Trump’s Tariff Plan Could Reshape North American Oil Trade
Introduction of Potential Tariffs on Oil Imports
Oil producers in Canada and Mexico are bracing for significant market disruptions as reports suggest U.S. President-elect Donald Trump may impose a 25% tariff on crude oil imports from the two countries. Sources familiar with Trump’s plans confirmed to Reuters that oil would not be exempt from the proposed tariff hikes, despite warnings from the U.S. oil industry about the policy’s potential to harm consumers, the industry, and national security.
Canada and Mexico: Key Suppliers to the U.S.
Canada and Mexico are the United States’ top petroleum suppliers, contributing 52% and 11% of gross imports, respectively, according to the U.S. Energy Information Administration (EIA). Ship tracking data from Kpler reveals that the U.S. accounts for 61% of Canadian waterborne crude flows and 56% of Mexico’s.
The newly expanded Trans-Mountain pipeline has further boosted Canadian exports, increasing shipments by 65% to 530,000 barrels per day (bpd) in 2024. However, both countries now face the challenge of redirecting these supplies should tariffs disrupt their access to the U.S. market.
Impact on Canadian and Mexican Oil Producers
If the tariffs are implemented, analysts predict Canadian and Mexican producers will be forced to lower prices and seek alternative buyers, particularly in Asia. Heavy high-sulfur crude, the primary export grade from both countries, is in demand at complex refineries in Asia but would require substantial discounts to remain competitive due to higher shipping costs.
“The Canadian producers, if they face export constraints and cannot reroute their barrels to other markets, may face deeper discounts and revenue losses,” said Daan Struyven, co-head of global commodities research at Goldman Sachs.
Mexican producers face similar challenges, with reduced export volumes already impacting their bottom line.
Challenges for U.S. Refiners
U.S. refiners, particularly those configured for processing heavy crude grades, may find themselves in a difficult position. Limited alternatives, such as Saudi Arabian heavy crude, and reliance on pipeline supply could restrict their ability to replace Canadian and Mexican imports.
“The impact is all on the heavy grades. What are the U.S. refiners going to do? Even Saudi Arabian Heavy crude is limited,” said a Singapore-based trader. “Either the producer or the refiner will have to absorb the tariffs,” he added, predicting higher costs across the board.
Shift Toward Asian Markets
Asian refiners, particularly in China and India, are expected to become key destinations for Canadian and Mexican crude should the tariffs take effect. LSEG analyst Anh Pham noted, “We are likely to see quite some volume going to China and India, where refiners’ configurations are able to refine the crude.”
Recent months have already seen a rise in Trans-Mountain pipeline exports to Asia, with Chinese refiners testing new Canadian grades. However, Mexican exports to Asia have decreased by 21% to 860,000 bpd, potentially limiting their ability to pivot.
Limited Opportunities in Europe
While Europe could absorb some displaced volumes, analysts believe the region is unlikely to become a major market for Canadian or Mexican crude. Christopher Haines of Energy Aspects explained, “Tariffs on Mexico would potentially free up some crude for Spanish refiners that take Maya, but Asia could easily absorb any volumes not sold into the U.S. Gulf.”
European refiners import minimal Canadian crude, averaging just 85,000 bpd, compared to 191,000 bpd from Mexico, most of which goes to Spain.
Economic Risks and Scepticism Over Implementation
Despite the far-reaching implications of the proposed tariffs, some traders and analysts remain skeptical that they will be implemented. Trump has previously used tariff threats as a negotiating tool, and the economic repercussions of such a move could deter action.
Imposing tariffs could increase costs for U.S. consumers and refiners, potentially driving inflation. This political and economic fallout may force the administration to reconsider.
Conclusion
The potential tariffs on Canadian and Mexican crude could significantly disrupt North American energy markets, forcing producers to redirect supplies and U.S. refiners to adapt to limited alternatives. While Asia stands to benefit from increased Canadian and Mexican oil flows, the broader impact on global trade and energy prices remains uncertain. As skepticism over the tariffs’ implementation lingers, stakeholders are preparing for a potentially transformative shift in the industry.