Trump's protectionism spooks energy industry
Steel tariffs could slow booming pipeline and downstream infrastructure construction and feed producer inflation
America's oil and gas industry is steeling itself for Trump's tariffs.
The White House has kept details of the new taxes close to the vest, but signs so far point to a 25% tariff on imported steel and 10% on aluminum starting next week. Carve outs could be made in the final ruling that lessens the fallout, but if the blanket tariffs go ahead it will hit the energy business particularly hard.
Pipelines are the most obvious place to start. America's network of oil and gas pipelines is growing quickly to accommodate booming domestic production, especially as new centres of production have to be connected to markets. Over the next few years, for instance, major new pipelines are needed around the
Marcellus gas play in the northeast and the Permian in west Texas to avoid bottlenecks that could throttle production growth.
Those pipelines just got a whole lot more expensive. Only around a third of the steel in American pipelines comes from domestic manufacturers; the rest is imported. The problem for pipeline builders is that switching to domestic suppliers isn't really an option. For much of the specialised steel products used in pipelines, there are no domestic suppliers to turn to.
This mismatch between domestic capacity and needs is why President Donald Trump's "Buy American" proposal for pipelines has dropped off the agenda. It isn't feasible. Pipeline builders will have little choice but to continue buying steel from abroad and absorb the tariff. That is likely to lead to significant cost inflation, delays and could even compromise some projects.
It isn't just the midstream either. The timing could hardly be worse as the industry pumps tens of billions of dollars into new downstream infrastructure, for which steel is often the single biggest input cost, to process all the new production coming onto the market.
Four major new liquefied natural gas export plants are under construction, and
Cheniere Energy's Sabine Pass plant is being expanded, all of which will face higher costs. Hundreds of natural-gas related petrochemical projects worth close to $185bn are being built or are under consideration. The , a trade group, warned the tariffs could see some of those projects scrapped and the investment taken elsewhere. American Chemical Society ExxonMobil is reportedly rethinking plans to expand its Beaumont, Texas refinery on the news.
Drillers, too, could see the tariffs feed cost inflation. The market for high-spec fracking and drilling equipment is tight and new kit will likely need to be built in the next couple years to meet surging demand. For shale's tight economics, every dollar counts and inflation from suppliers and transporters could hit the bottom line and growth.
The Trump presidency has generally been good to the oil and gas industry, but dangers have always lurked in the president's protectionist and populist tendencies. Those dangers are starting to surface.
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