OGJ Editorial: A risky move with steel

March 18, 2002
The oil and gas industry, especially in the US, faced two large economic questions when 2002 began. One was timing of the start of recovery. The other was whether recovery would last.

The oil and gas industry, especially in the US, faced two large economic questions when 2002 began. One was timing of the start of recovery. The other was whether recovery would last.

Answers to those questions are taking shape. The outlook? Mixed, at best.

Everyone's best guess in January was that recovery would take hold about midyear. For oil and gas producers, that seemed like forever. Demand stagnation due to economic recession has weakened prices and slowed drilling. The effect on oil field activity is exaggerated in the US, where drilling strongly favors natural gas. And US gas prices, because of full inventories and warm weather, are moribund.

Economic rebound

Oil and gas markets everywhere need a solid economic rebound, which must include the US. Hopeful signs have emerged. Federal Reserve Chairman Alan Greenspan told the Senate banking committee on Mar. 7 that "economic expansion is already well under way" in the US. The Department of Labor reported strong productivity growth in the fourth quarter of 2001, which eased fears about inflation.

A strong recovery would revive growth in demand for oil and gas. It also would speed withdrawal of gas from storage in the US and strengthen gas prices. The sooner, the better. High gas inventories mask steep underlying depletion, which can be offset only with drilling much more vigorous than it is now.

So much for the good news. Policy mistakes by the White House threaten to foreshorten recovery and make fears come true about a double-dip recession.

President George W. Bush took huge economic risks when he imposed tariffs of as much as 30% and quotas on US imports of steel. It was especially discouraging that he followed this capitulation to steel interests from the US East with support for economic-stimulus legislation that's both feeble and late and with a corporate-responsibility initiative that punishes all of American business for the recklessness of Enron Corp. With an important election looming, economics has taken a back seat to politics.

The potential damage from steel tariffs and quotas is great. The move will, of course, raise costs in other economic sectors, including oil and gas, to benefit inefficient steelmakers. That, alone, should have steered Bush away from this mistake.

Worse is the ready resort to protectionism. The steel move comes with Congress ready to pass a farm bill containing a massive $171 billion in subsidies and supports. The US commitment to trade liberalization is giving way to domestic politics. And it is happening just months after the US championed controversial but ultimately successful World Trade Organization efforts to begin a new round of global trade talks.

To no one's surprise, imposition of the tariffs brought quick promises of retaliation from steel producing areas that will be hurt: South Korea, Japan, Russia, China, and countries in the European Union. Russia called the US protections "unjustified from a legal or economic point of view" and suspended imports of US poultry. The EU promised a formal complaint to the WTO and said it would respond with steel protections of its own. Stock markets in the US sagged on news of Bush's initiative but later recovered.

Protectionism's risks

If the move touches off a costly cycle of protections and countermeasures, the economic recovery just now getting under way won't last long. And the long-term outlook will be cloudy.

The hope is that leaders in the EU and other tariff targets recognize the political motivation and compromise in Bush's steel step. It could have been worse. The US International Trade Commission, an advisory group, recommended steel tariffs as high as 40%. And Bush rejected a steel-lobby request that the government pay $21 billion of benefits due retired steelworkers.

What's more, the political advisors who prevailed in this case might be right. Compromise of US and world economic health might really be necessary to hold at bay those Democrats still inclined to govern by manipulating national wealth.

But the price is high. Indulgence of US political calculations is a lot to ask of trade partners and WTO allies. And paying for steel-industry inefficiency is a lot to ask of the US economy.