Markets are complicated – so much so that they are literally unmanageable. The business of establishing prices, production levels, goods and services to be produced, the location of production and so on is the result of billions of daily complex interactions and incentives about which no single person or government has complete knowledge or understanding.
Therefore, any attempt to manage markets or bring about a managed outcome, even with the best of intentions, sets off a chain reaction that ripples throughout the entire process. Most often, the broader outcome is unfavorable, even if the original objective was accomplished. The job of the economist is to attempt to supply some understanding of the deeper waves of impact from the initial event that far exceed the singular outcome of the stated objective itself.
And so it is with trade restrictions. There is little doubt about the fact that the primary steel-producing industry in the U.S. will be advantaged by the now in place steel tariffs and import quotas. Frankly, some other industries may fare somewhat better as well. But there is no doubt that steel-consuming industries in the U.S. will be harmed by those very same tariffs and quotas.
As a matter of fact, there is no doubt that other industries supplying a broad range of goods and services to U.S. household and business consumers will be harmed, even those seemingly having nothing to do with steel (and aluminum, on which a 10 percent tariff has been imposed). When all is considered, there is no doubt about the fact that more jobs will be lost economy-wide than will be gained or saved because of steel and aluminum tariffs and import quotas.
This is true mostly because the steel-consuming sector is much larger than the steel-producing sector. Primary steel-producing companies employ about 140,000 workers and added about $36 billion to the U.S. economy according to 2015 census data, whereas steel-consuming firms employed over 6 million workers and added about $1 trillion to the U.S. economy. Oil and gas producing, drilling and service companies are in that group.
The Trade Partnership, a Washington research and consulting firm, through some comprehensive deep modelling that far exceeds a simple input/output calculation, has estimated the current tariff and quota structure will add about 26,000 primary steel jobs, at the same time costing roughly 433,000 jobs for a net job loss of about 400,000 jobs throughout the entire economy. That is 16 jobs lost for every job gained, and every single state will experience net job loss — including Texas. While the study did not carve out the upstream sector, upstream oil and gas employment will unavoidably be negatively affected.
Trade restrictions — in this case, steel and aluminum tariffs and import quotas — must necessarily raise prices to domestic consumers. Were that not the case, the restrictions would be unsuccessful in achieving the desired stated outcome. Price increases limited to the amount of the tariffs passed through to customers in imported steel products alone would be troublesome enough. But alas, the price impacts extend far beyond the 25 percent tariff on steel products.
Domestic steel prices are pushed upward as well, so the 25 percent is going to be paid no matter the source. Import quotas further restrict available supply, adding to upward pressure on prices. U.S. domestic hot-rolled coil steel futures have increased by over 40 percent since the beginning of the year as markets assess the ability for steel consumers in the U.S. to acquire what they need in the current trade-restricted environment. The imposition of tariffs and import quotas overall create an artificial shortage of available product relative to current demand. Price increases have and will continue to exceed the 25 percent tariff.
Further complicating the picture for U.S. oil and gas companies is the sheer lack of availability for oilfield specialty steel products that are not produced in the U.S. Imports are thus the only source of supply for these products and prices are moving upward in a hurry because those products are subject to the full range of the impacts of tariffs and quotas.
Will higher prices for oilfield steel products cost oil and gas producing, drilling and service company jobs in Texas and the U.S.? Yes, indeed. A simple calculation based on upstream oil and gas company revenue impacts of a 30 percent increase in oilfield steel costs suggests the loss — or the lack of creation — of about 20,000 jobs in Texas, of which roughly two-thirds are direct oil and gas jobs. Is that catastrophic? Probably not, but again we ask, why is it okay to “save” (or create) primary steel jobs through policies that destroy or fail to create oil and gas jobs (or jobs in other steel-consuming industries)?
Even that fails to tell the story, of course, because of the complicated nature of the chain reaction. Here’s a slice. Tariffs raise costs to upstream oil and gas firms, indicating job loss. Steel-producing industries are energy-intensive, however, and the added energy demand indicates job growth. Steel-consuming industries are also energy-intensive, however, and the damage done to those firms indicates job loss. The U.S. economy is likely to suffer a hit to gross domestic product (GDP) of some magnitude because of the tariffs and quotas, reducing energy demand broadly and further indicating job loss. Other countries will retaliate, reducing U.S. exports to those countries and indicating job loss. And in an odd twist, it could easily be the case that workers who have lost their jobs in manufacturing or other steel-consuming industries may become available to staff upstream oil and gas jobs during a time of extremely tight industry labor markets.
When all is said and done, higher prices for oilfield steel products shift industry production revenues from profit to expense (crude oil and natural gas producers are unable to raise the price of the product to compensate for the increased costs), reducing the demand for labor. Period.
Steel and aluminum tariffs were implemented in March, with temporary exclusions for some key U.S. allies and suppliers; most notably Mexico, Canada and the European Union. On May 31, however, those exclusions were lifted, and the tariffs were in place across the board apart from negotiated import quotas as a substitute for the tariffs (South Korea, primarily). Either by tariffs or quotas, however, oilfield steel products across the board are subject to dramatically higher prices.
That being the case, what are the options available to upstream oil and gas companies in terms of gaining relief? Frankly, not many. The Texas Alliance of Energy Producers has pushed for blanket oil and gas industry exemptions from tariffs imposed on imports because of the unique nature of those products and the lack of domestic availability. The possibility of success is slim, however. That leaves individual firms to request exemptions on specified products. It is a cumbersome, tedious process and not all firms may have the expertise and the resources to navigate it successfully. Small, independent oil and gas companies will find it difficult to successfully apply for those exclusions — neither do they have the wiggle room to absorb the price increases without substantial detrimental effects.
It may well be that the imposition of tariffs and quotas on steel and aluminum are a negotiating tactic designed to bring the players to the table to negotiate a future beneficial outcome. Under that scenario, perhaps, the duration of the restrictions is relatively short. That is an unknown, however; and in the meantime, steel costs for Texas and U.S. oil and gas producers, service companies and drilling companies is rising at a pace that exceeds the 25 percent tariff. The Texas Alliance of Energy Producers will continue to oppose the tariffs and quotas with their elimination as our goal, and to call attention to the unavoidable fact that steel jobs saved means oil and gas jobs lost.
Karr Ingham is an Amarillo, Texas economist, and is the owner and President of InghamEcon, LLC, an economic analysis and research firm specializing in statewide, regional, and metro area economics, and oil & gas/energy economics.
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