Yves here. Mexican oil is example of where Trump will have fewer degrees of freedom than he anticipated. His economic team was reported to be working on a plan that among other things, had the US exiting Nafta and the WTO on the first day of his presidency. In reality, the US needs six months of notice to exit Nafta, but even that precipitous a move seems unlikely, given that the US is not prepared to handle the extra volume of work involved in computing and imposing tariffs, which among other things requires major changes in IT systems, a long lead-time item.
This article points out that leaving Nafta would mean tariffs on Mexican oil and US players being disadvantaged in developing
By Irina Slavis a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry. Originally published at OilPrice
Two of Donald Trump’s main pledges during the presidential race were building a wall along the border with Mexico, and making the U.S. energy-independent. Now that the election is over, these issues are coming to the fore.
First, the president-elect said that the wall, which he mentioned on the campaign trail and in numerous debates, is still very much on the table, though what type of “wall” that may be is an unknow. Second, he said he planned to start deporting illegal aliens—those with criminal records—which could amount to as many as three million individuals.
Despite “The Wall”, the deportation of Mexican citizens, and several grandiose comments about Mexico paying for said wall—not to mention Trump’s proclamation that he would raise import tariffs up to 35 percent on some Mexican products—Mexico’s President Enrique Pena Nieto was among the first of the world leaders to congratulate Trump on his victory.
And if NAFTA is no more, tariffs will rise for all imports. What does all this mean for the future of oil imports to the U.S.?
The United States imported over 670,000 bpd of crude and fuels from Mexico in August, according to the EIA. Another 773,000 bpd came from Venezuela. Together, the two countries ranked third in the U.S. oil and products import mix, after Canada and Saudi Arabia.
While supplies from Canada are unlikely to be threatened, thanks to traditionally warm bilateral relations with the country, the situation is different for both Mexico and Venezuela because of the illegal immigration issue and the blatantly anti-U.S. Caracas regime. Whether Trump is successful in cutting back—or cutting entirely—imports from Saudi Arabia is yet another unknown
And while it’s possible that Mexico and Venezuela could suffer a drop in exports to the U.S., if Trump stays true to his campaign promises, other forces are also influencing the matter.
The situation in Venezuela remains highly volatile, but there is a ray of hope on the horizon as the government of President Nicolas Maduro and the leaders of the opposition party MUD begrudgingly discusses the direction Venezuela should take. But no matter the outcome of these talks, the starving country will need markets for its crude oil, and the U.S. happens to be the largest one, so it is very unlikely that anyone there would seek to antagonize Trump.
Things are a bit different in Mexico, since many of the illegal immigrants Trump wants to deport come from the southern neighbor—a factor that may stress relations. But with the liberalization of the Mexican energy market in the last few years, Mexico is turning out to have lucrative opportunities for the U.S. energy industry, to include oil and gas production, refining, marketing, and, of course, transportation—the full deck. And U.S. energy businesses need these opportunities to sustain their profitability, just as Mexico needs to sell its crude. In short, the neighbors need each other.
President-elect Trump will likely come to rely on expert advisers for a lot of the decisions he will make once he steps into the Oval office. With various experts already warningagainst the adverse outcomes of NAFTA’s removal and the increase of tariffs, it’s possible that these advisers will help the president-elect tweak some of his campaign pledges. For the time being, imports from Mexico and Venezuela should be safe.
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Mexican and Venezuelan crude oil are “heavy crude”, meaning they are well suited for making asphalt, plastics, and roofing shingles. Only a small fraction of the resulting distillate is useful for transportation fuel, such as diesel or gasoline.
Light sweet Texas crude is the gold standard for refineries to process into fuel, and the stuff from the countries mentioned isn’t anywhere near as good, being high in both long-chain hydrocarbons and sulfur.
To the point: I’m not sure it’s clear-cut how “dependent” the US and Trump are on this mediocre crude oil supply from south of the border, given that most of the US storage facilities are brimming full at the moment.
Heavy crudes are vital to the US petroleum industry, because almost all growth in US production is in very light tight oil, which can’t be processed in existing refineries. It has to be mixed in with heavier crudes from Canada or Venezuela. No heavy crudes, means lots of light tight crude with nowhere to go.
Spud, in furtherance of your comment; Asphalt and roofing shingles can, should and are being replaced with gravel in rural counties that can’t afford to repave, with vinyl covered steel reinforced concrete that lasts forever on major roads and for roofing, solar panels and standing seam metal roofing that weighs little, lasts forever and is made from recycled and recyclable metal.
