The Trump Policy That Would Be Really Bad for Oil Companies
Jan 29, 2025
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Rory Johnston, an oil markets analyst and lecturer at the University of Toronto, dives into the potential fallout from President Trump's proposed 25% tariffs on Canadian and Mexican crude oil imports. He explains how these tariffs could severely impact U.S. refineries that rely on Canada’s heavy oil. The discussion covers the historical evolution of U.S.-Canadian oil trade, the environmental implications of different extraction methods, and how grassroots activism shapes pipeline developments. Johnston also addresses the economic consequences for consumers and refiners.
President Trump's proposed tariffs on Canadian crude oil could lead to higher gasoline prices and strain Midwestern refineries heavily dependent on this supply.
The evolving U.S.-Canadian oil trade relationship underlines a complex network of specialized refineries that may face costly adaptations due to tariff-induced changes.
While tariffs could reduce Canadian crude imports and force shifts toward alternative fuel sources, their long-term effectiveness in achieving climate goals remains questionable.
Deep dives
Impact of Trump's Tariffs on Energy Prices
President Trump's proposed 25% tariffs on all imports from Canada and Mexico, including crude oil, could significantly affect energy prices in the United States. This move may lead to increased gasoline prices at the pump, particularly in the Midwest battleground states that were crucial to Trump's election victory in 2024. Analysts suggest that a rise in oil prices could negatively impact consumers while paradoxically affecting greenhouse gas emissions by encouraging a shift away from reliance on Canadian crude. The situation raises questions about the complexities of energy trade and international relations between the U.S. and Canada.
The Integration of Oil Transportation Infrastructure
The movement of oil across North America is primarily reliant on a network of refineries, pipelines, and export terminals that have evolved significantly over the years. Increased oil production in North Dakota and Alberta has led to a reversal in pipeline flow, with Canadian crude becoming a major supply source for Midwestern refineries. These refineries have specialized their operations to handle Canadian crude, making it difficult for them to switch to alternative sources without incurring significant costs. This established infrastructure creates a lasting dependency on Canadian oil, complicating the implications of potential tariffs.
Specialization of Midwestern Refineries
Midwestern refineries have optimized their operations to process specific blends of crude oil, particularly Canadian grades, due to their compatibility with existing refining equipment. This specialization creates a dilemma: if Canadian crude is suddenly subjected to tariffs, these refiners may struggle to adapt to alternative crude blends. The economic investments made to accommodate heavy Canadian oil also mean that switching to lighter crudes would not only be costly but could also necessitate an overhaul of the existing refining process. Consequently, the decision to implement tariffs could further complicate the energy market and increase operational inefficiencies.
Potential Unintended Consequences of Tariffs
The imposition of tariffs on Canadian crude might initially seem to threaten energy demand and reduce imports, but it could lead to unexpected outcomes in greenhouse gas emissions. Higher production costs due to tariffs may force refiners to decrease output, leading to reduced demand for Canadian crude. This scenario might create incentives for consumers to seek more efficient or alternative fuel sources, mirroring some effects similar to a carbon tax. However, industry experts argue that the long-term repercussions may be less sustainable, viewing tariffs as a less effective route for achieving energy policy goals when compared to direct climate solutions.
Canada's Evolving Energy Export Strategy
The prospect of tariffs has led to discussions in Canada about diversifying its energy export strategies and potentially reducing reliance on U.S. markets. The recent political climate and infrastructural challenges may have shifted perspectives on pipeline projects, prompting consideration of alternative export routes to global markets. The threats of tariffs underline the vulnerability of Canadian crude exporters, leading to a possible reevaluation of their long-standing trade arrangements. As Canada seeks to insulate itself from U.S. policy fluctuations, the potential for increased energy independence may reshape North America's energy landscape.
On February 1 — that is, three days from now — President Donald Trump has promised to apply a tariff of 25% to all U.S. imports from Canada and Mexico, crude oil very much not excepted. Canada has been the largest source of American crude imports for more than 20 years. More than that, the U.S. oil industry has come to depend on Canada’s thick, sulfurous oil to blend with America’s light, sweet domestic product to suit its highly specialized refineries. If that heavy, gunky stuff suddenly becomes a lot more expensive, so will U.S. oil refining.
Rory Johnston is an oil markets analyst in Toronto. He writes the Commodity Context newsletter, a data-driven look at oil markets and commodity flows. He’s also a lecturer at the University of Toronto’s Munk School of Global Affairs and Public Policy and a fellow with the Canadian Global Affairs Institute and the Payne Institute for Public Policy at the Colorado School of Mines. He previously led commodities market research at Scotiabank. (And he’s Canadian.)
On this week’s episode of Shift Key, Jesse and Jillian attempt to untangle the pile of spaghetti that is the U.S.-Canadian oil trade. Shift Key is hosted by Jesse Jenkins, a professor of energy systems engineering at Princeton University, and Jillian Goodman, Heatmap’s deputy editor. Robinson Meyer is off this week.
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