Thoughts on Tariffs & Executive Actions Thus Far
- SWS
- Feb 7
- 7 min read
Energy Policy Perspectives Vol. 3- February 7, 2025
As you know by now, on February 1st, President Trump issued three new executive orders, Imposing Duties to Address the Situation at Our Southern Border, Imposing Duties to Address the Flow of Illicit Drugs Across Our Northern Border, and Imposing Duties to Address the Synthetic Opioid Supply Chain in the People’s Republic of China. The orders imposed incremental 25% tariffs on Mexican and Canadian products (only 10% on energy) with an additional 10% tariff on Chinese goods. The tariffs were paused for 30 days on February 3rd for Mexico and Canada.
China tariffs implemented. The 10% Chinese tariffs became effective February 4th and the Chinese responded with limited new tariffs on U.S. crude oil, LNG, and farm equipment, some further critical mineral export restrictions, with some other relatively minor issues addressed, including an anti-trust investigation of a browser not even operating in China. The Chinese response appears very muted, for now.
The bottom-line of what we have seen in the executive orders thus far is mixed. There have been positive orders suggesting a federal effort to ease the permitting burdens for new energy projects. The encouragement of new nuclear electricity generation and strategic mineral development are huge potential benefits. However, the deregulation executive order of January 31, 2025, Unleashing Prosperity Through Deregulation, also suggests less competition and innovation, which could slow economic growth over the intermediate and long-term (and has been a huge engine of growth historically).
Tariffs, however, could slow general energy infrastructure modernization. We previously discussed in our prior Energy Policy Perspectives how several of the January 20th executive orders appear designed to slow the deployment of wind and solar electricity generation resources via permitting and funding roadblocks. Certainly, the House Ways & Means committee appears to be working on legislation that could essentially gut the vast majority of the Inflation Reduction Act (IRA) funding for clean energy infrastructure projects and support for EV adoption and related infrastructure. What concerns us further about the full multitude of Trump administration executive actions thus far is the adverse impact of potentially higher interest rates than might otherwise have been and the potential for higher infrastructure equipment import costs as a result of some higher import tariffs.
Significant new tariffs, particularly on Chinese goods, could increase the cost of some energy infrastructure projects materially given the limited domestic manufacturing capacity and supply chains for many electricity infrastructure goods. Thus, given the limited annual infrastructure investment budgets at U.S. utilities and electricity generators, higher infrastructure equipment and financing costs could reduce absolute new infrastructure volumes. Any slowing of economic growth could also slow the revenues necessary in the electricity industries to fund that infrastructure investment. Thus, given the limited annual infrastructure investment budgets at U.S. utilities and electricity generators, higher infrastructure equipment and financing costs could reduce absolute new infrastructure volumes.
Given the massive undertaking required to double or triple U.S. electricity output over the coming decades (see Exhibit 1), anything that slows that infrastructure deployment is simply bad timing as infrastructure deployments actually need to accelerate from here. Also, if electricity infrastructure deployment growth is slowed, the promise of growth from tech industries will increasingly face a limit due to more restrictive electricity supplies. While some of the executive actions may help to accelerate some infrastructure projects, equipment costs and financing costs are key restrictive factors as well.
Exhibit 1: 2050 U.S. Electricity Growth Projections Made Prior to 2024 ByNotable Forecasters
Long-term electricity demand growth outlook little changed. While we are concerned by the potential adverse ramifications of potentially slower electricity generation infrastructure deployments of some types (renewables), our outlook for electricity demand growth remains largely unchanged. As we discussed in our January 28 Energy Policy Perspectives, the DeepSeek news is not necessarily bad news for AI computing electricity demand. While DeepSeek may provide some insights for optimizing existing AI models, it is also likely to accelerate U.S. AI developer research efforts to reestablish a clear U.S. dominance in AI, in our view. As we projected last year in our report, The Clean Energy Transition: The Really, Really Big Numbers, Their Implications for Electric Investment, & the Flourishing of the U.S. Economy, Exhibit 2 shows our projections for the sources of the near tripling of U.S. electricity demand over the next few decades. While the administration executive actions may slow earlier EV adoption, we believe that both AI development momentum and the DeepSeek revelations may only accelerate AI computing and data center electricity demand. We do not expect a material change to the longer-term outlook for extraordinary electricity demand growth or the generational secular investment opportunity in electric utilities or generators (see Exhibit 3), but acknowledge that near-term growth may be muted.
