Among the executive orders to be signed on day one of his incoming presidency, the maverick US President-elect Donald Trump has threatened to impose a 25 per cent tariff on all imports from Canada and Mexico. The tariff would also be levied on crude oil until these countries stop the inflow of illegal “immigrants and drugs fentanyl into the US”.

Canada and Mexico are the two top sources of US crude oil imports, accounting for around a quarter of the total oil US refiners process into fuels like gasoline and heating oil, according to the US Department of Energy.

The US imported about 5.2 million barrels per day (bpd) of crude and petroleum products from Canada and Mexico in 2024. Out of it, more than 4m barrels of oil came from Canada, and data from the US government’s statistical arm, the Energy Information Agency, showed that, as per a Canada Energy Regulator report in August, 97pc of Canadian crude oil exports went to the US. Most of this oil travels through pipelines to US oil refineries in the Midwest.

Canada is deeply dependent upon the US for its oil exports. If President-elect Trump goes ahead with his “adventure”, it could be disastrous for Canada and its oil-producing provinces. When the expansion of Canada’s Trans Mountain pipeline, carrying crude from the oilfields of Alberta to the refiners on the US west coast materialised earlier this year, the US imports of crude oil from Canada hit a record high of 4.3m bpd this July.

US tariffs on Canadian crude could raise global prices, hurting importers like Pakistan

Since then, refiners on the US West Coast have become an even bigger buyer of Canadian oil. Analysts say that the US west coast refineries are adapted to process heavy sour crude imported from Canada. These facilities, especially in the US Midwest and Gulf Coast, have invested heavily in equipment to process Canadian heavy crude.

This reliance means that imposing tariffs could increase costs for these US refiners and push fuel prices higher for American consumers — an outcome Trump is unlikely to favour, given his focus on affordability.

Although sources told Reuters that Trump does not intend to exempt crude oil from the proposed tariffs, oil pundits are confused about whether Trump’s threat is a bargaining chip in negotiations with its neighbours or whether he is serious about it.

The move also has some negatives for the US. Toronto’s Commodity Context analyst Rory Johnston emphasised, “Prospects of Trump imposing tariffs on Canadian barrels are extremely slim.”

America’s top oil trade groups are also saying that imposing tariffs would be a mistake. “Across-the-board trade policies that could inflate the cost of imports, reduce accessible supplies of oil feedstocks and products, or provoke retaliatory tariffs have the potential to impact consumers and undercut our advantage as the world’s leading maker of liquid fuels,” said a spokesperson for the American Fuel and Petrochemical Manufacturers group, which represents oil refiners.

The American Petroleum Institute, meanwhile, told the media, in response to a question about the threatened tariffs, that keeping up the trade of energy across borders is important.

“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 API spokesperson Scott Lauermann.

Oil industry analysts and traders also warned the move would likely raise oil prices for US refiners, squeezing margins and driving up the cost of fuel.

The stakes are high for Canada, the world’s fourth-largest oil producer. The tariff promise has sparked alarm here. The Canadian Chamber of Commerce has warned that such a policy could take a $30 billion toll or even more on the Canadian economy.

With the US “almost” being the sole buyer of Canadian crude, refiners in the United States are offered a considerable price discount. The discount is somewhere around 20pc. This vulnerability stems from Canada’s limited pipeline infrastructure and export options.

If the tariff is levied, Canadian oil producers would be left with few options. Without alternative markets or sufficient transportation capacity to reach global buyers, much of Alberta’s oil would face bottlenecks. Much of this oil will remain stranded.

That would result in a gaping hole in the total global supplies available. On a global scale, this could also be read from a different perspective. If the US purchase of Canadian crude heavy oil is reduced, some other producers will step in to meet the US requirements. However, that would result in tightness in the global markets, as Canada will not be able to send its oil to other export destinations.

This could result in higher crude oil prices globally. For oil importers, Pakistan included, that will be bad news, come Jan 20.

Published in Dawn, The Business and Finance Weekly, December 2nd, 2024