President-elect Donald Trump's promised trade policies could effectively replace two major intergovernmental economic coalitions with a new order focused solely on U.S. interests, petroleum analyst Philip Verleger said on Monday.

In his weekly "Notes at the Margin" report, he said the Group of 7 and Group of 20 intergovernmental forums are at risk of being replaced by what he called the "G1," or the U.S. alone.

He said that while the G7 and G20 have focused on free trade and international cooperation, the G1 is devoted to accomplishing Trump's campaign promise to "Make America Great Again," even if that effort diminishes the power of all other countries and attempts to replace cooperation with U.S. dominance.

Verleger referenced "National Power and the Structure of Foreign Trade," a book published in 1945 by Albert Hirschman that he believes could serve as a guide for the next four years. The book discusses creating conditions that would make the interruption of trade of much more concern to trading partners than to the U.S., adding that just the possibility of tariff wars and interruptions is sufficient to test the influence of the stronger country and shape the policy of the weaker nations.

Hirschman added that the country conducting such a "power policy" can choose its trading partners, while smaller countries would have no options "but to trade with that country."

He said both Canada and Mexico are in the category of smaller countries that primarily produce and export raw materials. Trump's recently proposed 25% tariffs on Canada and Mexico appear to represent the opening shots of the "G1" policy, he added.

Trump over the weekend also vowed to impose a 100% tariff on countries that abandon the U.S. dollar as a reserve currency. In a posting on social media platform Truth Social, Trump referenced a nascent effort by Brazil, Russia, India, China and South Africa, the so-called "BRICS" countries--to move off the dollar. BRIC members also include the United Arab Emirates and Saudi Arabia.

He said a 25% tariff on Canadian and Mexican imports could increase the price of crude oil from both countries by $16/bbl. Various reporters and columnists have warned that such a move would lead to higher fuel prices, particularly in the Midwest.

Verleger late last month said he believes Canadian crude producers would be hurt by any tariff and suggested they, rather than U.S. consumers, will bear most of the added cost.

He said U.S. refiners and traders will be able to work around the tariff impacts on Canada and Mexico, while producers in both countries will need to find other international buyers. He said that would likely be a daunting task given logistical issues.

Consumers in Illinois, Indiana, Michigan and Minnesota, which combined import nearly 3 million b/d of Canadian crude, would be particularly vulnerable to price increases. The American Fuel and Petrochemical Association warned last week that 65% of Midwestern refinery feedstock comes from Canada, with no "easy, fit-for-purpose" replacement crude.

Verleger, however, said he believes AFPM and Canadian producers have ignored the potential impact of arbitrage. Refined products can be moved from the U.S. Gulf Coast (PADD 3) to the Midwest (PADD 2) by pipeline, barge, and rail. In 2006, those methods of transportation provided the Midwest with more than 700,000 b/d of gasoline. Diesel shipments from the Gulf Coast to the Midwest were once as high as 400,000 b/d. The slowdown in intra-PADD shipments over the last 18 years or so has come thanks to the availability of low-cost Canadian crude.

Still, he said potential Trump tariffs could put Midwest refiners at a significant disadvantage compared with Gulf Coast crude processors, which Verleger said could obtain as much as 25% of the Midwest market--which uses nearly 4 million b/d of diesel and gasoline--and lead to the closure of two to four Midwest refineries.

About 400,000 to 500,000 b/d of Canadian crude is now processed by Midwest refineries, but he said the heavy sour crude they use is available on international markets. Refiners in the region will look for crude sources not subject to the tariff, he added.

Another potential outcome of Trump's policies could be an increase in exports of Canadian crude to the Gulf Coast. Only about 150,000 b/d of crude moving through the U.S. is exported and it's unclear whether these exports or higher departures would be subject to the tariff.

Tariffs would also put Canadian sales to West Coast (PADD 5) buyers at risk, Verleger said. West Coast refiners buy almost 6 million b/d of Canadian crude thanks to the expansion of the Trans Mountain Pipeline. But he said California and Washington refiners could "quickly substitute" volumes from the Middle East or elsewhere.

Verleger said Canadian producers will likely be forced to choose whether to absorb a large portion of any tariff or find new markets for their more than 2 million b/d of production.

Mexico will also likely become a target of Trump's "power policy." The U.S. imports just under 500,000 b/d of Mexican crude, with most of it destined for the Deer Park refinery in Houston that is owned and operated by Mexican state-owned oil company Pemex.

In addition, he said OPEC members and others intent on stabilizing crude prices through production cuts will face new challenges under Trump's promised trade policies. Canadian producers and Pemex could target new buyers in China, South Korea, and Japan, countries that would be happy to replace higher-priced Mideastern crude with Canadian or Mexican barrels.

Verleger said he believes there is "significant risk" that the tariffs will destabilize crude oil prices, despite OPEC's efforts.


This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.


--Reporting by Tom Kloza, tkloza@opisnet.com; Editing by Jeff Barber, jbarber@opisnet.com


(END) Dow Jones Newswires

12-02-24 1325ET