In recent discussions surrounding U.S. energy policy, a significant shift has emerged where tariffs imposed on imported oil have stirred considerable debateThe reason cited for these tariffs is to "protect American energy security." However, this logic has been increasingly critiqued, particularly by analysts like Callum Bruce from Goldman Sachs, who argues that such reasoning is fundamentally flawedCurrent data indicates that in 2024, the U.S. is set to import 4.05 million barrels of crude oil per day from Canada alone, amounting to 61.5% of its total crude oil importsFurthermore, an additional 470,000 barrels per day will come from Mexico, collectively accounting for a whopping 70% of U.S. crude oil importsThis crude oil, primarily medium to heavy grades, complements the lighter shale oil produced domestically in the U.S.
The geographical distribution of U.S. refining capabilities exacerbates this dependence on importsRefineries located along the Gulf Coast, which account for 55% of the nation’s total refining capacity, are equipped to handle heavy crude oil
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In contrast, the majority of domestic shale oil production hails from the Permian Basin, where the light oil needs to be blended with heavier grades to yield refined products meeting the required standardsAccording to Bruce's report, if the supply of crude oil from Canada and Mexico is disrupted, U.S. refineries would be compelled to source high-sulfur crude oil from South America or West AfricaThis presents a significant issue as transportation costs from these regions are about 30% higher than from Canada, alongside the increased sulfur content that necessitates further investments in desulfurization equipment.
The impact of these tariffs is already beginning to manifest in the marketRecent data from the U.SEnergy Information Administration indicates that, as of the first week in February, the benchmark price for crude oil has risen by 4.2% compared to JanuaryRetail gasoline prices have surpassed $3.5 per gallon, marking the highest point since July 2024. Goldman Sachs has predicted that if a 10% tariff on oil is fully implemented, gasoline prices could increase by an additional seven cents per gallon, while diesel prices may see a rise of twelve cents per gallon.
The increase in costs is starting to permeate various sectors of the economyA survey conducted by the National Federation of Independent Business revealed that 43% of small business owners have reported that rising energy costs are impacting their operational plans, with the transport sector being particularly hard-hitRuan Transportation, a trucking company based in Texas, noted that every ten-cent increase in diesel prices adds an annual operational expense of $12 millionThis pressure inevitably translates into consumer goods prices, creating a vicious cycle of "tariff - inflation - consumer shrinkage."
The political motivations behind the tariff policies also merit scrutiny
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Ironically, the refining companies in states that are predominantly in favor of these tariffs are among the biggest victimsValero Energy, located in Houston, has announced that if they are forced to switch to higher-priced imported crude oil, their quarterly profits could decrease by $1.5 billion.
The broader implications involve a potential fracturing of the North American supply chainThe "just-in-time production" model established under the United States-Mexico-Canada Agreement (USMCA) is at risk of unravelingAutomobile manufacturers in Michigan, for instance, have observed a 25% increase in the cost of parts imported from Mexico, resulting in an additional production cost of $800 to $1,200 per vehicleSuch 'self-harming' policies threaten to diminish the global competitiveness of U.S. manufacturing; notable entities like Apple have started shifting portions of their supply chains to countries like Vietnam and India.
This modern energy tariff war exhibits striking parallels to the oil crisis of the 1970sDuring that time, the U.S. enacted "energy independence" policies in reaction to the Arab oil embargo, a measure that subsequently led to overcapacity in refining and a slew of environmental disastersWhile the shale oil revolution positioned the U.S. as the number one oil producer globally, the frail nature of its supply chain continues to expose it to significant policy risks.
Historical data underlines the cyclical conundrum of U.S. industrial policyIn 1983, after the Reagan administration imposed a 25% tariff on Japanese imports, manufacturers like Toyota and Honda swiftly set up assembly plants in Kentucky and Ohio, leveraging the North American Free Trade Agreement to embark on what can be termed "tariff-jumping investments." By 1990, Japanese car manufacturers had escalated their market share in the U.S. from 18% to 29%, while the Big Three automakers in Detroit saw their market share plummet from 72% to 45%. Such patterns of industrial migration are now resurfacing in the energy sector
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