Key Takeaways
President Trump instituted a one-month pause on tariffs on goods from Mexico and Canada that fall under the North American trade agreement, the USMCA.
Oil that does not fall under the USMCA is subject to a 25% tariff if it comes from Mexico and a 10% tariff if it comes from Canada.
The U.S. Midwest mainly depends upon Canadian oil to feed its refineries and could be impacted significantly if the 10% tariff were enacted.
These tariff actions are happening at a very inopportune time in the United States, which is preparing for the loss of another 400,000 barrels per day of refining capacity this year.
Trump’s tariffs on Mexico and Canada will impact global oil flow and oil and gasoline prices. Still, upcoming increases in output by OPEC+ at Trump’s urging could moderate some of the impact.
OPEC+ will now increase oil production and exports at President Trump’s urging, increasing oil production by 138,000 barrels a day in April to begin the first in a series of monthly hikes to resume production, which was halted for more than two years, that will gradually restore the lost output to 2.2 million barrels per day by 2026. The cartel has postponed increasing production three times since first announcing a supply roadmap last June. The increased OPEC+ production will help moderate some of the impact from potential tariffs on oil imports from Mexico and Canada, which will impact global oil flows.
President Trump announced 25% tariffs on Mexican and Canadian goods except for energy from Canada, which was to be taxed at 10% effective March 5. He has now given Mexico and Canada a one-month reprieve for goods covered by the North American trade agreement known as USMCA, which covers some oil imports. Oil that is not USMCA-compliant remains subject to the tariffs. According to a White House official, some 62% of Canadian imports were not USMCA-compliant, much of which are energy products. That percentage, however, could drop as importers comply with USMCA rules to secure tariff relief. Trump’s tariff relief applies to goods traded under the pact and not those eligible for USMCA, unless they become compliant. Companies will likely do the extra paperwork required by the USMCA to avoid the tariff, proving that the oil is from North America.
Canada and Mexico are currently the U.S.’s largest suppliers of imported oil and tariffs would lower those imports with OPEC+ and Latin America picking up some of the slack from Mexico’s lost exports and East Coast U.S. suppliers getting refined products from Europe to replace lost Canadian oil imports.
OPEC+’s announcement in early March resulted in Brent oil prices dropping as much as 3% to below $70 a barrel — the lowest since October. OPEC+ had resisted adding production because oil prices are too low for many members to cover government spending, and global markets are expected to see a supply surplus later this year. The International Energy Agency expects global oil markets to face a supply surplus, estimated at 450,000 barrels a day with flat output from OPEC+ as supplies from the United States, Brazil, Canada, and Guyana are expected to exceed demand growth.
The United States is the world’s top oil producer, with production continuously hitting records due to output from prolific shale basins due to hydraulic fracturing and directional drilling technology. The United States exports more oil than it imports. However, oil imports still play a significant role in the country’s refined product production. U.S. refineries are tooled to use heavy oil that the United States gets primarily from Canada and Mexico for gasoline and other refined products. About 40% of the oil processed at U.S. refineries is imported, and Canada and Mexico — the first and second greatest foreign oil suppliers to the United States, respectively — provide more than two-thirds of that oil. Despite that, oil flows would change if tariffs are placed on Canadian and Mexican energy imports.
While Canada’s oil may see the least disruption due to a lower tariff rate, it has another outlet for its oil exports via its recently expanded pipeline to its west coast that facilitates reaching Asian markets. It is expected that Canadian oil producers will divert about 200,000 barrels per day away from the United States to international markets via the Trans Mountain Pipeline if energy tariffs should prevail in the short term.
Mexico’s state oil company Pemex can redirect oil flows to buyers in Europe and Asia to respond to the tariffs, which should be doable, as there is demand for its heavy oil after stricter sanctions on Russia reduced Russian oil flows. However, Mexico would see less profit as it is more profitable for Mexico to sell oil to the United States than to ship it on long-haul voyages that can take as long as 60 days.
Mexico is the top buyer of gasoline and diesel exported by U.S. refiners. Almost 93% of Mexico’s fuel imports come from the United States. If Mexico retaliates to Trump’s tariffs as it is expected to do if tariffs resume, European and/or Asian suppliers could capture that market.
Trump’s tariffs on oil imports will first hit U.S. importers — the companies buying the oil and petroleum products from Canada and Mexico. Those companies are expected to pass along some of the higher costs to consumers, but Canadian producers or U.S. refiners may absorb a portion of the levies. Some refineries built to use heavy oil from Canada could retool to run much lighter and more expensive oil from U.S. producers, but at smaller profit margins. That is the case for the largest U.S. refiner, Marathon Petroleum, which could replace Canadian oil with lighter domestic grades at its six Midwest refineries. Valero, the second-largest U.S. refiner, has indicated that companies may cut processing rates by about 10% if the tariffs limit access to heavy, imported oil.
These events are not coming at a good time for U.S. refinery capacity as many refineries have shuttered. In contrast, others have turned to producing biofuels due to hefty subsidies, particularly in California. The Energy Information Administration indicates that two refineries are set to shut down this year — one in Houston, and the other in Los Angeles. The Houston facility, owned by LyondellBasell, which has already begun the shutdown process, has a capacity of 263,776 barrels per day. The Los Angeles refinery, property of Phillips 66, can process 138,700 barrels of oil per day. Closing these two refineries would reduce U.S. fuel production capacity by about 400,000 barrels per day. Under the Biden administration, the United States became the world’s second largest refiner, in terms of capacity, for the first time in history, falling behind China, the world’s current number one refiner. Refineries manufacture petroleum products from oil, adding value and creating good jobs and domestic security.
Goldman Sachs estimates 10% tariffs on all U.S. oil imports would cost US consumers $22 billion a year or $170 per household. U.S. gas prices are currently at about $3.10 a gallon on average nationwide, less than they were at the same time in the last three years, which could help to absorb the added cost from the tariffs in drivers’ minds. The Midwest expects significant price increases since they rely on Canadian oil imports. Maine, which is supplied by Irving Oil Ltd.’s Saint John refinery in Canada, is expecting local price spikes.
Conclusion
Trump’s actions regarding OPEC+ oil production and tariffs on oil from Mexico and Canada will impact oil and gasoline prices. OPEC+ has agreed to start increasing oil production next month and the announcement has brought down oil prices. On the other hand, tariffs on energy from Canada and Mexico — our two largest energy trading partners — would increase gasoline and diesel prices as the cost of oil imports from those two countries would be higher. It would also realign oil flows as Mexico may divert its oil exports to Europe and Asia and Canada may use its expanded Trans Mountain pipeline to ship more oil for export via its west coast. That means U.S. suppliers may purchase more oil and/or petroleum products from countries other than its neighbors.
