Credit |by Bloomberg, via RigZone.com|L.Kassai, R.Tuttle, E.Elkin| When President-elect Donald Trump announced his plan to impose tariffs on goods coming from Canada and Mexico until they stop the flow of migrants and drugs, he said he wanted the countries to “pay a very big price!”
In energy markets, it won’t just be Canada and Mexico taking the hit, according to analysts, who say the domestic fallout would be so severe that Trump will likely end up exempting energy products once he takes office.
Charging 25% levies on oil and gas from the US’s top two trading partners would spike gasoline prices in the Midwest, raise electricity costs along both US coasts and hammer profitability for America’s refiners, among other effects, experts say.
While tariffs can be disruptive in any market, they threaten to be particularly troublesome for a North American energy industry that has been tightly integrated for decades and already largely favors US interests.
“There are no winners from a tariff hike and ensuing price hike to the raw inputs that literally are foundational to our society,” said Joe DeLaura, a global energy strategist with Rabobank. For that reason, DeLaura said he expects Canadian crude imports to be exempt from tariffs or subject to a charge of only 1% to 2%.
Trump’s transition team said his tariffs against China in his first term created jobs, spurred investment and didn’t stoke inflation. His policies will make American energy dominant, protect energy jobs and bring down living costs, Karoline Leavitt, a spokeswoman for the Trump-Vance transition team, said in an emailed statement.
“President Trump will work quickly to fix and restore an economy that puts American workers first by re-shoring American jobs, lowering inflation, raising real wages, lowering taxes, cutting regulations, and unshackling American energy,” Leavitt said.
Crucial Trade
The trade in energy is crucial for all three countries. The US buys about 4 million barrels of oil a day from Canada, accounting for more than half of its crude imports. Most of that crude is cheaper, heavy grades, allowing the US to export vast quantities of its own higher-value, lighter oil while keeping domestic fuel costs in check.
In Canada, energy products are a critical economic lifeline that make up about 30% of its exports to the US. For Mexico, the US Gulf Coast refining complex has become an important source of gasoline as the country struggles to ramp up its own production. Mexico already buys more oil and products from the US than it sells to the country.
But perhaps the region hardest hit by the tariffs would be the US Midwest refining district, which includes the swing states of Ohio, Michigan and Wisconsin. Fuel makers in the region rely on Canada for 46% of the crude that they turn into gasoline and diesel.
That’s an arrangement that has benefited them as they can buy Canadian oil for $12 less per barrel than the benchmark US grade currently. Were Trump’s tariffs imposed, US refiners would be hard pressed to find other sources of crude since they rely solely on pipelines and railways to receive feedstock, essentially locking them into their current sources of oil.
Depending on how long their margins are squeezed, Midwest refiners may also curtail production or shutter plants. The result would be higher gasoline and diesel pump prices for US drivers.
Tariffs would have “hugely destructive consequences for refineries” in the Midwest, said Rabobank’s DeLaura.
A North American energy trade war also would likely hit Americans’ electricity bills. Power markets in the northeastern and northwestern US rely on electricity or natural gas imported from Canada, meaning customers in New York, New England, and the West Coast may see higher power prices to cover the cost of the tariffs, said Gary Cunningham, director of market research at risk management firm Tradition Energy.
Washington state imported more than 500 billion cubic feet of gas from Canada in 2023 before sending some supplies on to Oregon. While Washington also received gas from Idaho, taking the Canadian fuel away would cause a chain reaction down the coast, he said.
“The flows from Canada would be needed to maintain balance in the region,” said Cunningham, who doesn’t expect tariffs on oil and gas to be implemented.
All Products
While Trump exempted energy products from tariffs during his previous term, his post threatening the levies last month said they will apply to “ALL products” from Canada and Mexico.
That scenario would be especially damaging to Canadian oil producers. Only about 16% of their oil exports could be shifted to markets in Asia via the expanded Trans Mountain pipeline to the Pacific Ocean. Some of the country’s offshore production in the Atlantic also could be routed to new buyers, but that accounts for less than 4% of Canada’s output. The rest would still need to go to the US, and the tariffs would have to be shared by parties on both sides of the border, said Kevin Birn, an S&P Global analyst.
For Mexico, the charges would hurt a country that’s both one of the US Gulf Coast refining complex’s top suppliers and its top international customer. While Mexico sold about 636,000 barrels of oil and products to the US a day in September, the country bought almost twice that amount — about 1.2 million barrels a day — from the US that month.
The situation could be even worse for Canada if the tariffs apply not just to oil used in the US, but also to crude passing through the country. Refineries in Ontario and Quebec rely on western Canadian oil shipped via pipelines that cross into the US, meaning Canadian refiners could end up subject to American tariffs on Canadian crude.
“This would be very disruptive,” Birn said. “It’s a lot to take apart.”
