Trump’s Border Tax Could Further Reduce Mexican Oil’s U.S. Ties

  • U.S. president creates buzz for Mexico City oil conference
  • Asian demand for heavy Mexican crude expected to rise

What the $60B Trade Deficit With Mexico Means

U.S. President Donald Trump’s proposed tariff on Mexican goods has the country’s oil industry considering just how much it needs the American market.

A 20 percent border tax to build a wall between Mexico and the U.S. means Canadian oil-sands competitors will enjoy a leg up and U.S. motorists will suffer higher prices at the pump due to the tariff on Mexican oil.

Pemex, Mexico’s principal producer, isn’t waiting for Trump’s plan to come to reality. The state-owned company has already been reducing its reliance on the U.S. In the first 11 months of 2016, Mexico exported 48 percent of its crude to the U.S., down from 69 percent in 2014, according to Mexico’s Energy Information Agency data. Asian buyers took 26 percent while Europe accounted for 23 percent.

“Mexico has a strong relationship with clients in Asia and Europe,” said Ixchel Castro, a senior analyst for Latin American oils and refining markets at Wood Mackenzie in Mexico City.

Trump will give attendees of the Energy Mexico 2017 conference, convening today in Mexico City, plenty to chew over. Mohammad Barkindo, OPEC’s Secretary General, is scheduled to open the event. The three-day conference, organized in large part by former Pemex Chief Executive Officer Jesus Reyes Heroles, features experts from BP Plc, ExxonMobil Corp., Citigroup Inc., and many of Mexico’s top names in the industry.

Panels will discuss North America’s energy outlook, the changing geopolitical climate, global oil outlook and deep-water production in the Gulf of Mexico.

Crude Demand

Another topic -- no surprise -- will be Trump, and how’s he poised to upend the ties between the North American countries.

“If the relationship goes in the wrong direction, which it seems to be doing, then all the aspects of the current cohesive relationship are at risk,” said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.

Asian demand for Mexico’s heavy Maya crude is likely to rise even more, said Robert Campbell, head of oil products research for Energy Aspects in New York. Most Asian refineries are designed to process heavy oil and will need supplies as Organization of Petroleum Exporting Countries and other oil-rich nations curtail production, he said.

“There’s plenty of appetite,” Campbell said. India and China, especially, would be buyers, he said. “There’s so much demand worldwide for heavy crude that there would be no problem.”
Pemex declined to comment on the planned tax. The company has already sought to diversify its exports, said a company spokeswoman. About 40 percent of Pemex’s oil goes to the U.S., the spokeswoman said.

Mexico could expand sales to the Caribbean as Venezuela slashes subsidized oil shipments to neighboring states, said Castro of Wood McKenzie.

American Motorists

Trump’s envisioned tariff would mean U.S. refiners, reliant on Mexican crude, are likely to pass along the cost to American motorists.

“Assuming they’re proposing to impose a 20 percent tax on imports on countries from which we run a trade deficit, then we can expect gasoline prices to rise 30 cents per gallon,” said Phil Verleger, president of the economic-consulting company PKVerleger LLC by phone from Carbondale, Colorado.

The tax could be a boon for the Canadian oil industry. The heavy crude produced by Canadian oil-sands producers competes with Mexican supplies in the U.S. refining market, so Trump’s proposal “would attract more Canadian crude because it would be cheaper,” said Bart Melek, the head of global commodity strategy at TD Securities in Toronto. “It just makes Mexican oil more expensive by 20 percent, so it gives Canada a comparative advantage.”

This is happening at a time when Pemex, to stem what has been a 12-year decline in output, is seeking foreign partners for the first time in oil production. U.S. companies, including Exxon, have been among the bidders awarded access to explore for Mexican oil.

U.S. Gulf Coast refineries received 178 million barrels of Mexican crude in the first 10 months of last year, accounting for 97 percent of all crude imported from Mexico, according to the U.S. Energy Information Administration.

“Rising tensions between the two countries could certainly accelerate efforts to lower U.S. market share,” said BMI Research analyst Mara Roberts.

— With assistance by Joe Carroll, Sheela Tobben, Laura Blewitt, and Robert Tuttle

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