US Elections: Oil, Biofuel Industries Weigh Uncertain Impact of Trump Tariffs

November 04, 2024

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by Eamonn Brennan (S&P Global) Trump proposing at least a 20% tariff on all imports; Oil industry views Trump positively, but unsure of trade impact; Biofuel producers hope for targeted approach -- The US oil industry could be negatively affected by Donald Trump's proposed tariffs, which could lead the industry to pass on higher costs of imported crude and production supplies to consumers as higher gasoline prices, observers say.

Throughout his 2024 campaign, the former president has proposed tariffs on all US imports as high as 20%, as well as a tariff as high as 60% on Chinese goods if elected to a second term, arguing that such policies would promote domestic manufacturing and reshoring of jobs across the US economy. Vice President Kamala Harris has called the tariffs a "sales tax" on American consumers, while economists, such as those at the Yale Budget Lab, have said they could increase annual costs between $1,900 to $7,600 for the typical US household.

While the USoil industry views Trump's energy policies positively, oil industry trade groups have been pushing back on Trump's tariff proposals throughout his campaign.

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The precise implementation of Trump's proposals, or whether it would include the oil industry, which he has promised to "unleash" if elected, remains uncertain and difficult to project. Trump has proposed both 10% and 20% blanket tariffs at different stages of his campaign.

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At an Oct. 15 event at the Economic Club of Chicago, however, Trump said his administration could consider "a 100, 200, 2,000% tariff," and has continued to stand by the broader policy even as US business leaders have increasingly criticized it.

"I don't think anybody in the business community thinks it's a good idea," William Reinsch, senior advisor for the economics program at the Center for Strategic and International Studies and former president of the National Foreign Trade Council, told Commodity Insights Oct. 28.

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One area of US fuel production where tariffs could be viewed more favorably is the biofuels industry. While US imports of ethanol are negligible, some producers have pushed back on foreign feedstocks, like Chinese cooking oil, being eligible for new clean fuel tax credits under the Biden Administration's signature Inflation Reduction Act. The industry has also lobbied against what it says is a lopsided US trade policy with Brazil, which has restricted access there to US-produced ethanol while being allowed to sell its own products in the US market.

However, benefits specific to US ethanol trade policies would likely be outweighed by concerns if broad tariffs lead other countries to retaliate, Renewable Fuels Association President Geoff Cooper said.

"If a country allows free and fair access to their market for our biofuel products, we should do the same for their biofuels," Cooper said. "If, on the other hand, a country has a tariff or a technical barrier in place that blocks access, restricts our access to their market, we think it's appropriate to consider reciprocal treatment or some kind of equalization to level the playing field.

"We've always preferred a more targeted case by case approach to to trade policy and looking at various measures to regulate imports and exports," he added. "We have some some trepidation painting with too broad a brush, and what that might mean in terms of retaliation and new barriers for our products." READ MORE

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Excerpt from AEGIS Hedging/OilPrice.com: Uncertainty Centers on GREET

The crux to determine how much credit value is ultimately earned by US producers lies in the climate model ultimately adopted to establish emissions rates.

The US Department of Energy’s Argonne National Laboratory Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) is the preferred model to determine the ultimate life cycle analysis (LCA) of various feedstocks, farm practices, transportation impacts, and production processes.

The lower the emissions rate of a particular fuel pathway, the more credit value is earned by the producer.

Soybean oil is the most abundant renewable feedstock source available in the US, making up roughly 33% of the total feedstock slate across the renewable diesel and biodiesel sector. Canola is rapidly gaining share at 16% of the total feedstock slate.

Yet under current GREET modeling, soybean oil and canola oil do not qualify for 45Z crediting, putting US farmers at an enormous disadvantage to lower carbon-intensity (CI) imports like UCO and tallow.

US imports of UCO surged by more than 756% since 2022 and have grown more than 2.5X in the past year alone, with imports accounting for roughly 60% of all UCO used for renewable-fuel consumption (see graph).

The bulk of US UCO imports have been sourced from China. Chinese imports have come under increased scrutiny amid suspicions of virgin edible oil content.

With nearly half of soybean oil typically slated for renewable fuel consumption, US farmers could see a significant drop in demand for their feedstock, prompting calls for a domestic feedstock requirement to be added to the 45Z to even the playing field.

The GREET model in its current form could devastate US farmers and many US biofuel producers.

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Changes to various emissions scores could further advantage crop-based feedstocks, while the de-bundling of CSA, as well as the addition of additional CSA practices would make more of the US crop eligible for the 45Z.

This would be good news for farmers and producers, while additional updates could drive even greater profitability.

Crossing the Election

The IRA and its associated funding and tax cuts are a likely target for US Republicans, driving fears that the 45Z could be cut or watered down under a Republican administration.

The IRA eked out a narrow margin in 2022, passing along strict party lines with all 220 House Democrats voting for it and all 207 Republicans against.

Donald Trump has commented that he aims to scrub the IRA and rescind any unspent funds.

On the other side of the aisle, Vice President Harris cast the tie-breaking vote for the IRA, which, despite its name, became the largest climate-spending bill in history.? It seems almost certain the IRA would be implemented in-full under a Harris administration.

Despite the rhetoric, if elected, a Trump administration is unlikely to materially alter the IRA, particularly the 45Z, as a swath of key stakeholders ranging from big oil to big Ag have made substantial investments to date and may require section 45 credits to remain profitable. The bulk of these projects also reside in red states and due to lucrative conditions for prevailing wage and apprenticeship provisions under the IRA, spur job growth in the renewable fuels sector.

Killing the IRA or repealing portions of the Act would require an act of congress.

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Despite various calls for a domestic feedstock requirement, based on our analysis, the USDA is unlikely to pursue this stipulation.

The USDA will likely unbundle CSA practices and add additional practices to ensure that the bulk of the US crop is eligible for credits.

Under a second Trump term, we see the potential for tariffs on foreign feedstock to even the playing field with US crop-based feedstocks. This may be augmented with favorable changes to the GREET model for crop-based feedstocks.

Under Harris, crop-based feedstocks would require more favorable terms under the GREET model in the absence of any limitations on foreign feedstock.

There is also the possibility for an extension of the BTC for 2025. Veterans of the industry have seen several extensions and even retroactive extensions of the BTC over the years, so this remains on the table in the form of HR 9060. READ MORE