Steep tariffs on Mexico and Canada are set to go into effect on Saturday as President Trump threatens trade with America's neighbors unless they address illegal migration, drug trafficking, and "massive subsidies in the form of deficits." One closely watched area likely to be excluded is oil, due to the complicated nature of the U.S. energy industry. There's a notable paradox for a country that has become a dominant energy superpower, where despite producing more oil than it consumes, it remains th...
Steep tariffs on Mexico and Canada are set to go into effect on Saturday as President Trump threatens trade with America's neighbors unless they address illegal migration, drug trafficking, and "massive subsidies in the form of deficits." One closely watched area likely to be excluded is oil, due to the complicated nature of the U.S. energy industry. There's a notable paradox for a country that has become a dominant energy superpower, where despite producing more oil than it consumes, it remains the second-largest importer in the world after China.
How did things get this way? Lower barriers to trade since the 1970s meant it became more profitable for the U.S. to import oil from abroad rather than produce it at home. Importing ramped up from countries like Canada, Mexico, Venezuela and Saudi Arabia, where oil was more abundant and production costs were lower, while historic regulations like the Jones Act pushed up (and continue to impact) local transport costs. The refinery system in the U.S. also centered around heavy, sour oil grades, which were available from these countries, though geopolitical risks increased as the U.S. became more dependent on foreign oil.
In the early 2000s, the fracking revolution changed the entire landscape as the U.S. returned to the world stage as a producer capable of supplying cheap energy (and recently became the largest oil producer in the world). However, this light, sweet crude wasn't a match for most of the U.S. refinery system that was based on heavier grades, and building out new infrastructure would take decades and hundreds of billions of dollars. While there are heavier oil sands in the U.S., located in areas like Alaska, California and Utah, processing them requires more capital than lighter oil and they only make up a fraction of the total available crude in America.
Energy security (not independence?): Everything works fine as long as the U.S. has buyers of its oil, and is able to import its needs, but arrangements can be agitated if things are shaken up on the trade front. Expanding and converting current refineries, or developing new ones to process sweeter crude (less sulfur and contaminants), would be too expensive and require an extended time horizon for an industry that must please new U.S. administrations every four to eight years (renewables and green energy?). Other problems include the lack of infrastructure to get U.S.-produced oil to U.S. refineries, as well as environmental permits and regulations, and don't forget the premium to be made on the sale of light sweet WTI (CL1:COM) and the strengthening of margins by processing cheaper sour crude.
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