latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/despite-opec-pledge-to-cut-output-oil-import-tariffs-still-possible-57965666 content esgSubNav
In This List

Despite OPEC+ pledge to cut output, oil import tariffs still possible

Case Study

A Leading Renewable Energy Financing Bank Gains Important Insights on U.S.- based Opportunities

Blog

Exploring the Energy Dynamics of AI Datacenters: A Dual-Edged Sword

Blog

Despite turmoil, project finance remains keen on offshore wind

Case Study

An Energy Company Assesses Datacenter Demand for Renewable Energy


Despite OPEC+ pledge to cut output, oil import tariffs still possible

The Trump administration is considering using tariffs on imported oil as a means to help the beleaguered U.S. shale industry, a move that some policy analysts have questioned and called "extreme."

Francis Fannon, U.S. assistant secretary of state for the bureau of energy resources, on April 15 said oil tariffs are still a tool the U.S. could use in its toolbox to try to limit oil oversupply, Reuters reported. While tariffs could provide a boost to some in the industry, their potential use has drawn mixed reviews from energy sector experts.

"It's an extreme policy for extreme circumstances, and you run the risk if you go to that well too often, then it loses credibility as a threat," Benjamin Salisbury, who leads Height Capital Markets' energy and utilities team, said in an April 13 interview. Tariffs, he said, are "not just a regular tool of U.S. energy policy."

Trump's interest in oil import tariffs was piqued amid the oil price war between Russia and Saudi Arabia, and some observers have indicated that the move would send a strong message to hold production down and preserve prices. Others fear tariffs could have unintended consequences and hurt portions of the U.S. oil sector.

OPEC and its allies ultimately agreed to cut 9.7 million barrels of daily crude oil production in May and June. Analysts said those cuts were insufficient to meet the substantial drop in demand caused by the coronavirus.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

The U.S. imported about 3.32 billion barrels of petroleum and other liquids in 2019, about 11.5% of which originated in Saudi Arabia and Russia, according to data from the U.S. Energy Information Administration.

SNL Image

Tariffs could have different impacts on the various parts of the domestic oil sector, according to David Livingston, senior analyst with the Eurasia Group. A tariff would likely benefit small, independent U.S. shale producers, while potentially harming U.S. refiners and integrated oil majors trading internationally, he said. Many domestic refiners need imported medium sour or heavy sour crude oil, the analyst noted, and a tariff would raise imported crude prices while also likely driving up domestic crude costs.

While the U.S. would likely consume more of its own crude oil and less from some foreign nations with a tariff in place, those producers could take over market share in Europe and Asia, Livingston said. The analyst also said that the Trump administration may have greater difficulty justifying tariffs as well if the U.S. fails to set its own domestic production restrictions.

"It's a reshuffling, and it's essentially a political economy transfer. There are winners and losers within the United States," Livingston said. "If a tariff is put in place without any sort of meaningful supply cuts or any sort of meaningful demand increase, it's just not going to make a difference and you're still going to see a number of bankruptcies in the shale sector."

If tariffs helped the U.S. prevent OPEC from gaining control of the global market, which could result in higher oil prices in the long-term, that may be worth the loss of some refineries, PRICE Futures senior analyst Phil Flynn said, dubbing it "short-term pain for long-term gain." If the U.S. issued a tariff, it could signal to other nations the Trump administration's ability to "make their oil as toxic as Venezuelan oil and Iranian oil," he said.

But industry groups, including the American Petroleum Institute and the Western Energy Alliance, said they do not support tariffs.

"I just think tariffs have too many unintended consequences and are just too fundamentally problematic," said Kathleen Sgamma, president of the Western Energy Alliance.

With Trump's stated interest in tariffs throughout his administration, "that tool never goes back in the chest," said Kevin Book, managing director of ClearView Energy Partners LLC. However, the president is also likely mindful of what tariffs could mean for energy customers — an issue that may prove critical heading into the November election. In the days leading up to the OPEC+ meeting, Trump came to the defense of the domestic oil industry, while also discussing how important low energy prices are for end-users, he said.

"I think the president is very cautious because he knows that it's going to be marginal voters in critical states that may decide the election," Book said, "and for people who are at lower income levels, higher energy prices don't sound like a good thing."