Will Trump's Trade War Affect Oil?

The Trump administration has drummed up its fair share of criticism, from separating migrant children from their parents to covering up tax records. Now, experts are warning that escalating international trade wars could have dire consequences for the oil and gas industry.

Concerns are swirling around the 25 percent steel and 10 percent aluminium tariffs imposed by the Trump administration on a string of nations, including Canada, Mexico and the European Union. In response, the cost of steel purchased in the US has soared, which has inflated costs for oil and gas projects.

US companies jostle for tariff waivers

While certain companies are eligible for waivers issued by the federal government, the application process is complex and time-consuming, which means most developers are forced to swallow the tariffs. There's also ambiguity surrounding eligibility, with Chevron recently receiving a waiver from the US Commerce Department for importing a 4.5-inch steel pipe intended for oil exploration, while Borusan Mannesmann Pipe, a smaller company based in Texas, had its application rejected for a similar steel pipe. As a result, Borusan is bracing for a US$10 million increase in operating costs.

An application submitted by Plains All American also was rejected, with the company's CEO accusing the US Commerce Department of imposing a “US$40 million tax” on steel imported for use in its Cactus oil pipeline in Texas. Not only will the rejection increase operational costs for Plains All American, but the tariffs could hinder attempts to relieve the midstream bottleneck that's currently afflicting the Permian Basin and dragging down oil prices.

Concerns over Chinese economy

The state of the Chinese economy is also a major concern, with analysts predicting that rising trade tensions could trigger a major slowdown. Currently, China consumes a huge 11.5 million barrels of oil a day, making it the world's second biggest oil consumer. Following US$34 billion worth of tariffs imposed on Chinese imports in July, a second round of US$16 billion in August and threats from Trump to impose an additional US$200 billion, China's national economy could flatline.

“The scale is enormous and once the tariffs materialise, they will definitely send jitters through financial markets,” warns Gai Xinzhe, an analyst at the Bank of China’s Institute of International Finance in Beijing, told Bloomberg.

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