By volume, we are reasonably close. But by grades of oil US refiners need, we aren’t. Here are the details.
Understanding Oil Imports
The American Fuel & Petrochemical Manufacturers (AFPM) addresses the question How much oil does the United States import and why?
- The amount of crude oil U.S. refineries process greatly exceeds U.S. crude oil production. The United States is producing a record amount of crude oil (~13.4 million barrels per day), while U.S. refineries need about 16.5 million barrels per day to maintain current production levels. [Mish Note: On a volume basis we produce about 81 percent of what we need but …]
- About 60% of the crude oil that runs through U.S. refineries is extracted right here at home.
- Many refineries need heavier crude oil to maximize flexibility of gasoline, diesel and jet fuel production. Today, most crude oil produced in the United States is light, including much of what’s produced in the Permian and Bakken. Light crudes are not good replacements for the heavy crude oil we get from Canada and Mexico.
- Re-tooling refineries to process solely U.S. crude oil (light crude) would cost billions — a risky investment that would take decades to permit, construct and eventually pay off.
- We lack the infrastructure (like pipelines) needed to cost effectively supply U.S crude oil and refined products to every region. Even if the economics of re-tooling our facilities
Why are tariffs and taxes on oil imports bad for the United States?
- Import tariffs and taxes would increase the cost of producing gasoline, diesel and jet fuel and compromise our energy security.
- Raising the cost of heavier crude oil would increase the cost of manufacturing fuel.
- Forcing refineries to process oil they weren’t designed for would cause them to reduce production and potentially shut down.
- Tariffs on North American imports could spur retaliatory actions and make our exports less attractive.
Why do U.S. refineries run on heavier crude oils that we need to import?
- Long before the U.S. shale boom, when global production of light sweet crude oil was declining, we made significant investments in our refineries to process heavier, high-sulfur crude oils that were more widely available
in the global market. - These investments were made to ensure U.S. refineries would have access to the feedstocks needed to produce gasoline, diesel and jet fuel. Heavier crude is now an essential feedstock for many U.S. refineries.
- Substituting it for U.S. light sweet crude oil would make these facilities less efficient and competitive, leading to a decline in fuel production and higher costs for consumers.
- Refineries run on a mix of crude oils in order to run efficiently and maximize outputs. More than 70% of U.S. refining capacity runs most efficiently with heavier crude.
- Because heavier crude is more difficult to process, it tends to trade at a discount to light crude.
All of the above points are from the AFPM. Here are some of my thoughts.
Drill, Baby, Drill?!
Shale oil is getting lighter and lighter as time passes, making it even harder to use in our refineries.
The amount of water used in the fracking process is getting harder to deal with.
A better solution might be to build a couple of brand new refineries that could process light shale oil, close to the current producing regions.
Perhaps Trump could make this happen. However, by the time the refineries are built in 5-10 years time, Trump will be gone.
There is also a concern about how much light shale oil will still be left to process.
So, “drill, baby, drill” is impractical, especially in the time frame Trump needs to bring costs down.
What Will US Refiners Do?
US refiners will use the cheapest oil they can get. If that is from Canada, then production costs on those imports will rise by 10 percent and the price of gasoline will rise too.
US importers, not Canada and Mexico will take the hit.
But that is not as bad as it might seem at first glance because ~60% of the crude oil that runs through U.S. refineries is extracted in the US.
A 10 percent increase on 40 percent is effectively 4 percent, but that is not spread uniformly. The more a refiner depends on Canadian oil, the bigger the hit to that refiner.
Saudi makes five grades of oil but transportation costs would rise.
What About Venezuela?
We could also get heavy crude from Venezuela.
Was that also discussed when team Trump went to Venezuela demanding the release of hostages?
“Just been informed that we are bringing six hostages home from Venezuela,” Trump said on social media. “Thank you to Ric Grenell and my entire staff. Great job!”
According to the New York Times, Mauricio Claver-Carone, the U.S. special envoy for Latin America, said in a call with journalists on Friday morning that Mr. Grenell would not make any concessions in exchange for releasing American detainees.
“This is not a quid pro quo,” he said. “It’s not a negotiation in exchange for anything.” He urged the Maduro government to “heed” to Mr. Grenell’s demands “because ultimately there will be consequences otherwise.”
OilPrice reports Trade Dispute Could Force U.S. to Buy Venezuelan Oil, Canada Says
President Trump’s threat of tariffs on Canadian imports could leave the United States reliant on crude oil from Venezuela, with which the U.S. doesn’t want to work, Canadian Foreign Minister Melanie Joly told the Financial Times.
Joly is visiting this week Washington, D.C. for her first official meeting with U.S. Secretary of State Marco Rubio and other U.S. government leaders. The Canadian foreign minister emphasized the negative impacts that U.S. tariffs on Canadian goods would have on both countries’ economies, workers, and businesses on both sides of the border.
“Canadian energy and resources—including oil and critical minerals—underpin the long-term economic security and prosperity of both Canada and the United States to protect our energy security and reduce our reliance on the resources of non-like-minded countries,” Joly said ahead of her trip to Washington.
Do we really want money going to Venezuela rather than Canada? And do we even have the infrastructure where that would make any sense?
I no longer rule out economic madness.
Synopsis
This action by Trump makes little sense at first glance, and negative sense the more one understands about US refiner needs.
Trump is refusing to honor his own USMCA trade deal.
Welcome to higher prices at the pump.
Related Posts
February 1, 2025: Welcome to the Dumbest Trade War in US History, What’s Next?
February 1, 2025: Trade War Details Emerge: 25 Percent Tariffs but Only 10 Percent on Oil
We need to reflect a bit on “only 10 percent on oil”.
February 2: What’s the Impact on CPI Inflation and GDP of Trump’s Global Trade War?
Canada and Mexico plan precision responses to Trump’s tariffs. What about prices and GDP?
There are very serious potential repercussion depending on how Mexico, Canada, and China respond. Click above link for analysis and many charts.
Finally, what price does the US pay if no country expects Trump to honor his own trade deals? That’s a serious unknown.