Hirs: America Confronts Sovereign Risk with Recession on the Horizon

The U.S. oil and gas industry understands sovereign risk, or political risk. As the industry proved up reserves and production across the world, regimes often found it easy to renege on their development agreements.

OPEC was founded in 1960. In ensuing years, member nations took back control of their oil and gas fields. Actions against global oil companies by Russia, Venezuela, Mexico, Canada, Colombia and several African nations have run the gamut from outright expropriation to increasing taxes on production. 

But now the risk to U.S. domestic oil and gas production, as well to as the greater U.S. economy, comes from within.

The Trump administration has doubled down on its support of U.S. oil and gas, but despite that, the oil patch is facing a double whammy—the latest 25% tariffs on imported steel will raise costs, and the administration’s pressuring of Saudi Arabia to increase production could lower revenues.

That doesn’t count the possibility of a looming recession. Higher costs for steel will raise the cost of pipelines needed to connect producing regions to consumers and LNG exporters. If the promised mass deportations of undocumented immigrants reach the Permian Basin, the cost of labor will also increase. Even if domestic and foreign banks are abandoning net zero redlining, Wall Street will not be forthcoming with new capital for any industry facing the prospect of higher costs and lower revenues.

It is not just the oil patch facing political difficulty. The announced rollbacks of federal incentives and subsidies for wind, solar and batteries will delay installations that many states now require to meet peak electricity demand—especially Texas.

In his first term, President Donald Trump withdrew from the Trans-Pacific Partnership and imposed 25% tariffs on China. China’s response was to devalue its currency to counteract the impact of tariffs and to cut imports of U.S. farm products. The Trump administration and Congress paid out $23 billion to compensate farmers for their lost markets.

Trump has temporarily suspended his proposed 25% tariffs on most goods imported from Mexico and Canada (dropping to 10% on imports of Canadian oil). This unilateral threat to suspend the United States-Mexico-Canada Agreement, negotiated during the first Trump administration, is tied to his demand that Mexico and Canada do more to eliminate unauthorized border crossings and the devastating cross-border trade in fentanyl, which contributed to more than 80,000 drug overdose deaths in the U.S. in 2024.

If the nations do not reach an agreement and Trump goes ahead with the punitive tariffs, both Mexico and Canada have promised retaliatory measures that will drive up the costs to U.S. consumers for everything from beer to electricity.

The secondary impact on U.S. capital markets may be more severe. Many domestic companies began to prepare for tariffs in fourth-quarter 2024 by rearranging supply chains and prepositioning inventories in the U.S. These additional costs will manifest themselves in lower-than-expected earnings for 2024, pressuring stock prices downward. This will be the least significant impact of the new protectionist tariffs.  

While the U.S. does run a trade deficit in goods and services, the domestic economy benefits because U.S. dollars paid out to trading partners come back as foreign direct investment and in dollar purchases of stocks and bonds at home and abroad. This continuing source of investment capital has helped lower domestic interest rates and kept the U.S. stock market at record levels. 

The catalyst for the most recent bear market was Russia’s invasion of Ukraine. Since then, the S&P 500 index is up more than 2,500 points without a significant correction. Losing any portion of this circular reinvestment back into the U.S. capital markets will knock the legs out from under the stock markets. We will all be poorer.

The Trump administration’s plans to reduce domestic federal spending on entitlements programs, direct aid, research and federal staffing will increase unemployment. State and federal workforce aid programs will be strained. 

To sum it up, until the benefits of the administration’s new policy directions can be seen, a recession is on the horizon for the U.S. and our trading partners. The U.S. oil and gas industry will suffer in a recession and prolonged trade war. The resilience of all Americans will be tested, and the jockeying for the 2026 midterm elections has already begun.