By Ed Longanecker, opinion contributor
As the Trump administration prepares to sign the U.S.-Mexico-Canada Agreement — one of its greatest accomplishments to date — 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 import quotas.
We’ve seen this movie before. While this 25-percent border tax on imported steel is already causing big problems for American oil and gas producers, quotas have been far more damaging, as projects increasingly face the risk of grinding to a halt while steel imports sit in warehouses waiting for the quota to open.
The oil and gas industry relies on Mexico and Canada to supply steel products that many mills in the United States either simply don’t manufacture because the market is too small or can’t supply at a scale that meets today’s demand.
Even if domestic steel producers chose to ramp up production, it is unlikely they will be able to meet the surge in demand that is projected to accompany the U.S. energy renaissance in the coming years.
That’s why our North American partners are a vitally important backup source, supplying 20 percent of the tubular steel products and 19 percent of all steel line pipe required by domestic energy producers to support the growth of U.S. energy production.
Nowhere in America is this steel more crucial than in the energy-rich Permian Basin in Texas, which is already struggling under the weight of 25-percent higher steel costs resulting from tariffs imposed earlier this year.
While tariffs have a detrimental impact by increasing project costs, the approach at least ensures firms can still buy the steel needed to drill new projects. Quotas, in contrast, put up a brick wall that absolutely cuts off the supply of products critical to getting oil and gas from the ground in the Permian Basin.
Compounding the problem, the 2015-2017 timeline the administration previously used as a baseline to calculate quotas on steel from South Korea, Argentina and Brazil covers a period when oil prices were in freefall. The industry was in survival mode and did not invest in much steel for new production, making the quotas artificially low.
The industry has since come back from that slump, with domestic production levels surpassing both Russia and Saudi Arabia, making America the world’s leading oil producer. Production in the Permian Basin alone is nearly on par with Iran, with the potential for output to increase by 50 percent within just six years.
Every day, the region produces more than 1 million barrels of oil, 20 percent of all oil production in the lower 48 states. Oil and gas production in the Permian Basin has played a pivotal role in the economic success of Texas.
The state has already recovered 46 percent of jobs lost in the upstream sector between October 2014 and September 2016. Now more than 245,000 people are employed in the upstream sector, with each worker taking home $124,000 per year on average.
Since the beginning of 2017, a recovering industry has had to open the throttle on bringing in line pipe from Mexico to meet the surging demand for new production, with average import levels 150-200-percent higher than they were during USTR’s 2015-2017 target quota period.
Arbitrarily capping access to these steel supplies will potentially choke off America’s oil boom just as it’s really taking off. As it already stands, a shortage of pipelines already is reducing the flow of Permian Basin oil and gas to American consumers.
Oil development in the Permian Basin will almost certainly suffer if a hard limit on steel from Mexico and Canada is imposed, causing real harm to the oil and gas industry here in Texas and to other critical industries that benefit from vital energy production.
If quotas cut off the tubulars and line pipe needed to drill new wells and develop pipelines, companies will be forced to downsize development, turning the boom to bust.
We can’t put a chokehold on energy production and fulfill the president’s aspiration to have American energy dominance. Steel tariffs already are an impediment to energy production in Texas. We can’t afford steel quotas that could force projects to shut down altogether.
Ed Longanecker is the president of the Texas Independent Producers & Royalty Owners Association, a trade association representing the interests of nearly 3,000 independent oil and natural gas producers and royalty owners throughout Texas.