Since his re-election, President Trump has repeatedly threatened to impose big tariffs on imports from Canada and Mexico.
And in recent days, he’s made it clear: Yes, he really means all imports.
“We don’t need them to make our cars, we make a lot of them. We don’t need their lumber because we have our own forests,” he told Davos attendees last week. “We don’t need their oil and gas, we have more than anybody.”
The president is mistaken about the American fossil fuel industry — at least in its current structure. Even though the United States is the world’s No. 1 producer of oil and natural gas, the industry really doesdepend on oil imported from its neighbors, especially Canada. If Trump makes good on his threats to tariff oil imports from Canada and Mexico, then he will cost the American oil and gas industry tens of billions of dollars while causing gasoline prices to rise across much of the country.
That’s because not all petroleum is created equal. The type of crude that oozes out of wells in Alberta and Saskatchewan is not identical to what’s extracted by frackers in Texas and Oklahoma. But the types of petroleum now produced in Canada and in America pair especially well together — meaning that if the price of Canadian oil goes up, then American refineries, as well as American consumers, will pay the price.
That could hurt the president’s ability to fulfill one of his core promises. In his inaugural address, Trump promised to “rapidly bring down costs and prices” in part by fighting “escalating energy costs.” Levying tariffs on Canadian oil imports would likely raise energy prices.
But it could have more complicated environmental effects. Western Canadian petroleum has a higher carbon intensity than other crude oils, and American climate activists fought last decade to keep it from entering the United States. Trump, counterintuitively, could succeed more thoroughly than they did.
To understand why, you have to know a little bit of chemistry — and a bit of history, too.
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A brief digression
We often talk about oil as an homogenous and fungible commodity, but that’s not really true. In reality, oil and natural gas usually come out of the ground as a slurry of hydrocarbons.
A hydrocarbon is a chain of hydrogen and carbon atoms bonded together. Sometimes those chains are relatively short — as in methane, the major component of natural gas — and sometimes they’re longer — as in octane, a liquid and a major component of gasoline. As the number of carbon atoms keeps growing, the substance starts to get waxier until the chains get absolutely enormous and become the kind of molecule you find in coal. Nitrogen, oxygen, and sulfur atoms are sometimes jammed into the hydrocarbon chains too.
In other words, all fossil fuels exist on a spectrum — and crude oil, a melange of hydrocarbons of different lengths and properties, occupies the messy middle. Those properties can vary based on how and why in the past a crude field formed. Petroleum engineers classify it along two axes:
- Its weight. When oil has more short-chain hydrocarbons, it flows more easily, and petroleum engineers talk about it as being “light.” When oil has more long-chain hydrocarbons and is more viscous, they say that it’s “heavy.”
- Its sulfur content. Some hydrocarbon chains contain sulfur atoms mixed in with the hydrogen, carbon, and oxygen. But sulfur is generally a bad thing in oil: It produces toxic and corrosive byproducts when refined, and burning sulfur-heavy fuels can lead to acid rain. Engineers say that sulfur-rich crude is “sour,” while sulfur-light crude is “sweet.”
American fracking wells tend to produce light, sweet crude. The oil from Alberta is heavy and sour.
Normally, heavy and sour oil trades at a discount compared to light and sweet oil. That’s because the highest volume products that come out of a refinery — gasoline or jet fuel, for instance — are made of short hydrocarbons, not long ones. Light, sweet crudes are closer to the finished product, and thus require less refining.
Yet heavy, sour crudes are crucial to the U.S. oil industry anyway. American refiners use heavy crudes to bring down their input costs for refined products such as gasoline, diesel, and jet fuel.
Why? That’s where the history comes in.
North America is an integrated energy system
Nearly two decades ago, as oil prices reached painful highs as global demand outstripped supply, many refineries across the United States began to invest in technologies that would let them break down heavier, sour petroleum into something more commercially viable. They built coking refineries, expensive pieces of equipment that use extreme heat to break down long hydrocarbon chains into shorter ones. The cost of such a refinery can exceed $10 billion. Many were purpose-built for breaking down the sludgy, sour oil coming from Canada.
In the early 2010s, as the fracking revolution turned the United States into an oil-drilling superpower, those coking refineries remained important. They helped stretch the value out of the light, tight crude coming out of fracking wells, Rory Johnston, an oil markets analyst and the author of the Commodity Context newsletter, told me last week.
It does not make sense to use the coking refineries on oil from fracking wells, because that oil is already largely composed of short-chain hydrocarbons. But by breaking down Canadian oil in coking refineries, and blending it with American oil, the industry can make a wider blend of producers at a lower cost.