Exhibit 2: Our View in 2024 on The Sources of 2053 U.S. Electricity Growth
Exhibit 3: U.S. Electricity Growth Forecast -- Current vs. Original, Terawatt Hours (TWh)
Delayed clean energy deployments. Thus far, many of the executive actions have seemingly been intended to slow the adoption of both new clean energy production and the adoption of EVs. As we outlined in our The Clean Energy Transition: The Really, Really Big Numbers report, we believe that the benefits of these efforts could provide dramatic future benefits to the U.S. economy and American health. While not having a near-term dramatic effect on the economy, the benefits we foresee are postponed to some degree. The broader problem that we see is the fact that the stream of executive orders seemingly diminishes the role of clean electricity generation sources in the overall electricity supply equation at a time when the U.S. requires millions of new megawatts of generation capacity over just a few decades. One U.S. DOE study suggests the need to triple U.S. nameplate generation capacity and its electricity demand projections appear very conservative to us. Removing any of the arrows from the industry quiver of useful new resources merely makes achieving the necessary supply growth necessary to meet future energy demands considerably more difficult in the short run.
Tariff and potential funding concerns plague the clean tech industry. President Trump’s latest across the board tariffs on China and suspended duties on Canada and Mexico, have certainly raised fears of cost increases and a potential global trade war that could slow commerce and put clean tech supply chains at risk. While the clean tech industries are no stranger to protectionist tariffs against China, as President Biden continued the tariff war started by Trump in his first term, these tariffs were more focused and paired with record levels of investment in domestic manufacturing support via the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA). The Trump administration is combining its broad tariff increases with attempts to freeze these very same funding sources that were established under the Biden Administration. While the initial freeze was rescinded and blocked by two federal judges, it reignites the constitutional debate around impoundment and creates uncertainty around the funding underpinning billions of dollars of total investment in over 2,000 clean energy projects that are responsible for over 200,000 potential clean energy jobs across the country. As a result, clean energy names have broadly been in a material decline over the past month.
Two domestic battery projects were cancelled just this week. The implications of the freeze on IIJA and IRA funds may be seeing some initial effects already. Earlier this week KORE Power scrapped plans for its $1 billion lithium-ion battery plant in Buckeye, AZ that was expected to generate roughly 3,000 manufacturing jobs and be the first US-owned lithium-ion battery plant in the U.S. Despite being awarded an $850 million U.S. Department of Energy Loan in June 2023, the Company said it never received those funds and policy uncertainties led to fundraising challenges that ultimately led to the company’s decision to abandon the project. Yesterday, news also broke that FREYR Battery Inc (FREY, $1.96, NR), a Norwegian battery company, would not proceed with its planned $2.6 billion factory in
Newnan, GA following its strategic pivot into solar manufacturing after acquiring the U.S. assets of Chinese based Trina Solar Co Ltd. at the end of last year. The Trump administration’s attacks on EVs have potentially negative implications for the closely intertwined battery industry; however, the administration has been more positive in support for the upstream portion of the supply chain. Supply chain diversification away from China remains critical for the industry and has attracted broader political support from the military and defense angle. Specifically, a bipartisan, bicameral group of politicians (including now Secretary of State, Marco Rubio) were finally successful early last month in pushing the Department of Defense (DOD) to add China-based CATL, the world’s leading battery supplier, to its blacklist (blocking its ability to receive military contracts) over alleged ties to China’s military-industrial complex.
Tremendous uncertainty... In the past few days, comments from President Trump have heightened the level of uncertainty around oil prices and the oily equities. On Tuesday, the President issued executive order, National Security Presidential Memorandum/NSPM-2, imposing Iranian oil export restrictions. Reinforcing sanctions on Iran are positive for oil prices, as they would take a chunk of Iranian volumes off the market. President Trump’s aim is to apply maximum pressure on Iran, which we think could reduce Iranian crude oil production by more than 1.0 million b/d from the 3.4 million b/d in 4Q24 (according to the EIA). On the negative side, with China fighting back with retaliatory tariffs, the implications from the trade war on global oil demand are unclear and could easily offset the supply benefit from the sanctions. In addition, we do not think the Saudis will respond to President Trump’s push for increased production and the risk of elevated spare capacity (>4.0 million b/d) keeps investors more cautious. Further, President Trump proposed the takeover of the Gaza Strip, which could add volatility to oil prices, if it becomes a real target.
…puts downward pressure on oil prices in the near-term. The fast and furious headlines coming out of the Trump administration are creating wild swings across the energy sector. We are sticking with our mid-cycle WTI oil price deck of $70/bbl but think the risk near-term could be slightly to the downside on the uncertainty around Trump’s tariff war with China (albeit, the levies are not as high as initially expected) and his focus on driving down oil prices to reduce inflation and boost the economy. We think investors need to be more nimble with the oily E&Ps, especially as we enter the core of earnings season for the sector. For our detailed 4Q24 preview, see our January 27th industry note: E&P: 4Q24 Preview; Staying the Course w/2025 Outlooks Despite Higher Prices; Favorites in Print – CTRA, DVN, MTDR & PR.
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