(Bloomberg) -- Americans love driving and doing so on the cheap, but newly imposed tariffs on oil imported from Canada and Mexico are likely to raise gasoline prices around the US and cause headaches for the refiners responsible for making the fuel.
The cost of living is top of mind right now for US consumers, whose long-term inflation expectations are at the highest level in almost three decades on concerns that President Donald Trump’s tariffs will lead to higher prices. Although fuel is a small portion of the average American household’s budget, it’s a highly visible and politically sensitive expense that drivers are reminded of every time they fill up at the pump.
What tariffs did President Trump impose?
Trump announced on March 3 that he would impose duties of 25% on imports from Canada and Mexico, except for energy products from Canada, which will be taxed at 10%. The tariffs, which took effect March 4, have US refiners on edge, as they depend heavily on imported crude oil from those two countries to make gasoline and other fuels.
Who pays for tariffs on US energy imports?
The responsibility for paying the tariffs legally falls to the importers, in this case the US companies buying the oil and petroleum products from Canada and Mexico. The companies are expected to pass along at least some of the higher costs to consumers, but a portion of the levies could be absorbed by either Canadian producers or US refiners.
How reliant is the US on oil imports from Mexico and Canada?
Although the US exports more oil than it imports, oil imports still play a vital role in the country’s energy supply. That’s partly because US refiners rely on the heavy crude produced by Canada and Mexico to make gasoline and other fuels.
Some 40% of the crude oil processed at US refineries is imported, and Canada and Mexico — the No. 1 and No. 2 foreign suppliers of oil to the US, respectively — together deliver more than two-thirds of that oil.
Both Canada and Mexico expanded their oil exports in recent years after the first Trump administration imposed a de facto ban on imports from Venezuela. Refineries love the sludgy oil produced by Mexico and Canada both because it’s cheaper than lighter grades and because over the years they invested billions of dollars in equipment to squeeze more higher-value fuels, like jet fuel, out of the stuff.
Landlocked refineries in the Midwest and the Rockies are especially vulnerable to tariffs, because they depend on oil shipped via rail and pipeline from Canada.
How will the tariffs affect fuel prices in the US?
If crude costs go up, so do fuel prices. Goldman Sachs estimates 10% tariffs on all US crude oil imports would end up costing US consumers $22 billion a year — that’s $170 per household. Canada and Mexico account for 70% of those imports. The cost would be felt most on the West and Atlantic coasts, according to the bank’s research analysts.
The Midwest is also expected to see significant price increases. Local spikes are likely in places like Maine, which is supplied by Irving Oil Ltd.’s Saint John refinery in Canada. In February, the company issued a statement saying the tariffs would cause price increases for US customers.
Tariffs might not be in every consumer’s mind right now because US gas prices are at $3.10 a gallon on average nationwide, cheaper than they were at the same time in the last three years. But in the long run consumers expect that tariffs are going to weigh on their finances.
Can US refiners replace the missing imports?
The short answer is yes, but at a cost. Some refineries built to handle sludgier oil from Canada now might seek to run much lighter — and more expensive — oil from the US. That likely means smaller profit margins.
The largest US refiner, Marathon Petroleum, has said it could replace Canadian oil with lighter domestic grades at its six Midwest refineries. Valero, the second-largest US refiner, has said companies could have to cut processing rates by about 10% if the tariffs limit access to heavy, imported oil.
Are foreign trade zones a way out of tariffs?
There has been discussion of whether the many US refiners operating in so-called foreign trade zones, or FTZs, would get an exemption from tariffs. They would be entitled to it as long as they export the fuels produced with the imported oil. That would offer a way out for refiners with access to export markets, but US exports of gasoline, diesel and jet fuel only account for a little more than 10% of total US fuel production.
How have Canada and Mexico responded to Trump’s tariffs?
Canada immediately hit back against the US tariffs, announcing phased levies on about $100 billion worth of US goods. Mexican President Claudia Sheinbaum vowed to retaliate, saying she would announce measures on March 9.
In the hopes of averting the levies altogether, both countries had taken extra steps to address Trump’s criticism about the flow of both undocumented immigrants and drugs across America’s borders. Canadian Prime Minister Justin Trudeau appointed a “fentanyl czar” and listed seven organized crime groups as terrorist entities. Mexico arrested a drug cartel boss and stepped up efforts to seize narcotics heading to the US. The flow of migrants across the southern border has slumped.
How might Mexico’s oil industry respond to tariffs?
Mexico’s state oil company Pemex declared it can redirect flows of crude oil to clients in Europe and Asia to respond to tariffs. That should be doable, as currently there is healthy demand for the type of heavy oil the country produces after tougher sanctions on Russia reduced oil flows from there. But margins would likely suffer, because it’s more profitable for Mexico to sell oil to its next-door neighbor than sending it in long-haul voyages in trips that can take as long as 60 days.
Mexico is the top buyer of gasoline and diesel exported by American refiners. Close to 93% of Mexico’s fuel imports came from the US. If Mexico retaliates, that may open the doors for European and even Asian suppliers to step in.
Can Canadian oil drillers survive without the US market?
Canadian drillers are in real trouble compared with those in Mexico, because they wouldn’t be able to easily find a new home for oil currently shipped to the US. Canada also exports oil to Asia, but increasing the volume would be difficult: A single outlet, the Trans Mountain Pipeline, carries crude from the oil fields of Alberta west to ports on the country’s Pacific coast, and the line is approaching capacity.
That’s why analysts and some refiners say that Canada doesn’t have alternatives to bearing the brunt of the cost of tariffs. Levies could also put a damper on the country’s plan to keep expanding production.
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