(Bloomberg) -- US motorists should brace for a hike in gasoline prices under the incoming Trump administration plans to slap tariffs on imports of products from Canada and Mexico.
Together, Canada and Mexico supply seven out of 10 oil barrels imported by the US. Most of those flow to fuel makers in the Midwest, and some also head to the world’s largest oil refining hub on the Gulf Coast. Earlier this week, President-elect Donald Trump said he’s set to impose a 25% tariff on “ALL products” from Canada and Mexico.
The extra costs would send gasoline prices in the Midwest up by as much as 50 cents a gallon during summer’s peak driving season, said Patrick De Haan, head of petroleum analysis at GasBuddy.
Trump’s trade plans run in contrast to another goal the incoming president has made of cutting domestic energy costs and bringing the cost of gasoline down below $2 a gallon.
“It’s not a pretty situation,” De Haan said in a phone interview. “It’s actually counter to Trump’s stances on deregulation for the oil industry, and it’s very negative for refiners.”
The risk of rising prices underscores how the US is still dependent on imports of crude oil used to make gasoline and diesel. Even Trump’s vows to “frack, frack, frack” on America’s shale patches wouldn’t do much to ease that situation. Domestic output mainly consists of a grade of crude known as light sweet oil, but the nation’s refiners need a variety known as heavy crude to produce fuel.
That highlights why even as US oil production has soared to record levels, the nation still needs imports. Last year, fuelmakers imported 6.5 million barrels a day of oil — equivalent to the production of Iraq and Kuwait combined. The amount accounted for 40% of crude refined in the country.
Tariffs would renew fears of inflation and could potentially hit hard US fuelmakers at a time when margins are waning, a reversal of previous years when a pandemic and the Russian invasion of Ukraine roiled markets and boosted profits.
“Canada and Mexico are our top energy trading partners and maintaining the free flow of energy products across our borders is critical for North American energy security and US consumers,” said Scott Lauermann, a spokesman for the American Petroleum Institute, the US oil industry’s largest trade group.
Among the largest buyers are BP PLC, Exxon Mobil Corp. and top US refiner Marathon Petroleum Corp. The list also includes Mexico’s state oil company Pemex and Saudi Aramco’s Motiva, both owners of refineries in Texas.
Refiners in the upper Midwest, known as the PADD 2 market, get about 75% of their crude from Canada and would be most affected if Trump makes good on his threat, said Bob McNally, president of Rapidan Energy Group and an adviser in the George W. Bush administration.
“Canada and PADD 2 refiners are inextricably linked, with few options to divert and substitute,” McNally said in an interview. Rapidan assigned 25% odds Trump would go through with the plans he announced this week.
The imposition of tariffs on imports of crude oil are unlikely to happen, said David Oxley, a commodities economist at Capital Economics. But if they did happen, “they would probably result in lower oil production in Canada and Mexico, increased US gasoline prices, and could lead to a tightening in the global oil market over the medium term,” he said in a report.
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