Industry experts suggest that inflationary pressures could deter President-elect Donald Trump from implementing his proposed tariffs on Canada, which threaten to disrupt oil markets and drive up fuel prices for U.S. consumers. Trump's plan, announced on social media, involves imposing a 25% tariff on imports from Canada and Mexico on his first day in office, a move that could violate the United States-Mexico-Canada Agreement (USMCA), a regional free trade pact.
Potential Consequences of the Tariffs
Daan Struyven, Co-Head of Global Commodities Research at Goldman Sachs, outlined significant potential ramifications for various stakeholders if the proposed tariffs materialize. U.S. refiners that depend on Canadian oil, especially those processing heavy sour crude from Canada, could face tighter profit margins. Consumers might bear the brunt of higher fuel prices due to increased costs passed down by refiners.
Moreover, Canadian oil producers could suffer revenue losses if they fail to find alternative markets for crude that would otherwise be exported to the U.S. "If we were to see a 25% tariff on Canadian energy exports, I think it could have some very significant ramifications for trade flows," Struyven said during an online conference.
Dependence on Canadian Oil
The U.S. imports significant volumes of Canadian crude oil, which reached a record 4.3 million barrels per day in July 2024, thanks to the expanded capacity of Canada’s Trans Mountain pipeline, according to the U.S. Energy Information Administration (EIA). Midwestern U.S. refiners, in particular, are designed to handle the heavy sour crude from Canada, making them more vulnerable to disruptions in trade flows.
Refiners would face challenges adapting to the lighter, low-sulfur sweet crude that is predominantly produced domestically, Struyven explained. These operational difficulties could further drive up costs for both refiners and consumers.
Integration of Energy Markets
Citigroup analysts also emphasized the interconnected nature of the North American oil and gas markets. "Absent carve-outs, this would increase costs for U.S. refiners and U.S. consumers," noted Citigroup’s energy research team, led by strategist Eric Lee. Mexico and Canada are deeply integrated with the U.S. in energy and auto industries, making a blanket tariff policy particularly disruptive.
Inflation Concerns
Goldman Sachs highlighted the unlikelihood of the tariffs being implemented as proposed, citing the Trump administration's stated goal of lowering energy costs. Trump cannot risk spiraling inflation, particularly with the 2026 midterm elections looming, said Viktor Shvets, a global strategist at Macquarie Capital. "I do not believe for a second that there will be a massive increase in overall tariffs because that will represent a tax on U.S. domestic manufacturers and exporters," Shvets told CNBC.
Shvets argued that Trump's tariff threats might serve as a negotiating tactic aimed at addressing other policy objectives, such as border security. This perspective aligns with the broader view that such tariffs are unlikely to materialize in their proposed form.
Canadian Concerns
Canadian officials and industry leaders have voiced their apprehensions about the potential tariffs. Lisa Baiton, CEO of the Canadian Association of Petroleum Producers, called for vigilance, stating, "As Canadians, we need to be eyes-wide-open on the President-elect’s promise for across-the-board tariffs."
Danielle Smith, premier of Alberta, Canada’s largest oil-producing province, acknowledged U.S. concerns about illegal border activities but urged the Canadian federal government to address these issues promptly. "Unnecessary tariffs" on Canadian exports could significantly harm Alberta's economy, she warned.
Strategic and Economic Implications
The looming possibility of tariffs underscores the intricate dynamics of North American energy trade. Both countries stand to lose if tariffs are implemented: the U.S. would face increased energy costs, while Canada would grapple with lost revenue and the challenge of finding alternative markets.
Industry watchers largely agree that the economic and political costs of such tariffs outweigh their potential benefits. The interdependence of the U.S. and Canadian energy sectors makes unilateral tariff policies not only economically detrimental but also diplomatically precarious.
Conclusion
While Trump's proposed tariffs on Canada threaten to disrupt oil markets and fuel inflation, experts believe these levies are unlikely to be enacted. Inflationary pressures, coupled with the deep integration of North American energy markets, create substantial barriers to implementing such measures.
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