Asphalt shingles are toxic crap from the bottom of the refining cracking barrel. No one in their right mind who gardens wants that crap dripping into their water table, or into their garden in areas that use rainwater for irrigation.
Two refineries (BP Whiting and Shell Motiva) have somewhat recently completed expansions (new crude distillation, sulfur handling, delayed coking, and some FCC upgrades) that can handle just about the whole of this Mexican import in bpd processing. So I don’t think it’s too much for the US refining industry to handle.
IdahoSpud, but is heavy crude lacking in demand relative to light sweet? Are there other available sources? And that is still a wide range of uses you cited for heavy crude. Just asking b/c I have little grasp of the forces at play here.
I wonder which oil and banking industry oxen would get gored by this little rearrangement. And this is just energy-related industries. Presumably, exiting Nafta which would entail a similar scope of rearrangements across all kinds of industries. Should be fun. The “negotiations” could be epic. For the moment, forget about having the knowledge or skill to achieve some point along a scale of positive value, does Trump and/or tbd Trump team have the will and backing to take on and win these fights?
I can’t yet see what the concrete outcomes are likely to be.
The current world problem is it’s nearly all heavy crude.
I think most of our refineries can handle both. As light crude became scarce they modified refineries to handle heavy crude. That is the more difficult one – sulfur is bad for corrosion and emissions.
That’s why we can’t turn off the industrial fertilizer industry, we wouldn’t have anyplace for all that sulfur. The world only needs so many fireworks.
If only we didn’t export the petcoke to China for burning…
i see PlutoniumKun answered some of my questions then.
I’m certainly no expert but even if the US leaves NAFTA, why would she be “forced” to apply tariffs to Mexican oil? Isn’t that a choice a sovereign nation can make all on their own? Even if for example Mexico applies tariffs to US oil, I cannot imagine there is some ironclad law that says the US must reciprocate if the US doesn’t feel like it?
From Bloomberg. Same concept applies to Mexico. Preferred buyer status = lower prices, irrespective of tariffs:
http://www.bloomberg.com/news/articles/2015-10-01/trump-killing-nafta-could-mean-big-unintended-consequences-for-the-u-s-
It appears tariffs would kick in at “normal trade relations status,” whatever that means, at a minimum. That is presumably higher than Nafta levels:
http://money.cnn.com/2016/07/06/news/economy/trump-nafta/
The only time Trump could get 0 tariffs on Canadian/Mexican oil and say 10% tariffs on Saudi oil is if US left WTO. Otherwise, as a member of WTO, it has to apply the same tariffs to all WTO countries it does not have a specific bi/multilateral trade agreement with.
So if you exit NAFTA, you’d have to agree a different trade relationship with Canada/Mexico, which would take time, and who knows how different from NAFTA would it look like..
If Nafta was unplugged, would that make all tariffs a matter of sovereign choice?
The wall is just for people. We want the oil. Heh heh heh – don’t be alarmed by the “Hey, Rube” patter – it’s just to draw them in and make the sale.
Further to PK’s educational comment above – the high volatility of fracked Bakken crude is why 40 people in Megantic were blown to kingdom come when a trainload of the stuff derailed. It was destined for east coast Canadian refineries that use a blend of Bakken and tar sands crude (heavy crude which used to come by tanker from Venezuela and pipeline from Portland ME to Montreal. The pipeline is now empty – the good people of Portland refused to allow reversing the line to allow tarsands oil to be exported via Portland.)
Maine and especially the Penobscot tribe (backed by good lawyers and an older, fairer treaty) would not allow Maine to be crossed by a destructive system like
the one in North Dakota.
The “oil-crats” therefore, and their Canadian shills lost heavily! A good lesson
for “water protectors” everywhere!
See, e.g.
Am noticing a lot of reasons being given why we can’t have policy changes because government too small….examples….Trump can’t deport because too few judges and lack of staff at immigration services, DHS, etc, can’t handle the work. Can’t do NAFTA changes because lack of IT. Can’t do infrastructure w/o “public/private” approach because lack of staff. Years of budget cutting and austerity have cut government back too much. Trump will need to realize government needs to be staffed up (increased).
Of course we could always bring som HB-1 workers from India to do the IT or outsource it to India. I have yet to work at a large company in the Boston area that doesn’t have Indians comprising the bulk of the IT department.
