By Ed Longanecker, president of the Texas Independent Producers & Royalty Owners Association (TIPRO)
The Office of the U.S. Trade Representative (USTR) is reportedly considering replacing the current 25 percent tariffs on Mexican and Canadian steel imports with restrictive import quotas under Section 232 of the Trade Expansion Act of 1962. Such a move could prospectively cripple expansion of U.S. oil and natural gas production because of supply restrictions.
A tax on material used in exploration and production and critical infrastructure projects was imposed on the U.S. oil and natural gas industry with previously adopted steel and aluminum tariffs with Mexico and Canada. This added expense, combined with challenges associated with pipeline constraints in West Texas and the Chinese retaliation on domestic oil exports has caused unnecessary strain for an industry vital to our state and country from an economic and national security perspective. If import quotas were to be imposed, the consequences could be far worse if these products are made unavailable. Of particular concern to independent oil and natural gas producers is the reality that quotas also have a disproportionate impact on small businesses, who are unable to purchase this material in bulk to meet their supply needs.
As the largest producer of oil and natural gas in the United States, Texas will bear an inordinate burden from the adoption of quotas on steel imports from Canada and Mexico. Crude oil production in the state totaled an estimated 1.1 billion barrels through September of 2018, representing an increase of 189 million barrels of oil produced compared to the same timeframe last year, and a total of 1.5 billion barrels forcasted for the full year). Natural gas production increased slightly for a total of 6.1 trillion cubic feet of gas produced through September. Much of the increased output and related activity is coming from West Texas with Permian Basin oil production expected to average 3.4 million barrels per day in 2018, an 871,000 b/d increase from 2017. Texas currently contributes over 40 percent of U.S. crude oil production and approximately 30 percent of U.S. natural gas.
More than 10,000 net new oil and natural gas jobs were added to the state’s economy through September of this year compared to 2017, for a total of 336,000 workers directly employed by the industry. Oil and natural gas jobs also have a multiplier effect of 2 - 27 times per job, with the industry fully supporting over 1 million workers directly or indirectly in Texas. Upstream sector jobs continued to account for the majority of the employment growth through September as more favorable market conditions continue to drive increased exploration and production activity, with a total of 78,000 oil and gas extraction jobs and 142,000 oil and gas support activities jobs in the state.
Texas, and the U.S. economy as a whole, has much to lose if the USTR moves forward with implementing quotas on steel imports. Under any scenario, quotas will result in a reduction in workforce, threatening historic statewide unemployment lows fueled by the Texas oil and gas industry. Slowing down drilling while companies wait on steel product availability will ultimately decrease overall production as well as severance tax revenues that benefit the public. At a minimum, TIPRO encourages the USTR and the U.S. Department of Commerce to exclude steel products that are critical to the energy sector from the proposed import quotas in order to maintain strong economic growth and a healthy employment rate. Such an approach would maintain Texas’ contribution to making America energy dominant on a global basis and would preserve access to steel products for small and large oil and natural gas producers alike.
Continuing regulatory improvements at the federal level, expanding pipeline capacity in West Texas and an expedited resolution to trade disputes will support increased U.S. energy production, strengthen national security and drive further economic growth for the state of Texas.