President Trump has begun to execute on his campaign promises and implement tariffs on major trade partners, including Canada and Mexico, our two largest partners. This policy will no doubt affect critical energy like crude oil and gas. Given Trump’s efforts in using tariffs elsewhere to advance American interests and strengthen national security, it is clearly a useful foreign policy lever. In the case of Canada, however, nuance must be considered and applied.
In short, applying a “good” idea too broadly will have too many unintended consequences. The President should use a rheostat and target the tariffs more specifically and an exemption for Canadian heavy crude oil should be made.
The tariffs will have a major impact on the Midwest in particular. States like Michigan and Illinois import the greatest amount from Canada and Mexico, comprising 19% and 12% of their GDP respectively. Tariffs thus could result in Midwest consumers being impacted by an increase in the price of gasoline, The tariffs, as proposed, could see Midwestern and Great Lakes states gasoline prices rising more than the “normal” seasonal increase of 25 cents to 75 cents a gallon. Americans and specifically Midwesterners, need not be subjected to higher energy costs due to Trump’s tariffs, if adjustment can avoid.
According to the Energy Information Administration, the Midwest is the largest destination for Canada’s oil exports, importing 977,056 thousand barrels in 2023. According to Canada Energy Regulator, in 2023, Canadian crude oil exports were primarily received by PADD 2 (U.S. Midwest), which accounted for 61.8% of the total volume. Therefore, American partnership with Canadian exporters in that region especially cannot be understated and must not be jeopardized by tariffs that would weaken local economies.
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Mexico and Canada are two of America’s top three trade partners, collectively 30% of valued goods that the U.S. imported last year. Within energy, Canada alone supplied nearly 60% of U.S. crude oil imports, which have become increasingly important to U.S. oil refineries, now making up most U.S. imports. Our oil refining capacity stood at 18.4 million barrels per day (b/d) as of January 1, 2024, with many refineries able to handle heavy oils like those produced in Canada, yielding refined products such as transportation fuels, chemicals, and plastics.
Most significantly, the proposed tariffs on refined products oppose Trump’s energy dominance agenda and will result in increased costs on fuel and other products and services that drive economic growth. They will also hammer our USMCA allies – a successful agreement that Trump led and finalized in 2020.
And while it sounds counterintuitive, we can’t just “drill” our way out of the need for Canadian heavy crude by increasing domestic output. U.S. light sweet shale oil is not a viable substitute for much of the heavier crude oil we import from Canada. At its most basic level, a tariff on Canadian crude oil is a price increase on the primary ingredient in gasoline, diesel and jet fuel which we do not have domestically. Rather than driving increased production in the U.S., the tariffs would hamper fuel production.
Trying to swap Canadian crude oil for American light sweet would also not work, just like filling a gasoline-powered car with diesel. If our refineries cannot get the crude oil they were designed to process because that oil becomes too expensive, it’s possible heavy-oil units and eventually entire refineries could be shut down, leading to less American-made gasoline, diesel and jet fuel.
The ability to import and export crude oil benefits both consumers and U.S. energy security, of which Canadian heavy crude is a particularly important piece. U.S. energy security depends on imports, as U.S. refineries process daily more crude oil than we produce.
Currently, the U.S. is producing a record amount of crude oil (~13.4 million barrels per day), while our refineries need about 16.5 million barrels per day to maintain current production levels. The key is that many refineries need heavier crude oil to maximize the flexibility of gasoline, diesel and jet fuel production, as most crude oil produced in the United States is light. Canadian crude oil is therefore necessary for American refineries to continue to be in business.
Re-tooling refineries to process solely U.S. light crude oil would cost billions — which would take decades to permit, construct and pay off. We also lack the pipeline infrastructure needed to effectively supply U.S. crude oil and refined products to every region. Even if the re-tooling our facilities worked economically, it can take close to a decade to permit and build pipelines in the United States under our convoluted permitting process.
The bottom line is this: While the Administration’s tariffs are designed to alter Canada’s policies, the Trump team can use them effectively without cutting off our own nose. Add much needed precision to the effort by judicious exemptions like Canadian heavy crude when the facts justify it. This should certainly be one of those situations.
Steve Bucci, who served America for three decades as an Army Special Forces officer and top Pentagon official, is a visiting research fellow at The Heritage Foundation.
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