Tariffs on Canadian imports could drive up US fuel prices

US oil producers have warned that Donald Trump’s plan to impose tariffs on Canadian imports will drive up US fuel prices, as the US president-elect’s threats hit global markets. Trump proposed late on Monday a 25% tariff on all imports from Mexico and Canada, accusing the US’s closest neighbours of failing to tackle illegal migration and drug trafficking. Canada’s oil industry, which supplies more than half of US crude imports, would be among the industries hit hardest. Producers warned that US consumers would feel the repercussions should imports slide and prices rise.

A 25% tariff on oil and natural gas would likely result in lower production in Canada and higher gasoline and energy costs to American consumers while threatening North American energy security. The levies could be imposed using executive powers that would override the USMCA, the free trade agreement Trump signed with Canada and Mexico during his first term as president. The supply chains and economies of the three countries have become deeply integrated in the 30 years since they first set up a trilateral trade agreement, ties that could be disrupted by tariffs or a trade war.

Canadian Prime Minister Justin Trudeau called Trump on Monday night as Ottawa scrambled to respond to the announcement. Mexico’s President Claudia Sheinbaum suggested the president-elect’s plan could escalate into a tit-for-tat trade war. On Tuesday morning, the Mexican peso shed 2.3% against the US dollar, adding to a sharp depreciation this year, while the Canadian dollar fell to a four-year low.

Trump also threatened this week to impose an extra 10% tariff on Chinese goods, a move that Beijing’s state television CCTV labelled “irresponsible”. China has sought to present itself as a guardian of open trade, despite accusations of heavily subsidising its manufacturers and maintaining tight barriers on international companies’ access to parts of its domestic market. “Economic globalisation is an irreversible historical trend,” said vice-president Han Zheng.

Despite being the largest oil producer in the world, the US imports large amounts of crude which is converted in its refineries into fuel and other fueleum products. About 40% of the crude refined in the US is imported, with 60% of that coming from Canada and 11% from Mexico.

The American Fuel and Petrochemical Manufacturers, the main industry group representing US refiners, urged politicians “to veer clear of any policies that could disrupt America’s energy advantage.” “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 potential to impact consumers and undercut our advantage as the world’s leading maker of liquid fuels,” an AFPM spokesperson said.

US refiners, especially in the north of the country, rely on imports of Canadian crude, which is much heavier than the type of oil produced in the Texas oilfields that drives US output. Analysts say local producers would struggle to plug the gap if Canadian oil was restricted. If tariffs are applied to oil imports, the first and primary direct effect will be higher US pump prices and weaker US refining margins given a higher cost of crude feedstock — much of which still needs to be imported and more than half of which comes from Canada,” said Rory Johnston at Commodity Context, a Toronto-based energy consultancy.