In ways both narrow and sweeping, US tariffs imposed on Mexican goods in response to illegal immigration would hurt the oil and gas industry.
US President Donald Trump on May 30 said he would start tariffs at 5% on June 10 and raise them incrementally to 25% in October unless the Mexican government strengthened its efforts to cut arrivals of Central American migrants at the US border. He didn’t specify what he wants Mexico to do.
Bilateral oil trade
Of obvious concern to the oil and gas industry is the effect on trade involving 630,000 b/d of Mexican crude imported by the US and about 1 million b/d of US crude and product bought in Mexico. The tariff would raise the cost of feedstock to US refiners and possibly divert heavy crude away from Gulf Coast facilities that need it. And it might provoke countervailing measures against US exports.
Mexican officials responded quickly to Trump’s threat with offers to meet. Maybe, therefore, a cascading trade conflict won’t develop. Meanwhile, though, US companies with interests in Mexican oil and gas blocks must worry about how Trump’s squeeze will affect a Mexican president wary of foreign investment in exploration and production.
The possibility of a new tariff against Mexico of course amplifies concern about the trade conflict escalating between the US and China. On May 10, Trump raised the tariff rate to 25% on $200 billion worth of Chinese goods. China retaliated. Because US exports of farm products have been hurt, the Trump administration added $16 billion in agricultural reparations to the $12 billion he offered last year.
This coddling adds context to the Environmental Protection Agency’s final action on May 31 allowing year-around sales of ethanol containing 15 vol % ethanol (E15). Environmentally and economically, the move makes no sense. And it expands the chronically flawed Renewable Fuel Program, which serves no national energy interest. But the E15 expansion and RFS soothe farmers, who, like most Americans, have excellent reason to consider Trump’s trade war with China an expensive miscalculation. EPA would have made the E15 mistake anyway, of course. The Mexican adventure just added a political push.
More broadly still, Trump’s trade brinksmanship takes undue risk with the US and global economies—and, therefore, oil and gas demand. Tariffs and retaliations, even between behemoths like the US and China, affect trade that looks small in comparison with regional and international totals. Some analysts thus argue that US skirmishes with China and Mexico can’t hurt whole economies much. But when did a trade war ever stimulate growth? And economies respond less to numbers than to perceptions, which often are shaped by fear such as Trump creates with his penchant for trade fights.
Further increasing economic hazard is the off-handedness with which Trump confronted Mexico with tariffs. Against protests of key advisers, some working to complete the US-Mexico-Canada Agreement on trade, and to the shock of many observers, he just did it. That’s his style. And that’s a problem. Uncertainty is bad for business, and surprise is devastating. Trump is creating an atmosphere in which decision-makers must worry constantly about what diplomatic haymaker he’ll throw next. They must become cautious, and caution makes them reluctant to invest.
Trump’s Mexican affront similarly degrades US foreign relations, traditional practices of which the president treats with disdain. As was argued here last week, the US oil and gas industry needs at least cordiality between the US and foreign governments (OGJ, June 3, 2019, p. 16). Trump’s squeeze-and-deal approach to diplomacy neither makes nor keeps friends.
Willingness to rebuke
At this writing, Congressional Republicans were showing more willingness than usual to rebuke Trump. The oil and gas industry must hope they rein him in. Nobody, except Trump, wants a trade war. Nobody, except Trump, wants to alienate Mexico. And nobody, except Trump, wants to alienate other allies.
So why is the US in a trade war and alienating Mexico and other allies?
