The Tariff Shock: How U.S. Policy Could Reshape North American Energy Trade

In early 2025, President Donald Trump proposed tariffs targeting oil, natural gas, and refined product imports from Canada and Mexico. These measures aim to boost domestic energy production but could disrupt prices, trade flows, and geopolitical relationships.

Impacts on North American Energy Prices and Flows

1. Natural Gas:

   • Canada supplies approximately 8 billion cubic feet per day (Bcf/d) of natural gas to the U.S., primarily through pipelines. This accounts for a significant portion of U.S. natural gas imports, especially in northern states. Tariffs could raise costs for U.S. importers, leading to higher prices in regions reliant on imports, reduced exports from Canada, and increased investment in U.S. production.

2. Crude Oil:

   • Tariffs on Canadian and Mexican crude could raise U.S. refinery costs, particularly for heavy crude from Alberta. This may depress Canadian oil prices and force U.S. refineries to seek alternative supplies.

3. Refined Products:

   • Mexico's reliance on U.S. refined products might decrease, creating oversupply in U.S. markets while forcing Mexico to find alternative sources.

4. Electricity Trade:

   • Canada exports approximately 60 terawatt-hours (TWh) of electricity annually to the U.S., with daily flows varying by season and demand. Much of this power is sourced from hydroelectric generation, which supports states like New York, Vermont, and Minnesota. Tariffs could increase electricity costs in these regions, especially during peak demand periods, and reduce the competitiveness of Canadian power exports.

Tariff Mechanics: Impacts on Costs and Flows

1. Natural Gas:

   • Cost Implications: A 25% tariff on 8 Bcf/d imports at $2/MMBtu increases costs to $2.75/MMBtu or $2.19 billion per year.

   • Flow Impacts with Coal Substitution: Higher natural gas prices might prompt utilities to switch to coal for power generation, especially in regions like the Midwest and Southeast, where coal infrastructure is already in place. This substitution could reduce natural gas demand significantly. Each power jurisdication has a difference generation mix, but the impact could be significant.

   • Environmental Trade-Offs: Increased coal use would lead to higher greenhouse gas emissions, potentially offsetting climate progress made by transitioning to natural gas in prior years.

2. Crude Oil:

   • Types of Canadian Oil: Canada predominantly exports heavy crude oil from Alberta's oil sands (e.g., Western Canadian Select or WCS) to the U.S. This oil is essential for U.S. refineries designed to process heavier grades, particularly in the Gulf Coast region.

   • Domestic Replacement Challenges: While the U.S. produces significant light crude oil from shale (e.g., Permian Basin), it lacks sufficient heavy crude production to replace Canadian imports. U.S. refineries optimized for heavy crude might need to:

     • Import heavy crude from alternative sources, such as Venezuela or the Middle East, potentially increasing costs due to higher transport fees and quality adjustments.

     • Adjust refinery configurations to process lighter crude, a costly and time-intensive modification.

   • Refinery Impacts: Reduced heavy crude availability could lower refinery utilization rates, increase operational costs, and lead to higher gasoline and diesel prices domestically.

3. Refined Products:

   • Mexican Demand: Tariffs on U.S. refined products (gasoline, diesel) could force Mexico to seek alternatives from Europe or Asia. This would reduce U.S. export volumes, creating a domestic surplus and putting downward pressure on U.S. refined product prices.

Impacts on U.S. Power Prices

1. Regional Effects:

   • New England (ISO-NE): Higher natural gas prices could spike electricity costs in winter.

   • Midwest (MISO): Tariffs may elevate wholesale power prices due to increased generation costs.

   • California (CAISO): Natural gas-fired plants could see higher costs, raising electricity prices.

2. Coal Substitution and Its Effects:

   • Rising natural gas costs due to tariffs could lead power markets to increase coal usage, especially in regions with significant coal capacity such as the Midwest and Southeast. This substitution could have profound implications:

     • Reduced Natural Gas Flows: Coal substitution in power generation could significantly reduce demand for natural gas, especially in states where coal remains a competitive energy source.

     • Higher Greenhouse Gas Emissions: Greater reliance on coal would likely increase CO2 and other pollutant emissions, undermining progress toward climate goals.

     • Economic Strain: While coal might lower immediate costs for electricity generation, long-term health and environmental impacts could offset these short-term savings.

   • Regions like MISO and SERC, which have maintained coal infrastructure, are particularly poised to revert to coal if natural gas prices become uncompetitive.

3. National Trends:

   • Higher natural gas prices could spur adoption of renewables due to improved cost competitiveness, particularly in regions like California (CAISO) where clean energy targets are driving investment.

Impacts on Global Energy Prices and Flows

1. Crude and Natural Gas:

   • Canadian producers may redirect crude exports to Asia, potentially affecting global benchmarks. Reduced exports to the U.S. might push Canada and Mexico to expand LNG capacities, increasing global competition.

2. OPEC and OPEC+ Dynamics:

   • Tariffs may benefit OPEC producers by tightening North American markets, boosting demand for Middle Eastern and Russian oil.

Reactions from Key Stakeholders

1. President Donald Trump: "These tariffs prioritize American energy and jobs while reducing reliance on foreign producers."

2. Canadian Prime Minister Justin Trudeau: "This policy undermines decades of partnership and threatens Canadian energy producers."

3. Alberta Premier Danielle Smith: "Tariffs are an attack on fair trade, harming both Canadian and U.S. families."

4. Mexican President Andrés Manuel López Obrador: "Mexico will diversify trade relationships to ensure energy security."

Insights from OPEC and OPEC+ Members

1. OPEC: "Disruptions in North America could destabilize global markets, but also create opportunities for OPEC members."

2. Russia (OPEC+ partner): "The tariffs reveal divisions in global energy markets, reinforcing Russia's role as a stable supplier."

Perspectives from Major Global Consumers

1. China: "We see an opportunity to deepen energy ties with Canada and Mexico."

2. India: "Diversification of suppliers remains critical for India’s growing energy needs."

The proposed tariffs by President Trump could reshape North American energy markets, leading to higher costs, altered trade flows, and potential shifts in global energy dynamics. While promoting U.S. energy independence, the policy risks damaging key partnerships and increasing consumer prices. Coal substitution, though economically attractive in the short term, could have lasting environmental and economic consequences, requiring careful consideration by policymakers and industry leaders.

THIS REPORT WAS FULLY WRITTEN BY THE CHATNRG NATGAS AGENT