Analysis by Energy Workforce President Tim Tarpley
The Middle East was plunged into the most significant conflict in years over the weekend when Israel and the United States launched a series of airstrikes and missile strikes on Iran targeting their leadership, infrastructure and military capabilities. In one of the first major strikes, Ayatollah Ali Khamenei, the leader of Iran, was killed. Dozens of other senior Iranian leaders were also killed. In response, Iran has launched a number of drones and ballistic missiles at Israel and other Gulf countries that host US bases. So far, most of the Iranian launches have been intercepted, but some have made it through, hitting oil and gas infrastructure, civilian hotels and apartments, and US military facilities throughout the region.
Stock markets have reacted with increased volatility. As of the time of writing, the Iranian Navy appears to have been seriously degraded; however, they are still attempting to shut off the Strait of Hormuz and are warning that ships attempting to pass through will be set on fire. Whether the Iranians still have the capability to follow through on such threats over the long run is unclear, but many shippers are halting shipments, and those that are continuing are operating under much higher insurance requirements, causing a major snag in global shipping of oil, gas, and related equipment. If the Iranians are successful in closing off the strait for a significant period of time or if shipping is halted due to a prolonged conflict, it is very likely that oil prices will remain volatile, with some analysts projecting $120 in short order.
On Tuesday, the British government moved forward with an effort to evacuate some 100,000 registered UK nationals in the region. The United States followed suit on Tuesday, issuing a rare “DEPART NOW” order for Bahrain, Egypt, Iran, Iraq, Israel, Gaza, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, UAE, Yemen. This widespread departure warning is dramatic, and we have not seen anything of that scope in many years. Many EWTC are working to determine safe ways to evacuate those who wish to leave. Currently, most airports in the region remain closed or operate on a significantly limited basis. Riyadh airport remains one option, as it has been operating on a minimal basis, with some folks in the Gulf region using buses to access it for flights out. The US State Department has set up a 24/7 number to assist with evacuation arrangements, which can be reached at 202-501-4444.
What does all of this mean for EWTC operations in the region and the energy industry as a whole? Certainly, implications could be significant. So far, the Administration has worked hard to define overall objectives and the length of operations, with varying descriptions offered at different stages. Most notably, the President has indicated he expects a 4–5-week operation with more significant strikes to come. Under that scenario, we could certainly see significant disruptions to operations in the Middle East for 2-3 months, depending on the extent and severity of damage and escalation. A lot will also depend on the Iranian willingness and ability to continue fighting and to continue to target energy infrastructure in other Gulf countries. Should their military capabilities be destroyed sooner rather than later, long-term implications could be more limited.
While the implications of the ruling should not be understated, the actions taken by the Administration and the relevant agencies after the ruling have been significant. Shortly after the ruling, the White House released an Executive Order that took two major actions in response. First, the EO put a 10% tariff on virtually every country in the world. The President followed up on Truth Social the next day and directed that the rate be raised to 15%, but this has not yet been officially put into place. We expect an additional EO along these lines soon. These new section 122 baseline tariffs are intended to replace the IEEPA baseline country tariffs that the court invalidated. Virtually all current exemptions that were in place for the IEEPA tariffs are carried over to this new line. This is important to us: USMCA-exempt products will continue to receive a carve-out, and the 122 tariff will not stack on an existing Section 232 product, although it may stack on other applicable tariff lines.
The new tariff line cites section 122 as its legal authority, which is important for several reasons. First, this authority requires a “large and serious” trade imbalance between the two countries. This is relevant because it may subject these new tariff lines to challenges for countries that do not have a significant trade deficit with the United States. We can expect multiple legal challenges to be filed along these lines. Second, the section 122 tariffs are temporary and must be sustained by Congress after 150 days. Whether or not there are votes in Congress to sustain these tariffs is an open question, but it certainly ends the ability for Congress to attempt to dodge “owning” the tariff issue. There will clearly be a vote at some time along these lines. The President’s strongest supporters in the chamber are already pushing for a move to “sustain” the President’s trade agenda. It is unclear if there is support for such a move, but it will be important to watch for these developments.
The second major action the EO included was order additional “Section 301” investigations for a number of countries. This tariff line may be used to move some countries from section 122 over time; however, 301 requires lengthy investigations and findings, so it may not be an option for all countries, and it will take USTR quite some time to complete these investigations. Section 301 allows for significant tariffs to be imposed on countries found to be engaging in unfair trade practices.
What does this all mean for us? Well, the first thing it means is that it throws a lot more uncertainty and confusion into our supply chains and international trade. Countries around the world already smell blood in the water and are starting to pull out of, or signal they want to renegotiate, existing trade deals. The EU is one of the most notable examples. This uncertainty certainly may weaken the President’s hand as he works to negotiate further deals. Additionally, while the White House was quick to replace the lost IEEPA tariffs with these new lines, the political reality is that they will be harder to defend both politically and legally. There are many more procedural, legal, and political calculations to consider with these new tariff lines. This is the main reason the Administration ultimately chose the IEEPA approach: it was much more straightforward, without these calculations. Also, the importance of the Congressional aspect should not be underestimated. The Republican majority in the House is very slim. The President does not have command over retiring members as he does over those who will face a primary. It will be a challenge to sustain any tariff policy through Congress before the midterms. If it is not possible to sustain, and the section 122 tariffs expire in 150 days, where does that leave us long term? Section 232 may be all that remains for many of the products and materials that our sector cares the most about. These tariffs are very impactful to our sector and were left untouched by the ruling and the subsequent EO. These tariffs may ultimately survive longer and should remain our focus. It will become increasingly vital for the energy services sector to work together to ensure that the tariff framework ultimately in place after all these changes is one we can work with and thrive on.
