There are ways to avoid the tariff on imports of Mexican crude oil, but at this point it is unclear whether those will succeed. If not, some refiners will pay more and some crude will head to Asia.
President Trump’s announcement that he will impose a 5-25 percent tariff on all Mexican goods has roiled markets today. This development however should not be seen in the same light as tougher positions on Venezuelan and Iranian exports. There are many ways this dispute with Mexico can be resolved. The two countries are not that far apart on immigration policy, and the President’s threat could be seen as an effort to push Mexico into action it has already deemed acceptable, such as better enforcement of Mexico’s southern border and requiring refugees to file for asylum in Mexico.
If President Trump can negotiate a fairly quick understanding with Mexico’s president, he can claim credit that his get tough policies work and register a “win” on immigration. If he cannot fashion a fairly reachable deal with Mexico, he will face considerable litigation in U.S. courts and possibly even a formal resolution opposing this move in Congress. Moreover, he will raise the cost of crude oil and likely gasoline for U.S. consumers.
In the meantime, the roughly 630,000 b/d of crude oil the U.S. imports from Mexico will be subject to a 5 percent tariff, which will rise to 10 percent on July 1 and continue rising incrementally toward 25 percent in October, if the US does not remove the tariffs earlier.
Differentials between sweet and sour crude have widened in recent weeks, softening the effect of the penalty on buyers in the US Gulf. Still, it is a seller’s market for heavy oil, as Venezuela’s volumes wane and the removal of waivers on Iranian crude set in. With the current price of Maya around $63 per barrel, a 5 percent tariff will raise the price by more than $3 per barrel. This is more than the shipping cost to Asia, which means Mexico would sell barrels on to Asian buyers, especially China and India, rather than pay any of the cost of the tariff themselves. US refiners are likely to pay up given the lack of other heavy crude, but if not, then China and India will take advantage.