“Heavy crude’s cheaper, and they want to refine this into valuable end products,” Johnston said in a separate conversation recorded this week on Heatmap’s Shift Key podcast. “And so because of this, to just run light crude through that, you would instantly render economically worthless all of this very, very expensive equipment.”
Many of America’s refineries — especially those in the Midwest — are now tuned specifically to process light fracking oil and heavy Canadian sludge together, he said. What this means in practice is that the United States exports as a finished product much of the crude oil that it imports from Canada. Under the current situation, the U.S. earns more money selling refined products made from Canadian crude than it spends importing raw petroleum from Canada, Johnston added.
Tariffs will collapse the price relationships that allow for that mutually beneficial situation to persist. It will boost the cost of Canadian oil by at least $5 a barrel on each side of the border, raising pump prices by about 13 cents in the Midwest, Johnston told me.
That may not sound so bad for consumers. But it would be terrible for refiners. “The total effect of Trump’s actions so far is to nuke the economics of U.S. coking refineries. It’s truly magnificent,” he said. “You couldn’t create a better scenario to destroy the economics of U.S. coking refineries.”
If U.S. oil companies lose access to cheap Canadian oil, they will struggle to replace it. That’s because the next best place to get heavy, sour crude is Mexico — and Mexican imports, too, would likely face 25% tariffs under most scenarios where Canada is levied. The next places to get heavy, sour crude are Venezuela (where the Trump administration wants to tighten sanctions) and Colombia (where Trump nearly imposed tariffs last weekend).
One reason Canadian oil is so cheap in the United States is that companies have invested billions integrating the two countries’ oil infrastructure. A network of pipelines and storage tanks bring millions of barrels of oil from Canada down to the U.S. Gulf Coast every day. The countries — and especially their fossil fuel industries — are interdependent.
Meanwhile, only one pipeline system — the Trans Mountain pipeline — connects Alberta’s oil fields to the Pacific coast.
If you begin to play out how each country might react to a tariff, Johnston said, “you get into these completely absurd scenario discussions,” Johnston said. “The result is everyone would be poorer in that scenario.”
None other than the U.S. oil industry itself has opposed the tariffs.
“We import a lot of oil from both Mexico and Canada, and we refine it here in the most sophisticated refinery system in the world,” Mike Sommers, the CEO of the American Petroleum Institute, said at an event in Washington last week. “We’re going to continue to work with the Trump administration on this so that they understand how important it is that we continue these trade relationships.”
On Monday, The Wall Street Journal reported that some Trump aides are eager to hit Canada and Mexico with tariffs this weekend, even though the president has yet to reopen talks — or even describe his demands — for a reworked U.S.-Mexico-Canada free trade agreement. Canadian and Mexican officials have said that they are not sure what Trump actually wants in the talks.
One irony of this fracas is that the tariffs would have a more uncertain environmental effect. Western Canadian crude is unusually carbon-intensive to extract and refine. If its price rose — or if Canadian officials responded to tariffs in part by shutting down production — then Trump could accidentally, if marginally, decrease carbon emissions. American refineries might also respond to tariffs by importing heavy, sour crude oil from abroad, essentially just shifting production around the planet.
Still, it remains ridiculous that Trump, who has spent his first days in the White House attacking a “Green New Deal” agenda that never actually passed Congress, might succeed in raising the cost of oil consumption and production in the U.S. where a decade of climate activism has largely failed.
Perhaps that’s why many still doubt it would happen. On Wednesday morning, President Claudia Sheinbaum of Mexico said that she did not think Trump would ultimately impose sanctions on her country. And even within the oil industry, tariffs on Canadian oil seem unthinkable. A 25% tariff would whack the industry hardest, even though it has allied itself closely with Trump. Trump’s likely energy secretary, Chris Wright, is the CEO of Liberty Energy, an oilfield services company.
“A lot of the people I’m hearing on the Canadian side are saying, ‘Maybe we should try to speak with these people around Trump. Maybe Wright or [Trump’s energy czar Doug] Burgum understand what’s happening,’” Johnston said.
But Trump has already made demands that strike the North American oil industry as bizarre. At the same Davos meeting where he said the United States didn’t need Canadian oil, Trump demanded that OPEC and Saudi Arabia cut global oil prices so that global interest rates could fall. Such a move would cut profits in the American oil industry while hampering Trump’s goal of increasing U.S. oil production.
The irony that a Republican president would push off Canadian crude to increase America’s reliance on OPEC is hard to comprehend, Johnston said.
“I don’t know that anyone has a great sense of where Trump’s true philosophical anchor is,” he said, “other than that we are now getting a clear picture that he views any and all trade deficits as a sin unto themselves.”
Thermasol
