President Biden and others in Washington are imploring U.S.-based oil and gas companies to increase drilling and production to help temper rising energy prices. The administration even tried enticing these companies by resuming plans for oil and gas development on federal lands. But many of the largest firms are refusing to start new projects on the grounds that they cannot achieve a sustainable return on potential investments. One important factor in these investment decisions is production costs, which can make the difference for a project’s viability and are rising in the current inflationary environment. You’d therefore think that the Biden administration—eager to boost domestic oil and gas output—would be doing everything in its power to temper the rising costs of vital drilling inputs.
Think again.
Last month, the Department of Commerce announced new “trade remedy” duties on oil country tubular goods (OCTG), which are types of pipes used in oil and gas drilling. The new duties join a barrel of others imposed over the last twelve years (and not just on imports from China). As shown in Table 1, the United States subjects seven of its most important trading partners to antidumping and countervailing duties (AD/CVDs) on OCTG. (Note that China, India, and Turkey are subject to both antidumping and countervailing duties.)
The United States is the largest oil producer in the world, and exploration activities drive domestic demand for OCTG. Given the sheer size of the U.S. industry, however, imports of OCTG are an essential supplement to domestic production. Figure 1 illustrates the importance of OCTG imports as they correspond to the surges in U.S. oil production activities. Companies are already reporting a scarcity of inputs, which increases their costs and hampers their ability to respond with higher output —exactly what the global economy (and close U.S. allies in Europe) needs right now. Thus, increasing duties at the same time as calling to increase production to help stabilize energy prices is senseless.
The domestic industry has been increasingly successful in winning trade remedy protection from imports as Congress has made numerous amendments to the AD/CVD laws over time. (For more in depth analysis on the problems with the numerous amendments made to AD/CVD laws; see here, here, here, here, here, and here.)
One such amendment gives the Department of Commerce broader discretion on the necessary data businesses provide as part of its AD petition. For example, if Commerce deems, “a particular market situation exists such that the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade,” it can alter this data. Often, Commerce alters the data to illustrate higher production costs, resulting in higher antidumping duties (to help restrict imports). Commerce used its discretion to apply the particular market situation methodology in the Korea AD case on OCTG as the agency accepted claims that the Korean OCTG manufacturing data was “artificially depressed.”
Commerce can also abuse its discretion using another approach, known as “adverse facts available (AFA).” The agency can exercise AFA when it considers information from the respondents (usually the exporting companies) is missing or deficient. Basically, Commerce can fill in information for the respondents to make the petition more attractive for domestic industry. In doing so, the agency is incentivized to calculate duty rates using proxies that are intentionally adverse to the respondents. What’s worse is that this proxy information is often provided by the industry petitioning for protection, which of course makes their competitors look worse so that higher duties can be imposed.
Making matters even worse, the United States continues to impose additional 25 percent “national security” tariffs on OCTG imports via “Section 232”—tariffs that also apply to upstream, “semi-finished” steel and thus harm the American OCTG industry (yes, the same one that petitioned the Commerce Department for trade remedy relief from OCTG imports). As my colleague Scott Lincicome explained last year, the steel tariffs directly contributed to increased steel prices in the United States. Given that steel is a vital component in OCTG, high steel prices increased domestic OCTG producers’ costs, thereby harming their competitiveness and pushing the industry to petition for protection from import competition.
In the end, American oil and gas companies end up paying even more.
The OCTG duties, along with a recent ones on steel nails and beer kegs, also reveal a systemic problem: As one industry lobbies for tariff protection and succeeds (as with Section 232 tariffs on steel or aluminum), another industry (OCTG, nails, kegs, etc.) turns to AD/CVD laws to block injurious imports even though upstream tariffs, not imports, are what’s harming the domestic industry’s competitiveness. The U.S. government, however, does not consider this fact or the consumer or broader “public interest” impact of duties when deciding whether to impose trade remedies duties. And import-consuming industries are left footing the bill. In the OCTG cases, this means that the very U.S. oil and gas companies asked by the president to increase output will be constrained by artificially high prices for a key input—prices stoked by the executive branch’s own actions (or, in the case of the Trump-era Section 232 tariffs, inaction).
To be clear, not all of this is the president’s fault. As Cato scholars have long explained, U.S. trade remedy laws have been repeatedly amended to make high duties more likely and quick changes difficult. The OCTG cases are thus sadly no different from those on nails, kegs, chassis, lumber, and many others, due in large part to the law and its abuse by the administering agencies afforded expansive discretion. In short, systemic problems require systemic solutions, so Congress must act here too.
On the other hand, President Biden has no such excuse for keeping the Section 232 tariffs around, which he could lift by executive action (and thus perhaps help ease inflationary pressures in the process). If increased American oil and gas really is a national priority, nixing those tariffs is the least he could do.
