Scott Lincicome and Alfredo Carrillo Obregon
Following a one-month suspension in the 25 percent tariffs on all goods imported into the United States from Canada and Mexico, President Trump announced on February 27 that his administration would move forward with these duties. As we explained in a previous blog post, these US tariffs (and the subsequent retaliation by the Mexican and Canadian governments) would cause significant damage to the three countries’ economies, and because of North America’s decades-long economic integration, some industries would suffer disproportionately.
Having explored the potential impact of the tariffs on the US auto industry, we now turn to another sector that is significantly interconnected with the Mexican and Canadian economies and would thus suffer disproportionately from Trump’s tariffs: energy.
The United States Has Extensive Oil and Gas Ties with Canada
Top-line data show that the United States’ neighbors are major customers of US energy exports and major suppliers of US energy imports, demonstrating the interconnectedness of the three countries’ energy sectors and the global nature of the US energy market (Figure 1).
US imports of crude oil from Canada and Mexico are of particular importance. Though domestic US production of crude oil has skyrocketed since 2010, it mostly consists of lighter grades of crude oil, while 70 percent of US refineries are configured to run heavier grades—precisely the type imported from Canada, Mexico, and other countries. So, instead of spending billions to reconfigure their facilities to better handle lighter US crude, American refineries instead use imports (and pass on some of the savings to consumers).
As Canadian oil production increased in recent years and geopolitical tensions rose elsewhere, US refiners turned to Canada for their heavy crude needs. As a result, Canada in 2015 replaced countries in the Organization of the Petroleum Exporting Countries as the United States’ main source of imported crude, and the US today sources 60 percent of its imported crude from Canada (Figure 2).
The importance of Canadian crude for the American petroleum industry—and the potential harms that would arise from tariffs—is particularly acute for certain parts of the United States that have limited alternative supplies due to geography, infrastructure, and other market factors. Most notably, Canada provides the US Midwest (Petroleum Administration for Defense District [PADD] 2) with 100 percent of the region’s crude oil imports and 70 percent of all crude oil processed by Midwest refineries (Figure 3).
These transactions have benefited both Canadian exporters and Midwest refineries (and their American customers). And as imports of Canadian crude have increased in PADD 2, so has the region’s refining capacity (Figure 4)—a clear sign that US-Canada energy trade isn’t a zero-sum proposition.
Other US regions also benefit. New England, for example, sources a large portion of its heating oil, gasoline, and diesel from Canadian refineries and imports Canadian electricity and natural gas. Overall, mutually beneficial energy transactions between the United States and Canada are a huge part of bilateral trade today, so much so that if one were to remove energy from the equation, the United States would run a large and persistent bilateral goods trade surplus with Canada (Figure 5).
Tariffs would unsurprisingly interfere with bilateral energy trade, raising prices for American consumers. Thus, for example, Canadian supplier Irving Oil has warned that the tariffs would translate to increased prices for New England households, and one expert recently predicted that gasoline prices in the region could rise from 15 to 30 cents a gallon “within the first couple of weeks” of the tariffs taking effect. (Others have predicted similar impacts for gasoline prices in the Midwest.)
The United States Also Has Significant Oil and Gas Ties with Mexico
US imports of crude oil from Mexico have declined since the mid-2000s—largely coinciding with declining Mexican crude oil production—but they continue to play an important role in cross-border energy supply chains (Figure 6).
Regional trade again looms large here. Mexico remains the top source for Gulf Coast crude oil imports (though quality concerns are prompting Gulf Coast refineries to buy more from Canadian and Colombian producers), and Mexico is also the top customer for Gulf Coast refined products (Figure 7).
Mexico also purchases significant quantities of US natural gas, mostly to generate electricity for domestic consumption.
Mexico and Canada Are Also Major Sources of Non-Energy Inputs for the US Energy Industry
The harm to American energy producers from Trump’s proposed tariffs would stem not only from increased duties on petroleum products but also from duties on non-energy inputs used by the American oil and gas industry, especially steel. Over the past 10 years, for example, both Canada and Mexico together have accounted for 24 to 36 percent of US imports of steel pipes and tubes in any given year (Figure 8).
According to a 2023 report from the US International Trade Commission, the 25 percent “national security” tariffs on steel and aluminum disproportionately harmed the US oil and gas extraction industry (NAICS 2110), causing it to lose almost $586 million in production between 2018 and 2021 (Figure 9).
Canada and Mexico were exempted from those tariffs in 2019 and are major steel suppliers today. Thus, new 25 percent tariffs on steel imports from these countries—or the reapplication of the national security tariffs that Trump has also promised—would do serious damage to oil and gas producers in the United States.
Trilateral Energy Ties Go Beyond Oil and Gas
The importance of Canada and Mexico to US energy—and thus, the harms of potential across-the-board tariffs—go beyond oil and gas production and exports. For example, the Wall Street Journal reported earlier this month that the proposed 25 percent tariffs could spell trouble for a US power grid that is due for major investments to meet increasing electricity demand. This is because, as energy analysts at Wood Mackenzie note, Canada and Mexico are important sources of imported electrical equipment, such as transformers, circuit breakers, and switchgear (Figure 10). Transformers, already in high demand, could become “a chokepoint,” as only 20 percent of total US demand can be met by domestic suppliers, who are reluctant to make additional investments and have moreover seen their production costs increase due to higher raw material prices.
Wood Mackenzie thus estimates that if the Trump administration imposes the 25 percent tariffs on Canada and Mexico and additional tariffs on copper—which his administration might do under the guise of “national security” in the coming months—transformer prices could increase by 8 to 9 percent.
Finally, Canada and Mexico are also major sources of certain “critical minerals” used in various energy applications by US consumers reliant on imports (Table 1). While these minerals are not exclusively used by energy producers, many of them—including graphite, barite, cobalt, and vanadium—are inputs in various energy-related products, such as hydrocarbons, batteries, fuel cells, and solar cells. The Biden-era Department of Energy also identified several of these minerals as critical for renewable energy applications. Tariffs would therefore impose both short-term costs on industries that rely on these critical minerals and potentially longer-term harms to the nation’s deployment of greener technologies.
Conclusion
As Scott Lincicome wrote in 2022, the United States’ deep integration into global energy markets—involving billions of dollars in annual trilateral trade and investment—has been a boon for the nation’s economy and energy security, boosting production and supply, lowering prices, and mitigating domestic and foreign shocks. Though the United States became a net exporter of energy in 2019, imports—especially from Canada and Mexico—remain important for the American energy industry and American energy consumers. President Trump’s tariffs, as well as retaliation by Canada and Mexico, threaten to upend this mutually beneficial dynamic and impose significant costs on US energy producers and consumers, the US economy, and perhaps also national environmental and geopolitical objectives.
Hopefully, cooler heads prevail.