Decoding US tariffs and their impact on global energy markets

The oil market really doesn’t like tariffs. As US President Donald Trump unveiled his levies last week, Brent crude plunged almost $2 per barrel over the course of an hour, and have fallen further since then. When the US last had tariffs this high, in 1930, US producers couldn’t give their oil away, and the Texas National Guard had to be ordered in to shut down over-production.

We’ll see if the consequences this time are as dramatic. President Trump announced blanket 10% tariffs on all imports into the US, then an additional levy on a range of countries allegedly treating US trade unfairly. The numbers were calculated by a formula based on countries’ goods trade surpluses with the US.

Limited direct impact

This means the major Gulf oil producers have got off relatively lightly, as all GCC states face the basic 10% levy, like Iran, far below the 34% on imports from China or the 20% on the EU. Other major petroleum-exporting states are harder-hit: Iraq faces a 39% tariff, Libya 31%, Algeria 30%, Venezuela 15%. But since their main exports, oil and gas, are exempted, the direct impact is limited. Indeed, for that reason, the tariffs won’t achieve their alleged aim of eliminating bilateral trade deficits.

President Joe Biden had slapped 35% war-related tariffs on Russia in 2022. This time, Russia was not mentioned, and nor were Canada and Mexico in the initial list. The two US neighbours, though, continue to be subject to the 25% rate previously announced for many products (and 10% for Canadian energy). The Heard and Norfolk Islands, with zero human population, also got off with a 10% rate, a testament to the strength of the penguin lobby in Washington!

It is possible that the tariffs might be modified based on lobbying by countries and companies concerned. These measures go along with President Trump’s announcement of a new concept, “secondary tariffs”, on countries importing oil from Russia, Iran or Venezuela. This makes their exact impact hard to analyse.

Rejigging trade flows

There will be a significant impact on rejigging trade flows. As noted, energy, including oil and gas, is not (yet) included, nor are some strategic minerals.

That could change, of course. The five top sources of crude oil imports to the US are Canada (with 52% of the total), Mexico, Saudi Arabia, Iraq and Brazil. Europe provides significant refined product shipments to the east coast. Canada will find it difficult to redirect much of its oil and gas in the short term, but the measures have already stirred urgency in Ottawa to develop new pipeline routes going east and west instead of only south.

The large bilateral US trade deficit with Iraq, anyway a meaningless statistic, arises because of Iraq’s oil exports to the US, so the exemption will not contribute to rebalancing the relationship. But if energy is included at some point, it could wildly reshuffle oil trade patterns, already upended by the EU’s ban on nearly all oil from Russia, and the US measures against Iran and Venezuela.

Challenges and opportunities

American oil refineries need heavy crude to blend with their own light crude; a reduction in Canadian flows and a deterrence of imports from Venezuela and Mexico would leave them scrabbling in a shrinking pool of alternatives.

The impact on the US’s own energy sector will also be profound. Tariffs on steel and aluminium already threatened to push up the cost of producing oil and building liquefied natural gas (LNG) facilities in the US. Drill-pipe is up 30%.

And though President Trump has exempted energy, other countries will see the US’s oil and gas exports as a key point. The three biggest US export products are crude oil, refined petroleum, and petroleum gas, making up 17% of its total goods exports. Already, trade retaliation by China has largely closed its market to US LNG. Exported oil and gas are also produced mostly in Republican-voting states.

US oil production growth was already set for a sharp deceleration this year. Higher costs and trade barriers will hamper it further. That at least will provide some cushion for other major oil producers.

Beyond direct effects on energy, the big picture is clear: slower US economic growth (and possible recession), and higher inflation. Estimates based on a 10% tariff suggested a hit to GDP of about 0.7%; the effect now will presumably be bigger.

Oil demand growth

The impact on the rest of the world depends on their exposure to the US, and their degree of retaliation. Mexico and Canada are most exposed; the immediate hit to Europe, India and China is assessed to be quite small. Some of the highest tariff rates apply to emerging south- and south-east Asian export powerhouses: Vietnam, Bangladesh, Indonesia, Thailand. Asian countries were counted on for 60% of oil demand growth this year, as well as driving rising imports of LNG over the next few years, which may now be in doubt.

The next serious risk is of a widened trade war. China, France, Canada and others have announced reciprocal measures, that in turn may be met with further US retaliation. That is not so critical, as America increasingly cuts itself off from world trade.

But a wider turn to trade barriers would intensify and spread the pain. However determined other countries are to avoid this outcome, it may prove politically unavoidable. For instance, cheap Chinese goods, pushed out of the US, may turn up in Europe, inspiring Brussels to impose countervailing measures against Beijing. That would repeat the cycle following the infamous Smoot-Hawley tariffs of 1930, which provoked a global trade collapse, deepening and lengthening the Great Depression.

And the greatest threat of all from this episode is a continuation of economic policy in what remains, for now, the world’s biggest economy, largest oil and gas producer and energy consumer.

• Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis