Mexico’s President Claudia Sheinbaum has announced that U.S. tariffs are on hold for one month after she held talks with President Trump and pledged to send 10,000 troops to the border to fight drug trafficking. Trump also spoke to Canadian Prime Minister Trudeau to discuss the punitive tariffs, saying that Ottawa has “misunderstood” the situation. Over the weekend, Trump slapped Canada and Mexico with duties of 25% and China with a 10% levy. Oil flows facing tariffs represent 44% of U.S. oil product imports, 69% of crude oil imports and 81% of heavy crude oil imports. Last week, Trump engaged in his usual isolationist bluster, claiming that the U.S. does not need Canadian commodities including oil and lumber. “We don’t need anything they have. We have unlimited Energy, should make our own Cars, and have more Lumber than we can ever use. Without this massive subsidy, Canada ceases to exist as a viable Country,” he said while speaking at the World Economic Forum.
However, the experts have pointed out that Trump needs a reality check.
“It’s not factually correct,” Richard Masson, an executive at the University of Calgary’s School of Public Policy, told CTV News. “They do need our oil. We ship diluted bitumen, so four million barrels a day go to the states; more than two million barrels a day of that is diluted bitumen. It goes to refineries that are specifically configured to process it, especially in Minneapolis, Chicago and Wood River. That’s why they rely on it so heavily. So, the first part is hopefully we can talk to him and educate him if he doesn’t understand it. I’m sure that the big refiners in the U.S. are doing that now. But if it turns out that he’s going to put a tariff on it, then our challenge will be what happens to overall demand.”
Similarly, commodity analysts at StandardChartered have painted a dire picture of the situation, saying oil buyers in the Midwest will almost certainly pay the price of the tariffs thanks to the limited substitutability of Canadian crude with other oils resulting in strong pass-through to retail prices.
According to the analysts, the U.S. imported ~ 6.6 million barrels per day (mb/d) of crude oil in the first 10 months of 2024, of which 4.0 mb/d was heavy oil for use in upgraded refineries with cracking units. Canada provided 75% of U.S. heavy crude oil imports in 2024, with its market share having steadily increased since 2000, squeezing outflows from Mexico, Venezuela and Colombia. Some 80% of Canada's crude production flows downstream to U.S. refiners, with U.S. imports of Canadian crude reaching a record high of 4.42M bbl/day in the week ending January 3, according to the U.S. Energy Information Administration.
Unfortunately for Midwest refineries, heavy oil cannot easily be substituted with the light oil that makes up most of U.S. shale oil production. StanChart has pointed out that such a switch would create a significant loss of optimization in the highly expensive cracking units that require feed from vacuum distillation of the heavy residual obtained by simple distillation. Canada has supplied 99.89% of all heavy imports into Midwest refineries over the past decade; the low substitutability of this flow implies that a tariff would largely feed through to local retail prices. Refiners will also have to cut runs due to the loss of refinery optimisation.
And, the increase in fuel prices would be substantial: According to GasBuddy analyst Patrick De Haan, consumers in the Midwest could end up paying ~10% extra for their gas if Trump goes ahead with his tariffs. Tom Kloza at the Oil Price Information Service has predicted that the tariffs could raise gasoline prices by $0.35/gal in parts of the country if the tariffs were passed completely along to consumers.
Meanwhile, StanChart has predicted that Mexico’s exports to the U.S. are likely to all but cease, with oil being rerouted into Asia and Europe. Last month, the European Union and Mexico agreed to a revamped free-trade agreement days before Trump began a second term. Mexico, in particular, pushed hard to revamp the trade deal with the EU ahead of Trump’s inauguration as a way to show strength before the review of the US-Mexico-Canada trade agreement, known as USMCA. The U.S. is, by far, Mexico’s biggest trade partner, accounting for 83% of Mexico’s trade relationship. Trump has criticized the EU’s trade practices and said he would impose duties on exports by the bloc. He’s also said he’d impose 25% tariffs on goods from Mexico.
“This landmark deal proves that open, rules-based trade can deliver for our prosperity and economic security, as well as climate action and sustainable development,” European Commission President Ursula von der Leyen said in a statement.
By Alex Kimani for Oilprice.com
