Insight from Washington: US refiners remain pragmatic amid tariff disputes

Like many ways the Trump administration has reshaped US policy norms, the use of tariffs and tariff threats to address non-trade policy issues with other countries is here to stay, and companies like US Gulf Coast refiners are learning to adapt.

That reality has set in for the energy sector not only because of the ongoing trade conflict with China, but also since President Donald Trump's threat to impose a 5% tariff on all Mexican imports.

Although the threat was called off at the 11th hour, it was a huge shock to the US refining sector, which depends on Mexico as one of its top sources for heavy crude imports and the most valuable customer for its refined product exports.

Refiners turn $14 billion worth of annual Mexican crude imports into $30 billion worth of gasoline, diesel and other fuels exported back to Mexico. Additionally, Mexico's heavy Maya grade has been key to refiners as other sources of heavy crude dwindle on the global market as a result of turmoil in Venezuela, US sanctions against Iran, and pipeline constraints out of Canada.

"Not having access to Maya would definitely make things much more challenging" for US refiners, said Susan Grissom, chief industry analyst for the American Fuel & Petrochemical Manufacturers, a trade group.

Derrick Morgan, AFPM's senior vice president for government affairs, said that since the Mexico tariff threat, the group and its refinery members have had many meetings with White House and federal agency staffers on how energy-sector tariffs would hurt the overall US economy.

While Trump pulled back on the tariff threat, he could revive it if he does not like how the Mexican administration handles the Central American migrant issue.

"We made a little bit of headway and progress on our point that a tariff on crude oil in particular was counterproductive," Morgan said, stopping short of saying he was confident the administration would not seek to target energy trade in the future. "If tariffs were to come up again, I think we'd be picking up that conversation with a higher level of knowledge about why the crude oil piece of this doesn't make sense."

Exports are becoming increasingly important to the US energy sector and Gulf Coast refiners in particular, as the country has gone from the top importer of fuels to the top exporter.

Grissom said refiners' response to the Mexico tariff threat was not unlike what they have to do every day when watching factors that may affect global supply and demand, be they production outages, hurricanes or geopolitical tensions. They are constantly examining alternative supply sources and export markets for the best fit.

"The global market is very resilient," Grissom said. "Solutions are found when there are disruptions. One of the reasons the market is resilient is because all of the participants in the market are going through and looking at the alternatives, so they don't often get taken by surprise. When something is no longer available on the market, chances are they've already figured out what the best alternative option might be."

Duncan Wood, director of the Wilson Center's Mexico Institute, said that even if Trump revives his Mexico tariff threats, he doubts the administration would ever apply it to petroleum trade, which "would be hugely damaging to US refiners."

"However, it has raised the prospect that North American free trade is not a given and refiners are beginning to think of alternate logistical arrangements," Wood said.

On the other side of the border, Mexico was already trying to diversify trade partners, and Trump's tariff threat underlined the need to do so. In July, China's West Pacific Petrochemical Corp. refinery exported 900,000 barrels of gasoline to Mexico, its largest monthly shipment to the country.

"Mexico is certainly interested in diversification," Wood said. "Recent engagements with China and India highlight this. However, reorienting Mexico's crude exports away from Texas and bringing in refined product from other parts of the world is tricky."

Wood pointed to the Deer Park refinery in Texas, a 50-50 joint venture between Shell and Pemex, which processes 275,000 b/d of Mexican crude. "Finding another taker for that would be very difficult and wholly illogical for Pemex."

"On the other hand, [Mexican President Andres Manuel Lopez Obrador’s] plan to build a new refinery and refit existing plants poses a long-term threat to the integrated petroleum supply chain between Mexico and Texas," Wood said.

S&P Global Platts Analytics expects these trade tensions to stick around, with the US continuing to use tariffs and tariff threats to pursue other policy goals. "In a sense, we are seeing the weaponization of tariff policy," Platts Analytics said in a recent global economic outlook. "This threat will remain part of the global framework for the foreseeable future."