This may support those who warn Trump will be rolled by the Repub establishment. If they can’t blind him with brilliance, they’ll baffle him with bull shit – like “because IT” – to get Trump to confirm to traditional establishment policy.
Time to roll up our sleeves and hire a bunch of Americans into expanded and well funded government agencies and get to work on figuring how this gets done! Would a neo-liberal say that?
It will be interesting to see how Trumps deals with change as he gets into the weeds of implementing his stated goals.
I have no idea what Trump might do. I too am noticing a lot of reasons for why he can’t make this change or do that change because it could raise prices or create new problems for some emplaced industry (this post about Mexican oil) or it would cause unemployment of all the workers producing the boondoggle or cast aside too much money already sunk in the boondoggle (thinking F-35). Changes regularly make and break rice bowls, and increase costs here and decrease costs there and not all costs or benefits are in dollars.
I don’t believe Trump has a comprehensive vision for making changes to anything. The Brexit catastrophe seems an apt lesson of what change without vision or structure might mean. Trump is a wild card and we could be in for a most interesting game.
I’m wondering though if a rising dollar would balance out any extra cost in bringing in oil imports. The markets seem to be assuming a very strong dollar – its been speculated today that we might see euro/dollar parity again.
The tariff system is there already and at all points of entry. Everything does get charged tariff, it’s just that averages only 3%. The US is allowed under WTO rules to apply punitive tariffs if they can prove dumping in US markets. A current example is Chinese steel/solar panels.
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United States[edit]
The United States imposes tariffs or “customs duties” on imports of goods: 3% on average.[9] The duty is levied at the time of import and is paid by the importer of record. Individuals arriving in the United States may be exempt from duty on a limited amount of purchases, and on goods temporarily imported (such as laptop computers) under the ATA Carnet system. Customs duties vary by country of origin and product, with duties ranging from zero to 81% of the value of the goods. Goods from many countries are exempt from duty under various trade agreements. Certain types of goods are exempt from duty regardless of source. Customs rules differ from other import restrictions. Failure to comply with customs rules can result in seizure of goods and civil and criminal penalties against involved parties. The U.S. Customs and Border Protection (CBP) enforces customs rules. All goods entering the United States are subject to inspection by CBP prior to legal entry.
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https://en.wikipedia.org/wiki/Customs
The issue is not the higher tariffs on oil, the issue is that US would probably prefer to keep low tariffs (and the preferred status) on the oil from Canada/Mexico.
You can selectively raise tariffs when you can show dumping (but don’t have to, see Chinese steel and EU), but you can’t selectively reduce tariffs.
I was just pointing out we have a tariff system in place already in response to Yves’ intro about it being a lot of work and IT development.
As far as oil goes, the US frackers would like a higher price. Also, Mexico is dependent to a certain extent on our oil industry for equipment (rigs), deep water expertise, etc… I imagine some negotiation would go on there.
As far as Canada goes, you could exit NAFTA, then rename it Canadian American….and have them sign it quick.
Withdrawal from NAFTA (or renegotiation of it) could benefit many Mexican people. Many Mexican farmers have suffered from the dumping of subsidized U.S. agricultural products on Mexico, which have driven prices down for Mexican farm products. Some of those Mexican farmers were forced to migrate to the U.S. to seek jobs after they could no longer make a living in farming.
So changes to NAFTA could help many Mexicans and reduce illegal immigration to the U.S. The richest people in both countries probably would not be satisfied with these outcomes, though.
Here’s one of many articles about the effects of NAFTA on Mexican farming:
http://www.huffingtonpost.com/2013/01/11/mexican-farmers-agricultural-subsidies_n_2457845.html
“Second, he said he planned to start deporting illegal aliens—those with criminal records—which could amount to as many as three million individuals.[link}”
What’s really telling is that there are cadres of people who are willing to defend and promote the idea that
” an estimated 178,000 illegal immigrants with criminal records in the US in 2010, [according to a congressional report.]”, should be allowed to remain in the U.S. with all the privileges and rights of Americans and no danger of repatriation.
Update to Venezuelan developments: Opposition and Government Reach Five Agreements for Continued Dialogue.
Lots of info on the various factions that make up the MUD (the opposition that currently controls Congress).
Given the world oil glut, news that we cannot import oil from Mexico and Venezuela in relatively small amounts — relative to world production — is not a big deal as long as the change is not too rapid. Recall that Cushing oil storage arrangements are close to overflowing.