February 5, 2025
A 0.5 Mb/d New Market Opportunity for Heavy Crude Producers with the Introduction of a 25% Tariff on Mexican Crude Oil Imports into the United States
Key Highlights
The potential 25% tariff on imports of Mexican oil to the United States opens up a new 0.5 Mb/d market niche for heavy oil producers around the world. Should the tariff gets imposed, most of these producers will have a price advantage over Mexican heavy sour Maya crude in the U.S. oil market. Additional consequences may include:
Background
On February 1, 2025, the United States imposed a 25% import tariff on crude oil and energy products from Mexico, marking a significant shift in trade dynamics between the two countries. The tariff (which has now been delayed for 30 days) aims to address broader economic and geopolitical concerns, including reducing trade imbalances and protecting domestic industries, but it is expected to have wide-ranging implications for both nations.
The U.S. refining sector, particularly along the coast of the Gulf of Mexico (GOM), heavily depends on imports of Maya crude due to its compatibility with complex refining systems designed to process heavy, sour crudes. If the tariff goes forward, it will increase costs for U.S. refiners, reducing their profit margins and prompting some to seek alternative supplies from regions like South America or the Middle East. However, given the limited global supply of comparable crude grades, these alternatives will come with additional costs and logistical challenges.
Commentary
In 2024, Mexico produced 1.8 Mb/d of crude oil, with 0.64 Mb/d (40%) exported to the U.S. This included 0.47 Mb/d of crude oil and 0.17 Mb/d of petroleum products. Most of Mexico’s oil exports to the U.S. consist of Maya heavy sour crude (22 API and 3.4% sulfur). This blend traded at an average of approximately $70/bbl in 2024, with a $7/bbl discount to WTI (FOB GOM).
U.S. refiners are likely to substitute Mexican crude oil with similar blends from other regions, creating an opportunity of 0.5 Mb/d for other heavy crude producers who can benefit from the disadvantage faced by Mexican oil.*
A 0.5 Mb/d New Market Opportunity for Heavy Crude Producers with the Introduction of a 25% Tariff on Mexican Crude Oil Imports into the United States
Key Highlights
The potential 25% tariff on imports of Mexican oil to the United States opens up a new 0.5 Mb/d market niche for heavy oil producers around the world. Should the tariff gets imposed, most of these producers will have a price advantage over Mexican heavy sour Maya crude in the U.S. oil market. Additional consequences may include:
- A redirection ↪ of up to 0.5 Mb/d of Mexican crude oil to alternative markets in Europe and Asia
- A drop ↘ in Mexican upstream producers’ margins of $2-4/bbl
- A $0.05-0.15 per gallon price increase ⬆ for gasoline and diesel for U.S. consumers in the southeastern states
Background
On February 1, 2025, the United States imposed a 25% import tariff on crude oil and energy products from Mexico, marking a significant shift in trade dynamics between the two countries. The tariff (which has now been delayed for 30 days) aims to address broader economic and geopolitical concerns, including reducing trade imbalances and protecting domestic industries, but it is expected to have wide-ranging implications for both nations.
The U.S. refining sector, particularly along the coast of the Gulf of Mexico (GOM), heavily depends on imports of Maya crude due to its compatibility with complex refining systems designed to process heavy, sour crudes. If the tariff goes forward, it will increase costs for U.S. refiners, reducing their profit margins and prompting some to seek alternative supplies from regions like South America or the Middle East. However, given the limited global supply of comparable crude grades, these alternatives will come with additional costs and logistical challenges.
Commentary
In 2024, Mexico produced 1.8 Mb/d of crude oil, with 0.64 Mb/d (40%) exported to the U.S. This included 0.47 Mb/d of crude oil and 0.17 Mb/d of petroleum products. Most of Mexico’s oil exports to the U.S. consist of Maya heavy sour crude (22 API and 3.4% sulfur). This blend traded at an average of approximately $70/bbl in 2024, with a $7/bbl discount to WTI (FOB GOM).
U.S. refiners are likely to substitute Mexican crude oil with similar blends from other regions, creating an opportunity of 0.5 Mb/d for other heavy crude producers who can benefit from the disadvantage faced by Mexican oil.*
The tariff impulse is likely to create several waves of price adjustments, bringing a new equilibrium to the heavy sour market in the Gulf of Mexico. As shown in the figure above, the immediate impact of the tariff introduction will be that Mexican crude becomes $18/bbl (an increase of 25% from $70/bbl) more expensive for U.S. refiners (1). As a result, U.S. Gulf of Mexico (GOM) refiners will turn away from Mexican crude in favor of alternative, comparable crudes from South America or the Middle East, priced similarly to Mexican volumes (2).
Mexican producers, on the other hand, have the option to divert their crude volumes to Europe or Asia, where comparable heavy sour crudes are selling for around $69/bbl (3). However, transporting Mexican crude to Europe or Asia will incur a cost of $2-4/bbl, meaning their revenue from each barrel sold in those markets will be $2-4/bbl lower than what they used to earn selling it to the U.S (4). Although Mexican producers may consider lowering their selling price to U.S. refiners to reflect this alternative, the final cost of Mexican crude for U.S. importers will still be $82-84/bbl (5) [$65-67/bbl + 25% tariff], making it uncompetitive compared to other heavy sour crudes.
That being said, refinery margins for U.S. refineries in Texas and Louisiana are expected to decrease by about $2-4/bbl, as alternative heavy sour crude supplies redirected from other regions will likely be more expensive than previous Mexican volumes. Alternatively, refiners may be forced to switch to lighter, sweeter crudes, which do not offer significant price discounts.
The $2-4/bbl increase in costs for U.S. GOM refiners could potentially be passed on to consumers, leading to an increase in gasoline and diesel prices by approximately $0.05-0.15 per gallon. However, given the bearish outlook for crude oil prices in 2025, this price increase may go largely unnoticed.
References:
Mexican producers, on the other hand, have the option to divert their crude volumes to Europe or Asia, where comparable heavy sour crudes are selling for around $69/bbl (3). However, transporting Mexican crude to Europe or Asia will incur a cost of $2-4/bbl, meaning their revenue from each barrel sold in those markets will be $2-4/bbl lower than what they used to earn selling it to the U.S (4). Although Mexican producers may consider lowering their selling price to U.S. refiners to reflect this alternative, the final cost of Mexican crude for U.S. importers will still be $82-84/bbl (5) [$65-67/bbl + 25% tariff], making it uncompetitive compared to other heavy sour crudes.
That being said, refinery margins for U.S. refineries in Texas and Louisiana are expected to decrease by about $2-4/bbl, as alternative heavy sour crude supplies redirected from other regions will likely be more expensive than previous Mexican volumes. Alternatively, refiners may be forced to switch to lighter, sweeter crudes, which do not offer significant price discounts.
The $2-4/bbl increase in costs for U.S. GOM refiners could potentially be passed on to consumers, leading to an increase in gasoline and diesel prices by approximately $0.05-0.15 per gallon. However, given the bearish outlook for crude oil prices in 2025, this price increase may go largely unnoticed.
References:
- Pump prices set to rise as Trump tariffs hit Canadian, Mexican oil. Reuters
- Energy Information Administration of the US Department of Energy
- Argus, S&P Global Platts, Wood Mackenzie for crude oil price data, refinery margins, freight rates