Exempt Pipelines from Steel Tariffs
President Trump’s 25 percent tariff on imported steel could undercut a major source of economic growth if it hinders the booming domestic energy industry. Pipelines are crucial in transporting natural gas and oil to its final destination, and new pipelines will be needed to accommodate both higher levels of production and the development of new sources. Steel tariffs would raise the cost of constructing and maintaining pipelines.
According to the American Petroleum Institute manufacturers import about 77 percent of the steel used in line pipe, 40 percent of the steel used for the high-pressure valves, and 42 percent of the market value for finished steel pipeline fittings. Across different components of pipelines, project sponsors and operators rely on steel imports for a substantial share of materials needed to construct these pipelines.
Pipeline industry officials are hopeful that they could qualify for an exemption from the tariffs. The related executive order authorizes Secretary of Commerce Wilbur Ross to provide relief from tariffs for steel products that are not produced in sufficient amounts or high enough quality, or qualify due to national security considerations. These companies have until March 23rd to qualify for an exemption.
The decision on exempting pipelines from tariffs has not been made. In earlier remarks in 2017 on the Keystone and Dakota Access pipelines, President Trump said, “If they want a pipeline in the United States, they're going to use pipe that's made in the United States." Those two pipelines were ultimately exempted from a requirement to buy American steel, but part of the justification was that the building process had already started.
Future projects may not qualify for this exemption. Still, pipeline manufacturers are hopeful that they could qualify, because the type of high-grade steel that can withstand pressure required for pipelines only accounts for three percent of the domestic steel market. The relatively small size of the market and inconsistent demand for pipeline steel might deter domestic steel producers from expanding. These features could lead Secretary Ross to conclude that domestic steel production cannot sufficiently meet the needs in this area.
Tariffs on the pipeline industry would have a range of adverse consequences.
Higher steel prices will result in higher costs to consumers, and people who have enjoyed low energy prices would face an increase. NAmerico Partners LP, which has a proposal for a major natural gas pipeline that would transport gas from West Texas to the Gulf Coast, estimates that the steel tariff would impose a two to four percent cost increase on customers.
Steel tariffs that raise related prices could deter some companies from pursuing planned projects in energy production and related transportation infrastructure, or cause them to scale back those plans. Each year from 2013 to 2017, annual capital expenditures on oil and gas infrastructure exceeded $70 billion, and according to one estimate will average between $56 billion and $71 billion per year through 2035.
According to the Bureau of Labor Statistics, about 48,000 people work in the pipeline transportation industry, with occupations ranging from valve installers to industrial machinery mechanics. These jobs, and the jobs more directly related to pipeline construction could be harmed by tariffs that raise the cost of pipelines.
Finally, higher prices could induce some energy producers to shift more transportation to rail cars or road transport, depending on their situation. My research has shown that pipelines are a safer mode of transportation than either of these alternatives. Average annual accident rates from 2007 to 2016, per billion ton-miles of oil and gas transported, were 0.66 for oil pipelines, 0.73 for natural gas pipelines, 2.20 for rail, and 7.11 for road.
Subjecting pipelines to the steel tariffs would harm consumers, companies, and the American economy. Reversing course on the recently-announced tariffs would be the best way to remove the source of uncertainty and potential for economic harm. In the more immediate term, the Trump Administration should at least consider an exemption for pipelines, so that the tariffs do not sap strong growth in the domestic energy industry.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.
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