia’s invasion of Ukraine, providing allies with necessary supplies amid rising tensions with Vladimir Putin.

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Despite this positive energy outlook, the U.S. still imports approximately 6.5 million barrels of oil daily. This paradox can confuse those unfamiliar with the complexities of the U.S. energy market. States with high gasoline consumption, like Florida and those in New England, lack the refining and pipeline infrastructure to connect with the rest of the country. Consequently, they rely on fuel imports to meet demand. Refineries in the Gulf Coast region primarily process heavy sour crude grades from countries like Canada, Saudi Arabia, and Mexico, while the light, sweet oil produced domestically is not compatible with their infrastructure. Although hydraulic fracturing has increased U.S. shale production, much of this new oil must be exported because it cannot be efficiently processed domestically.

Trump’s policy agenda remains unclear, but his intention to raise tariffs is evident. Initially proposing a 10% increase on all imports, he later suggested hikes to 20% or even 60% on goods made in China. If enacted, these tariffs would reach levels not seen since the 1930s, when global trade shrank due to U.S. protectionist policies and retaliatory tariffs from Europe. Such a scenario would likely harm the U.S. oil and gas industry significantly. High tariffs would impact the oil imported by U.S. refineries, forcing them to either absorb new import taxes or invest millions to upgrade their infrastructure for domestic crude processing. Either option would lead to increased costs for consumers, reflected in higher gasoline and diesel prices.

Moreover, raising tariffs on imported oil would likely push up prices for domestically produced crude, as domestic oil prices tend to follow the trends of imports. The total demand for oil, rather than the proportion of imports, influences prices. U.S. oil producers may lack the incentive to lower production costs if they are competing with more expensive imported crude. If tariffs remain in place for an extended period, the increased costs may become a permanent fixture in the market.

Some industry experts suggest that the Trump Administration could mitigate consumer impacts by exempting petroleum trade from tariffs and negotiating bilateral agreements. However, the risk of a breakdown in trade negotiations could destabilize the global oil market, leading to price volatility and unregulated shadow transactions.

If other countries retaliate by imposing their own trade barriers, as occurred during Trump’s first term, this could create a global tax on trade. U.S. oil exports would become less attractive to foreign buyers. For instance, a hypothetical 60% tariff on American oil exports to China could halt trade between the two largest oil-consuming nations. Additionally, higher import tariffs could lead to overall inflation and increased prices for equipment needed in oil drilling and transportation. A previous example occurred in 2018 when the U.S. implemented a 25% tariff on imported steel and aluminum, causing gasoline prices to surge that summer.

While U.S. oil producers might support Trump’s deregulation agenda, it alone cannot sustain lower energy costs. Deregulation and permitting reforms, such as an active leasing program or eased emissions rules, could boost production but will only have a marginal impact on prices for consumers. The debate should focus on the potential consequences of Trump’s proposed protectionist trade policies. Oil tariffs represent a detrimental policy choice, imposing significant costs on American consumers, businesses, and the overall economy. The true cost of petroleum tariffs could exceed initial estimates. Without a reliable supply of affordable energy, no modern nation can achieve sustainable economic growth, which could compromise national security for the U.S. and its allies. However, based on Trump’s rhetoric, it appears unlikely that he will change his stance on tariffs in the near future.

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