Macro vs micro: the impact of tariffs on the energy industry

While the impact of the actual and threatened tariffs will be complex and far-reaching, beyond the microeconomic impacts on specific sectors and companies, the macroeconomic consequences may end up being more significant

On the campaign trail last year, President Donald Trump promised steep increases in US tariffs, and in office he has been acting swiftly to make good on those pledges. On April 2, he announced a broad-based package of new tariffs on US imports, in what is being seen as one of the most radical moves to reshape the world economy in decades.

The details of the package, announced on what the administration called “Liberation Day”, have been adjusted significantly since then. For every country except China, the new tariffs have been delayed for 90 days. China faces a blanket tariff rate of 145%. There are exceptions for some items, including consumer electronics, but these are expected to be covered by new sectoral tariffs to be announced soon.

The impacts of the actual and threatened tariffs will be complex and far-reaching. The tariff rates announced on April 2 vary widely across countries, and there is a 37-page list of exemptions, which includes oil, gas, copper and lithium. Working out the full effects on global supply chains will take time.

But beyond the microeconomic impacts on specific sectors and companies, the macroeconomic consequences may end up being more significant.

The Wood Mackenzie view: sector and company impacts

The breadth and depth of Wood Mackenzie’s data on energy industry supply chains make it possible to analyse the impacts of the tariffs in detail. We can identify the specific consequences for particular sectors, companies and pieces of equipment.

One important conclusion from looking at the potential impact of the April 2 tariffs is that the US power industry is one of the sectors that is most exposed. The new weighted average tariff rate on electrical equipment, based on the sources of US imports, would be 38% if those tariffs were implemented. Other high rates are faced by plastics, glass, and iron and steel products, which are all facing average tariffs of around 36-37%.

Those numbers highlight a tension in the Trump administration’s strategy. It is aiming to boost production of energy of all kinds, to support the growth of AI and to bring down costs for consumers. But the tariffs could lead to significant cost increases for power and other energy sectors. Uncertainty over tariff liabilities in complex supply chains, and over possible future changes in tariff rates, can also be a deterrent to investment.

The Wood Mackenzie view: macroeconomic impacts

While the variations in tariff impacts across companies and sectors are significant, they are overshadowed by the overall consequences for the global economy.

As the Federal Reserve chairman Jerome Powell says, the effects of the administration’s strategy are highly uncertain. They will depend on the duration of the tariffs, the scale of the exemptions, the retaliation by other countries, the responses from fiscal and monetary policy, changes in consumer and investor expectations, and many other factors.

However, it is likely that the result will be some combination of slower growth and/or higher inflation, at least in the short term. The uncertainty over the outlook is in itself an important factor: anecdotally, there are already reports of companies delaying investment decisions.

Peter Martin, Wood Mackenzie’s head of economics, last year modelled a high tariff scenario, with the aim of estimating the consequences if President Trump followed through on his campaign pledges. That scenario used an additional 60% tariff rate for US imports from China, and a 10% rate for all other countries. The tariff rates the President announced are significantly higher than that.

In that high tariff scenario, Wood Mackenzie’s Martin projected that US GDP growth would slow from about 2.8% in 2024 to about 1.2% this year, and to zero in 2026. Global growth would slow from 2.8% in 2024 to 2.5% this year and 2% in 2026. That scenario looks similar to the course we are now on.

Slower global growth would mean weaker demand for many commodities, including oil. Wood Mackenzie analysts have already calculated lower outlooks for oil demand, reflecting the impact of an economic slowdown caused by the tariffs.

Last year global oil demand grew by 1.4 million barrels per day, to about 103.5 million b/d. Wood Mackenzie has set out a downside risk case of slower growth reflecting tariff impacts:  a 900,000 b/d increase for 2025 and just 500,000 b/d for 2026. The result is a significantly lower equilibrium price for oil and weaker refining margins over the next two years.

The economic and political situation is evolving rapidly. If stock markets continue to slide, there will be growing pressure on the administration and Congress to change course. But as things stand, oil producers, like many other businesses, face a challenging outlook.