When U.S. 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 paying, 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 per cent levies on oil and gas from the U.S.’s top two trading partners would spike gasoline prices in the Midwest, raise electricity costs along both U.S. 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 favours U.S. 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 one per cent to two per cent.
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.
Top of Form
“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 U.S. buys about four 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 U.S. 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 per cent of its exports to the U.S. For Mexico, the U.S. 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 U.S. than it sells to the country.
But perhaps the region hardest hit by the tariffs would be the U.S. Midwest refining district, which includes the swing states of Ohio, Michigan and Wisconsin. Fuel makers in the region rely on Canada for 46 per cent 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 US$12 less per barrel than the benchmark U.S. grade currently. Were Trump’s tariffs imposed, U.S. 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 U.S. drivers.
Tariffs would have “hugely destructive consequences for refineries” in the Midwest, said Rabobank’s DeLaura.
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 per cent 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 four per cent of Canada’s output. The rest would still need to go to the U.S., 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 U.S. 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 U.S. a day in September, the country bought almost twice that amount — about 1.2 million barrels a day — from the U.S. that month.
The situation could be even worse for Canada if the tariffs apply not just to oil used in the U.S., 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 U.S., 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.”
Share This:
More News Articles
