MW This is why Trump's Canada-Mexico tariffs threaten a spike in gasoline prices

By Myra P. Saefong

The U.S. is the world's largest oil producer, but it still needs crude from Canada and Mexico

The U.S. is the world's largest oil producer, but it still needs to import more crude oil than it makes. The majority of those imports come from Canada and Mexico, thanks to a mutually beneficial relationship among neighbors that may see its biggest shake-up ever as soon as next week.

The U.S. importing oil from Canada has been the "status quo" for decades, said Patrick De Haan, head of petroleum analysis at GasBuddy. Canada has been a "very reliable, stable partner," he added.

For parts of the interior United States that don't have access to Gulf ports - such as the Great Lakes, Midwest and Rocky Mountains regions - this has been a "really sure-fire way of getting oil on a regular basis," he said.

President Donald Trump has indicated that he planned to move ahead with imposing a 25% tax on all imports from Canada and Mexico, with the exception of a 10% tariff on Canadian energy imports. Those could take effect as soon as Tuesday March 4.

Read: Here are all the Trump tariffs hitting the economy in the coming weeks

That's likely to have an impact on the U.S., which imported around 6.28 million barrels per day of crude oil in 2022, more than the 3.58 million bpd it exported, according to the U.S. Energy Information Administration.

Canada was the top source of U.S. crude-oil imports at 60% that year, while Mexico came in a distant second at 10%, the EIA said. In terms of petroleum, which includes crude oil, all other petroleum liquids and biofuels, the U.S. has been a net exporter since 2020.

Refineries and crude grades

The U.S. need to import crude oil is a bit perplexing, given that the nation has produced more of it than any other country since 2018, thanks in part to the shale boom, which began in the mid-2000s.

The shale boom, however, is "extremely young when you look at the totality of how long we've been producing oil and how long we've been refining it," said De Haan.

BP's $(BP)$ refinery in Whiting, Ind., for example, was built in the late 1880s, and most of the country's 132 operable petroleum refineries as of January 2024 were built before 1977.

The amount of crude oil domestic refineries process "greatly exceeds" the amount the nation produces, according to the American Fuel & Petrochemical Manufacturers, a trade association. The U.S. produces a record amount of more than 13 million barrels of crude oil per day, it said, but its refineries need about 16.5 million barrels per day to maintain current production levels. Domestic refinery utilization stands at around 90%.

Many refineries need a heavier grade of crude oil - one that is more viscous than the light sweet crudes produced from U.S. shale - to "maximize flexibility" of gasoline, diesel and jet-fuel production, according to the AFPM.

The extremely complex refineries on the Gulf Coast were configured to run these cheaper barrels of heavy sour crude, which often have "high yields of advantaged products like diesel, jet fuel and marine oil," said Tom Kloza, global head of energy analysis at OPIS, which is a subsidiary of MarketWatch publisher Dow Jones. U.S. refineries can process light sweet crude, but it is more costly and can lead to a surplus of gasoline, he said. Light crude yields more gasoline than heavier crude.

In terms of cost, De Haan estimated that Canada's benchmark Western Canadian Select oil, based on a 10-year average, has generally traded at a discount of $10 to $15 a barrel to U.S. benchmark West Texas Intermediate crude (CL.1) (CLJ25). April WTI settled at $68.93 a barrel on Tuesday.

'Canada's oil has always been there, and it's always been there at a discount.'Patrick De Haan, GasBuddy

There hasn't been a need to adjust the process at the refinery level to refine different types of oil, De Haan said, because "Canada's oil has always been there, and it's always been there at a discount."

Shaking up the 'status quo'

Tariffs between the U.S. and one of its most significant trading partners were not an issue before, but with the proposed U.S. tariffs on Canada, the "shock waves are obviously significant, because nobody's ever threatened the status quo," De Haan said.

Still, when it comes to U.S. oil and gasoline prices at the pump, he said he wouldn't consider the impact on prices as significant, but rather as "notable."

Canada's oil market has benefited from its relationship with the U.S., too. Canadian oil has been sent to the U.S. at a discount because Canada has limited options and lacks the infrastructure to export its oil to other countries, De Haan said.

Gary Cunningham, director of market research at Tradition Energy, believes that the biggest concern when it comes to the potential oil tariffs is regional prices in the Midwest.

That region "relies heavily on Canadian crude to produce diesel and kerosene key to farming, as well as gasoline for everyday consumers," he told MarketWatch. "A marked increase for the input costs for refineries in Oklahoma and Illinois would filter into higher overall costs for many U.S. products that have strong harvest or transportation influences from motor fuels." Diesel is the primary fuel used in the agricultural sector.

OPIS's Kloza pointed out that while a 10% tariff on Canadian oil would equate to a surcharge of roughly $5.60 a barrel, the consensus view is that Canadian producers will have to "eat most of the tariff levy."

Kloza said that a key reason tariffs aren't really leading to a rise in crude prices is the belief that these "levies are likely to last hours or days, and not months or years." The world also has "about 5.5 million barrels per day of spare crude production capacity, and traders are not willing to chase prices higher."

At the same time, according to De Haan, there's a chance that a slowdown in the economy could partially offset the impact of tariffs, meaning that U.S. motorists might not feel their full effect.

It's hard to quantify what will happen, De Haan said, but motorists in regions such as the Great Lakes, upper Midwest and Rockies will probably pay somewhere in the ballpark of 10 to 25 cents a gallon more within days or weeks of the implementation of tariffs. On Tuesday, GasBuddy showed the average price for regular unleaded gasoline was $3.11 a gallon.

De Haan emphasized that there are still a lot of unknowns, such as whether Canada will retaliate, so the timing of a gas price increase isn't certain, but it is likely to come just in time for the summer driving season.

-Myra P. Saefong

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March 03, 2025 07:10 ET (12:10 GMT)

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