The Trump Policy That Would Be Really Bad for Oil Companies

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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Here is an excerpt from our conversation:

Jesse Jenkins: I want to come back to what would happen if Trump did impose these tariffs, but before we get there, I think it’d be helpful just to understand a little bit more about what life looks like on either side of the border.

You mentioned that Canada has become dependent on the U.S. market for export. My understanding is that the refineries in the Midwest — because they are now used to just using a single source of crude rather than, say, a coastal refinery that might have to be more flexible because they could get crude from Venezuela one day and from Saudi Arabia another day, or something with different qualities. My understanding is that the refineries in the Midwest have become pretty specialized and optimized around refining specifically Canadian crude. Is that correct? And if so, what, what are the features there? How challenging would it be for refiners to switch to other supply in the U.S. if all of a sudden Canadian crude becomes 25% more expensive?

Rory Johnston: Yeah, and you’re absolutely right. So — and I had mentioned earlier, that one aspect of this entrenched relationship is this physical infrastructure, and this other point is this business mode optimization around the specific blend of crude.

Now, for those that aren’t aware, crude oil is not one thing. It is an endless cornucopia soup of hydrocarbons that, generally, we can divide along a two-part axis. On the one hand you have gravity or density, or weight of the crude. And then the other side you have sulfur concentration. Sulfur concentration is always bad because, you know, sulfur’s bad — acid rain, we want to get rid of that. So that costs money to extract. And then the density or the gravity, we talk about this in API gravity. The U.S. crude, like shale crude — that’s often what we call light, tight oil — is often 40 degrees API gravity or higher. It’s very, very, very light. That’s lighter even than WTI, the benchmark itself, whereas Canadian Western Canada select, which is the kind of primary export blend of Canadian crude, is at 22 degrees gravity. Way, way, way, way heavier. One of the heaviest major marketed crudes in the world and the largest, heaviest, marketed grade in the world in terms of size of the particular flow.

So what happens is, well, when you look at the actual blend that is consumed by U.S. refineries, it’s not that they consume a heavy blend of crude. Their blended refinery slate is more of a medium grade. But they have so much light crude, particularly from areas like the North Dakota Bakken, that they need heavy crude to blend and get that kind of medium grade in the middle.

So — to your point, though — that needs to happen. And particularly if you want to, let’s say, keep consuming more U.S. domestic crude in the United States, then you need heavy crude to blend with it to meet those refinery specifications.

This episode of Shift Key is sponsored by …

Intersolar & Energy Storage North America is the premier U.S.-based conference and trade show focused on solar, energy storage, and EV charging infrastructure. To learn more, visit intersolar.us.

Music for Shift Key is by Adam Kromelow.