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Tariffs and Potential Market Effects

Tariffs increase the cost of acquiring imported goods subject to tariff charges. Under a 25% tariff scenario applied to Canada and Mexico, refineries that continue importing from those countries would pay tariffs assessed on the value of crude oil imports. However, some refineries could be financially motivated to secure crude oil not subject to higher tariffs. This optionality makes it difficult to determine how U.S. crude oil and petroleum product prices might be affected. Exactly how tariffs, and related costs, might be distributed throughout the supply chain would likely be a function of responsive actions by U.S. refineries, Canadian crude oil producers/exporters, and the Government of Alberta. Tariffs could be reflected in refining profits, Canadian crude oil prices, and U.S. petroleum product prices.

Refining Profits

Since crude oil is the largest refinery input cost, higher tariffs could immediately reduce refinery profitability. To limit exposure to higher tariffs, refineries could source crude oil from other suppliers. For refineries in PADDs 1, 3, and 5 with access to flexible maritime oil supplies, import substitution is possible. In turn, crude oil imports from Canada and Mexico to those regions could be rerouted to non- U.S. refineries. While a less efficient, higher-cost crude oil supply system could result, such costs could be lower than a 25% tariff. For refineries connected with Canada by pipeline, especially those located in PADDs 2 and 4, supply alternatives are currently limited but could include increased processing of domestically produced light, sweet (low-sulfur) crude oil, a suboptimal feedstock for some U.S. refinery configurations.

Canadian Crude Oil Prices

Western Canadian Select (WCS)—a heavy, sour (high-sulfur) crude oil blend priced at Hardisty, Alberta, that some U.S. refineries prefer—is the benchmark price for most crude oil imports from Canada. WCS is typically priced lower than the U.S. benchmark price at Cushing, Oklahoma. This discount reflects quality differences and transportation costs, but can widen from time to time when Alberta crude oil production exceeds exports. Import reductions by refineries in PADDs 2 and 4 could put downward pressure on WCS prices, potentially offsetting tariffs on remaining imports. To counter downward price pressure, Alberta crude producers and exporters could increase, to the extent possible, pipeline deliveries to British Columbia and the U.S. Gulf Coast for export to global markets. Should wide price discounts persist, the Government of Alberta could consider reinstating a production curtailment policy intended to narrow WCS price discounts. Considering these complexities, uncertainties, and interrelated variables, it is uncertain to what extent tariffs might be reflected in WCS prices.

U.S. Petroleum Product Prices

Consumer prices for gasoline, diesel fuel, and other petroleum products throughout the country could be affected by crude oil import tariffs, especially in regions most reliant on imports from Canada (i.e., PADDs 2 and 4). Typically, crude oil is the largest retail price component for gasoline and diesel fuel. Higher crude oil costs, along with operational decisions influenced by lower refining profit margins, can be reflected in wholesale petroleum product prices, which are passed directly to consumers.

Options for Congress

President Trump has not stated which authority may be used should he impose tariffs. Many analysts have suggested that the International Emergency Economic Powers Act (IEEPA), which the President referenced during his first term, remains the likely option. IEEPA authorizes the President to regulate

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imports during a national emergency declared under the framework of the National Emergencies Act (NEA). No action by Congress is needed for such tariffs to take effect. If Congress wishes to block or modify the tariffs, it has several options. Congress could terminate the underlying national emergency by enacting a joint resolution of disapproval using NEA expedited procedures. Congress could also amend IEEPA to restrict its use in imposing tariffs. Several Members introduced bills in the 116^th Congress (e.g., S. 764, H.R. 1755, S. 2413, and H.R. 3557) to do just that following a suggestion by President Trump that he might use IEEPA to impose tariffs on Mexico.

Author Information

Phillip Brown Specialist in Energy Policy

^{Christopher A. Casey}

Analyst in International Trade and Finance

Disclaimer

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