President Donald Trump’s threatened tariffs on the United States’ two largest trade partners—Canada and Mexico—have become a reality. Canadian imports will now face a 25% tariff, while Mexico has secured a 30-day pause. Even with a reduced tariff on Canadian crude, the added costs will make refining feedstocks more expensive for U.S. refiners, giving their European and Asian competitors a competitive edge.
Trump has picked tariffs as his favored trade policy weapon to balance a trade deficit the U.S. is running with the European Union—next on the tariff chopping block—and as a means of forcing U.S. neighbors to tighten border control with a view to stemming illegal immigration and fentanyl smuggling. The decision to impose the tariffs on Canada and Mexico has been widely criticized, with critics noting it would hurt American taxpayers, whom Trump promised cheaper fuel.
Canada warned as much early on. “Canadian energy and resources—including oil and critical minerals—underpin the long-term economic security and prosperity of both Canada and the United States to protect our energy security and reduce our reliance on the resources of non-like-minded countries,” Canada’s foreign minister, Melanie Jolie, told the Financial Times last month. She went on to warn the tariff push could force U.S. refiners to swap Canadian for Venezuelan crude in what would be an ironic twist.
Related: U.S. Natural Gas Prices Surge On Canada Tariffs, Massive Withdrawals
Canada is the biggest supplier of heavy crude to American refiners, exporting it at a rate of close to 4 million barrels daily, which makes it the biggest exporter of crude oil to the U.S. in general. Mexican crude oil exports north of the border are much smaller, at less than half a million barrels daily, but they still comprise the second-largest share of foreign oil in U.S. refiners’ mix.
According to analysts that Reuters spoke to in the wake of the tariff announcement, the tariffs will hit refiners, shrink their margins and eventually force production curbs—to the potential benefit of refiners in Europe and Asia because as local production of fuels shrinks, imports would have to increase in what seems to be another ironic twist of the Trump tariff crusade.
“Less U.S. diesel exports would support European margins, while more export opportunities may remain in the strongly pressured gasoline market,” Vortexa chief economist David Wech told the publication, adding that the tariffs would be “overall a positive for European refiners, but likely not for European consumers,” as they would squeeze the local supply of fuels.
What could further complicate the situation is Trump’s plan to give the European Union the same tariff treatment he just gave Mexico and Canada, which means European fuel exports to the U.S. would also fall victim to tariffs. This would affect prices as well, both in Europe and the United States—and, of course, prompt retaliatory measures as it did from Canada.
Justin Trudeau already said Canada’s federal government would respond in kind to Trump’s tariffs with a 25 levy on U.S. imports worth some $21 billion, effective Tuesday, and then follow with extending the levy to another $85 billion worth of imports. He also suggested export curbs could be added to the retaliation. “There are a number of different industries and regions of the country that can have greater leverage over the US,” Trudeau said, as quoted by Argus. “One thinks of the oil industry for example.”
Meanwhile, Asian—and, more specifically, Chinese—refiners will be more than happy to take in Canadian and Mexican oil that has become too expensive for U.S. refiners, according to analysts interviewed by Reuters. One analyst, founder of Next Barrel, told the publication crude oil sellers would be forced to discount their crude in order to find alternative buyers to U.S. refiners—a most welcome development for Asian refiners who appreciate a bargain.
Another commentator pointed out that in China, demand for refinery feedstocks is about to increase, so it is an opportune moment for refiners there to stock up on discount-heavy from Canada—the expanded Trans Mountain pipeline will come in handy in this respect.
Trump himself has admitted there will be a negative impact from the tariffs on Americans, describing it as “short term” and adding, “I don’t expect anything dramatic,” and “They owe us a lot of money, and I’m sure they’re going to pay.” Trump also confirmed that the European Union is next, but did not specify a date.
“We may have short term some little pain, and people understand that. But in the long term, the United States has been ripped off by virtually every country in the world,” the U.S. president said, as quoted by Reuters. Indeed, the whole tariff spat could turn out to be a short-term thing as Trump has said he would talk to Justin Trudeau and Claudia Sheinbaum this week. If they fail to reach a mutually beneficial agreement, however, it’s win time for refiners in Europe and Asia—until they get hit by tariffs, too.
By Irina Slav for Oilprice.com