How significantly could President Donald Trump’s use of tariffs affect his broader goal of energy dominance?
President Trump’s use of tariffs poses a complex challenge to his broader goal of energy dominance. While carefully applied levies could protect certain industries, they risk disrupting critical North American energy trade flows, potentially undermining U.S. energy security and market stability.
The ultimate impact depends on how aggressively Trump wields the tariff stick. A carefully calibrated application of trade levies against Canada, Mexico, and China could limit disruptions to energy markets, but the risks are significant.
The key lies in the details. The administration’s decision to hold off on imposing new tariffs on Canada and Mexico signals an awareness of the risks of disrupting energy trade with America’s two most important partners in global oil and gas markets. This temporary reprieve could lead to a more permanent solution, depending on the effectiveness of the border control measures announced by Canada and Mexico in response to Trump’s threats. The administration’s next steps will hinge on whether Trump believes further concessions can be extracted from these countries.
In contrast, China appears headed into a renewed trade conflict with the United States, reminiscent of Trump’s first term. However, for U.S. energy dominance, trade relationships with Canada and Mexico are far more crucial than with China.
The initial White House plan, announced in early February, proposed new tariffs of 25% on imports from Canada and Mexico, with a reduced rate of 10% specifically for Canadian oil and gas, and an additional 10% tariff on imports from China. The announcement sparked backlash, including threats of retaliatory tariffs from all three countries, and raised concerns among economists about potential impacts on growth and inflation.
North America’s energy trade is deeply integrated, and the administration must tread carefully to avoid significant disruptions. Canada and Mexico are vital suppliers of oil to the U.S., with Canada exporting about 4 million barrels per day and Mexico over 700,000 barrels per day. Tariffs on these imports would severely disrupt supply chains. A 25% tariff on Mexican crude oil could prompt Mexico to redirect exports to Europe or Asia, forcing U.S. refiners to seek alternative sources, such as Iraq or other OPEC producers, to replace the heavy sour crude traditionally imported from Mexico.
Trade in Canadian crude, however, should be more resilient. Analysts suggest that a 10% tariff may not push Canadian producers to divert exports from the U.S. Gulf Coast, where much of Canada’s crude is processed. Goldman Sachs estimates Canadian producers could lose up to $3-$4 per barrel, leading to a modest 5-10 cent increase in U.S. gasoline prices.
Nevertheless, tariffs could prompt Canada to reconsider its long-term oil strategy. Currently, Canada’s capacity to export oil to markets beyond the U.S. is limited. The recent expansion of the Trans Mountain Pipeline to Canada’s west coast offers some access to Asian markets, although spare pipeline capacity is constrained. The current tariff talk could fan Canadian interest in further expanding its pipeline network.
The situation is similar in North America’s integrated natural gas sector. The 10% tariff on Canadian energy imports would likely have a minimal impact on U.S. consumers. Canada supplies over 8 billion cubic feet per day of natural gas to the U.S., meeting roughly 9% of domestic demand. While tariffs could slightly increase U.S. natural gas prices, Goldman Sachs estimates the rise would be only a few cents per million British thermal units (MMBtu) above the current $4 level.
Canada and Mexico have limited options for immediate retaliation in the energy sector. Canada has floated the idea of an export tax on energy shipments to the U.S., which could raise costs for American consumers. However, such a move risks escalating tensions with the Trump administration and would likely face strong opposition from Canada’s oil-producing provinces.
Mexico, heavily reliant on U.S. energy imports, lacks comparable leverage. The country imports 70% of its natural gas from the U.S. and depends on U.S. refined products, limiting its ability to retaliate effectively.
China’s role in this dynamic is more peripheral. Chinese imports of U.S. oil and LNG have declined sharply since Trump’s first term and now account for only a fraction of China’s total energy imports. While China’s retaliatory tariffs are unlikely to impact the U.S. LNG industry in the short term–LNG sold under contract to Chinese companies accounts for only about 5% of U.S. LNG exports today–they could deter Chinese buyers from signing future contracts with U.S. suppliers.
By imposing lower tariffs on critical energy imports and pausing new measures for Canada and Mexico, the administration is attempting to balance its broader trade objectives with its promise to lower consumer prices. Whether it can do both simultaneously remains to be seen.
Trump’s tariff gamble places energy dominance at a crossroads. Striking a delicate balance between trade toughness and market stability will determine whether the U.S. maintains its edge—or risks undermining the very dominance it seeks.