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The tariffs on Mexico – even at the 5% starting level that President Donald Trump has threatened – will further complicate the situation. US refiners will have to pay to buy oil elsewhere, which will result in higher energy prices than they would otherwise be.
"If these rates were maintained, US refineries would suffer a lot," said Michael Tran, general manager of RBC Capital Markets' global energy strategy. "It will aggravate the shortage of heavy barrels – at a time when you probably need it the most."
"Very few alternatives"
The problem is that not all raw is created equally. While the United States is now the world's largest oil producer thanks to the shale boom, most of these barrels are very light. This high-quality crude oil hardly fits the decades-old refining system of the Gulf Coast. Shale oil is mixed with heavier barrels to allow refiners to maximize their production.
Normally, the United States would turn to Saudi Arabia, which also produces heavy barrels. But Saudi Arabia has reduced shipments to the United States as part of OPEC's efforts to raise prices.
Canada, another major producer of heavy crude oil, is already the largest source of imported foreign oil in the United States. And a shortage of pipelines from Canada will make it difficult to send much more.
"There are very few short-term alternatives," Ryan Fitzmaurice, energy strategist at Rabobank, wrote in a note to customers.
Refiners urge Trump not to price Mexico
US refiners will be forced to pay the 5% tariff for Mexican oil or, more likely, pay for heavy barrels elsewhere. Some of this oil will probably come from Colombia, Brazil, Ecuador, Iraq and Kuwait, which already ship heavy crude oil to Asia and elsewhere.
"You will have to compete with countries like China," said RBC's Tran.
Fitzmaurice warned that tariffs on Mexico would "reduce" refining margins and could limit the amount of gasoline, diesel and jet fuel being produced.
The energy industry has partnered with other business groups to urge Trump not to add Mexico to the global trade war.
"Imposing tariffs on Mexican products, especially crude oil, could drive up energy prices for US consumers, put the US refining sector at a disadvantage and jeopardize the USMCA's move – any bad result, "said Chet Thompson, CEO of American Fuel & Petrochemical Manufacturers statement Friday, referring to the New trade agreement that the Trump administration has negotiated with Mexico and Canada to replace NAFTA.
The tariffs on Mexico will be a "headwind" for the refining activity of the US Gulf Coast, according to Stewart Glickman, an analyst at CFRA Research.
"Chevron is supportive of free and fair trade, and believes that the imposition of new tariffs must be weighed against the potential for retaliation that could hinder the development of new markets," Chevron said in a statement.
Increase the prices of gasoline?
The impact on energy prices is complicated.
Oil prices in the United States fell to their lowest level in three months last week because of fears that the trade war is slowing energy demand by slowing the global economy. Gas prices, which are changing with a lag, should also fall.
But US drivers should not celebrate yet. Analysts have warned that lower prices could be limited by Mexico's tariffs. US refiners, forced to pay for heavy crude oil, will bear at least some of the costs at the service stations.
"The drop at the pump might not be as extreme as it would have been," said Matt Smith, director of commodity research at ClipperData.
"That would leave the US without a place to go, which would weigh on prices, which would be a boon to Trump," said Tran of RBC.
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