The US may find it difficult to replace crude oil shipments from Canada and Mexico if President-elect Donald Trump imposes hefty tariffs on both countries.
In a much worse scenario, refineries in the US may have to borne heavy losses to import oil from the two countries.
A lot has been speculated after reports claimed that Trump will likely impose a 25% tariff on goods imported from Canada and Mexico.
What makes things interesting is that these reports have claimed the tariffs will also be applicable on crude oil imported from these two countries.
Shipments from Canada and Mexico can’t be replaced
Oil imports from these two countries, especially Canada cannot be replaced in terms of quality or quantity, according to experts.
According to data from the US Energy Information Administration, the country imported 6.64 million barrels per day of crude oil in the first eight months of 2024.
Canada accounted for 4.08 million barrels a day and Mexico for 478,000 barrels per day of the total barrels imported in the first eight months this year, the data showed.
“Canada is therefore by far the US’s most important oil supplier, Mexico ranks second,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
President-elect Trump is in favour of more production of oil and gas in the US.
However, “It is impossible to replace these volumes in the short term by increasing domestic production, especially as the light, low-sulphur US shale oil is not an adequate substitute for the heavy, sulphur-rich types of oil from Canada and Mexico anyway, Fritsch said.”
Oil production is already near record levels in the US. According to EIA’s data, oil production was at 13.513 million barrels per day in the week ended November 29.
The US is both the largest producer and consumer of crude oil.
Limited options for US refineries
“Tariffs do not change supply and demand for crude, they just limit the choices for US refiners,” Rohit Rathod, senior oil market analyst at Vortexa, told Invezz.
Rathod said that refiners could backfill the Canadian barrels by either exporting less of US sweet crude, which will make it difficult to the refineries optimally.
Another expensive option is to import Latin American crude as well as long-haul barrels from the Middle East.
Rathod noted:
The biggest hurdle here is the US Midwest refining system which relies mainly on Canadian crude and also lacks sufficient access to US Gulf Coast for seaborne barrels as replacement.
In the US, heavy grades of crude oil are produced in the Gulf of Mexico, where production has been stagnating.
According to Commerzbank, importing crude oil from other countries is not possible.
“Venezuela should be ruled out as a potential supplier of heavy crude oil for obvious reasons. The same applies to Russia and Iran.,” Fritsch said.
US oil imports from Saudi Arabia could be expanded.
“However, even at peak times around 20 years ago, these were only half as high as oil imports from Canada today.
In addition, the problem of varying quality also arises here,” Fritsch added.
Heavy toll on refineries and consumers
If Canadian and Mexican oil shipments cannot be replaced, US refineries will have to pay the punitive tariffs or suppliers from the two countries will have to significantly reduce their prices, according to the German bank.
“It will probably come down to a combination of both,” said Fritsch.
This would lead to a rise in the cost of oil processing in the US, and would also make fuel prices costlier for consumers.
Especially, in the US Midwest, where refineries are heavily dependent on Canadian shipments, gasoline prices will rise.
“This will lead to higher gasoline prices in these markets (US Midwest) and poor refinery margins for refiners that could lead to potential closures as well,” Rathod said.
The US consumers are very sensitive about gasoline prices. It is therefore very difficult to assume that the government will impose such a hefty tariff on Canada and Mexico.
Rathod said that the possibility of tariffs on Canada and Mexico is highly unlikely.
Echoing the same tone, Commerzbank’s Fritsch said that it is unlikely that the US would impose such a tariff “ because otherwise Trump’s aim of ensuring cheap energy in the USA would be jeopardised”.
Meanwhile, Rathod believes that if indeed Trump goes through with these tariffs, Mexico won’t be as badly affected.
“Mexico can avoid these tariffs by exporting to European and Asian buyers and free up some of the Middle East barrels going into these markets,” he said.
For Canadian sellers they will have to discount their crude as they have limited outlets and the US being their largest outlet.
Additionally, “TMX (Trans Mountain Expansion pipeline) could help somewhat but it is constrained by vessel restrictions at Vancouver as well as pipeline capacity. So to clear their barrels, Canadian sellers will have to offer discounts to US buyers”, Rathod added.
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