Issues & Insights

Keep Energy Markets Open

Rjcastillo

Between reduced demand resulting from the COVID-19 crisis and a Saudi Arabia-Russia price war, oil prices have taken a big hit in recent weeks. In response, many businesses and politicians that have repeatedly requested tariff reductions from the Trump administration are now using the administration’s protectionist tendencies to seek new tariffs of their own.

For example, Sen. Jim Inhofe (R-OK) has asked Commerce Secretary Wilbur Ross to conduct a “national security” investigation into oil sales by Russia and Saudi Arabia. The investigation could lead to new tariffs on imported oil. Some Texas producers have called for tariffs of up to $40 per barrel of Saudi-produced oil.

This is in contrast with what Inhofe said as the White House was ramping up the trade war, lamenting the effects that tariffs have on the economy of Oklahoma and the country at large. In June 2018, Inhofe wrote that he had “heard from businesses and industries across Oklahoma about how the immediate impact of tariffs and quotas have negatively impacted local investment.”

U.S. energy producers have been harmed by “national security” tariffs on steel and aluminum. The price of U.S. pipelines, drilling equipment, and other materials needed to find, produce, and deliver energy have been driven up by these tariffs. At the same time, energy producers faced new retaliatory tariffs on their exports. The government shouldn’t expand that damaging policy.

Tariffs aren’t the only risk. At the state level, Texas Railroad Commissioner Ryan Sitton, whose agency regulates oil and gas producers, has suggested limits on oil production. According to Commissioner Sitton, “In theory, Texas could cut production by 10%, and if Saudi Arabia is willing to cut production by 10% from its pre-pandemic levels and Russia is willing to do the same, it would return the market to pre-crisis levels.”

Railroad Commission chairman Wayne Christian responded “… as a free-market conservative, I have a number of reservations with this approach.” Fortunately, the commission decided against taking action on production limits.

There’s no doubt that currently low prices are harming many U.S. energy producers. But for every producer, there are thousands of consumers who benefit from lower energy prices. According to AAA, the average price for a gallon of gasoline fell from $2.89 per gallon a year ago to just $1.81 per gallon today.

The imposition of more tariffs isn’t the only concern. Another danger is that special interests may redouble their efforts to secure special tax treatment for so-called “green energy.” Lobbyists have already attempted to persuade Congress to include tax credits for wind and solar energy in COVID-19 relief bills.

There are better ways to address this issue than by imposing tariffs, enacting subsidies, or enforcing production limits.

For starters, the Trump administration should drop tariffs on imported steel and aluminum. By driving up the price of everything from drills to rigs to pipelines, these tariffs are a barrier to U.S. energy dominance.

In addition, President Trump has called Saudi crown prince Mohammed bin Salman “a friend of mine.” He should use this relationship to encourage that U.S. concerns are taken seriously. Six Republican Senators have asked Secretary of State Mike Pompeo to encourage the Saudi government to change course and leave OPEC entirely.

Oil prices have recently rebounded, and when things return to normal and global economic growth resumes, U.S. energy producers are sure to benefit from growing demand for energy. Tariffs and supply limits may look good to some as a temporary band-aid, but the best long-term solution is for the United States to remain a leader in promoting free markets.

Bryan Riley is director of the National Taxpayers Union’s Free Trade Initiative.

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