For Good Reasons, Industry Doesn’t Want Tariffs or Quotas
Posted March 23, 2020
As the world grapples with the ongoing spread of the coronavirus, the decision by Russia and the OPEC nations to increase energy supplies while demand is dropping has contributed to ongoing market instability and delivered a shock to America’s evolving energy picture.
Since the late 2000s, the U.S. has emerged as the world’s leading producer of natural gas and oil—last month producing at estimated record levels of 13 million barrels of oil and 96.5 billion cubic feet of natural gas to meet consumer demand. Innovative technologies like hydraulic fracturing have enabled producers to reach abundant U.S. shale reserves, and thus changed America’s trajectory from energy scarcity to abundance and from importing energy to exporting it.
It is not surprising, then, that some global energy players are threatened by American energy leadership and have actively tried to prevent its progress. Russia and other nations’ push to increase global energy supply despite lower demand in the short term is a reaction to America’s new paradigm as a global energy superpower. This is a challenging situation, compounded by the impact of the coronavirus, but interventions like protectionist trade measures are not the answer.
While today’s headlines demonstrate that our nation isn’t shielded entirely from impacts to global energy markets, America is in a better economic and energy security position today than it was in the past two decades. If history and market fundamentals are any measure, the U.S. will emerge stronger and continue to provide necessary energy leadership to meet the world’s long-term demand for natural gas and oil.
We’ve seen time and again that free-market policies provide greater stability and growth. Certain reactions in times of global market unrest—such as tariffs or sanctions—ultimately hurt U.S. producers and consumers.
There are multiple reasons the oil and natural gas industry does not want the government to enact harmful trade measures like tariffs or quotas.
First, tariffs delay energy projects by increasing the price of critical production materials not available in the U.S., hurting American energy leadership. Imposing tariffs on foreign countries has already resulted in higher costs for vital industry inputs. We shouldn’t repeat those mistakes during a public health crisis.
Instead, the administration should resolve these issues diplomatically and engage with our global supply partners to address the currently oversupplied market environment.
Second, global energy demand has remained robust for decades, following periods of transitory economic duress and geopolitical jockeying. Prominent examples are the seminal global oil market events of the 1970s and 80s and every recession since then, including the financial crisis of 2008-09. Markets bounce back.
Short-term demand for our products may be down, but long-term energy needs across the globe remain strong. OPEC and the International Energy Agency recently cut short-term demand projections, but certain physical properties—light viscosity and low sulfur content—make U.S. oil an attractive international product, as it is well-suited for relatively simple and low-cost refining processes globally.
When you look at refining capacity and its growth around the world, the Asia Pacific region, and especially China and India, are the fastest-growing markets, with the most voracious appetites for light crude oil. Last year, despite trade tensions, the Asia Pacific region purchased 42% of U.S. crude oil exports. That won’t change as populations return to normal, economies expand, and living standards improve worldwide.
Third, this is an industry that has proven resilient and innovative through market downturns in the past. Technological innovation is leading to productivity gains and new pipeline infrastructure is a testament to the strength and staying power of the U.S. energy revolution.
Finally, the natural gas and oil industry has, by necessity, long-term planning and investment horizons that require continued capital commitments to ensure that energy demands are met no matter what. What hangs in the balance now for the U.S. are trillions of dollars in much-needed existing energy infrastructure and investments, plus billions more in capital projects construction.
There’s no sugarcoating the challenges that unexpected market shifts present to America’s energy industry, our employees, and the states and communities where we live, all of which are vital to America. All industries face difficult decisions in the coming weeks and months, as the coronavirus has unleashed significant uncertainty.
As a nation and industry, we have weathered complicated periods before. The natural gas and oil industry will stay steady as problem solvers focused on providing safe, reliable, affordable, and cleaner energy to overcome immediate and future challenges.
This article also appears in Fortune.
About The Author
Mike Sommers is the 15th chief executive of API since its founding more than a century ago. Prior to coming to API, Mike led the American Investment Council, a trade association representing many of the nation’s leading private equity and growth capital firms and other business partners. He spent two decades in critical staff leadership positions in the U.S. House of Representatives and the White House, including chief of staff for then-House Speaker John Boehner. Mike is a native of Naperville, Illinois, and a graduate of the honors program at Miami University in Oxford, Ohio. Mike and Jill Sommers, a former commissioner at the Commodity Futures Trading Commission, have three children and live in Alexandria, Virginia.