The introduction of a 10% tariff on Canadian crude and refined product exports to the U.S. is expected to have its most immediate impact on New England, a region heavily reliant on Canadian imports. While Mexico is also subject to tariffs, its exports to the U.S. mainly consist of crude oil, meaning any effect on fuel prices may take longer to materialize. New England, however, sources a significant portion of its refined fuel from Canada, making it an early indicator of the tariff’s consequences.
One of the key suppliers to the region is Irving Oil, which operates the Saint John refinery in New Brunswick, Canada. With no refineries in New England, a substantial share of the refined products imported into the broader East Coast region designated as PADD 1 by the U.S. government likely flows directly into the area. PADD 1, which spans from Florida to Maine, imported just over 1 million barrels of refined products daily from Canada in December, underscoring Canada’s vital role in the region’s fuel supply.
Irving Oil’s Immediate Price Hike
The first tangible sign of tariff effects emerged when Irving Oil raised its wholesale diesel prices across much of New England by approximately 20 cents per gallon at the start of the week. According to fuel market analysts Patrick DeHaan of GasBuddy and Tom Kloza of OPIS, this increase was not driven by changes in the futures price of ultra-low sulfur diesel (ULSD), which has been trending downward. Given that New England’s diesel rack prices were averaging around $2.40 per gallon before the tariffs, the 10% tariff would add about 24 cents aligning with the magnitude of Irving’s price increase.
Rack prices, which fluctuate frequently, are closely tied to futures market movements. However, Kloza noted that as of Wednesday, no other suppliers had followed suit, which could put Irving at a competitive disadvantage.
Market Adjustments and Supply Chain Shifts
The tariffs have raised questions about how fuel markets will respond in the coming weeks. The most pressing issue is whether other suppliers will adjust their prices to match Irving’s or seek out alternative, non-tariffed sources of refined fuel.
Canada accounts for around 40% of the refined product imports into PADD 1, but the region also receives imports from Europe, including 100,000 barrels per day from the Netherlands and 47,000 barrels per day from the United Kingdom. One possible response to the tariff is for Canada to redirect its exports to Europe while European refineries increase their shipments to the U.S. However, this would introduce inefficiencies and additional shipping costs.
Domestically, there is potential for increased shipments from the Gulf Coast, though pipeline capacity constraints such as those on the Colonial Pipeline, which terminates in New York could limit how much fuel reaches New England. Transporting refined products via tanker from the Gulf Coast would require Jones Act compliant vessels, which are more expensive than international shipping alternatives.
These logistical challenges create an intricate balancing act as traders seek the most cost-effective routes to ensure supply while minimizing tariff related expenses.
Implications for Fuel Surcharges and Pricing Gaps
The tariff driven price increases could significantly impact transportation costs in New England, particularly for fleets that rely on fuel surcharges tied to national benchmarks. If diesel prices in the region rise significantly above the national average, it could lead to “basis risk” where a company’s fuel cost fluctuates independently of the pricing benchmark used for surcharges.
As of Monday, the national average retail diesel price was $3.635 per gallon, compared to $4.037 per gallon in New England. With the region already experiencing higher than average prices, further increases due to tariffs could exacerbate cost discrepancies.
Potential Effects on the Broader U.S. Market
While New England will see the earliest impacts, the broader U.S. market is also set to experience ripple effects from the tariffs. The Midwest, classified as PADD 2, imports roughly 2.9 million barrels of crude oil daily from Canada, representing 100% of the region’s crude imports. With limited alternatives, any price increases from tariffs will eventually be reflected in refined product prices, though the impact may take longer to materialize.
The challenge for refiners in PADD 2 is that many pipelines originally designed to transport crude from the Gulf of Mexico inland have been reversed in recent years to accommodate increased flows from Canada and North Dakota to the Gulf Coast. This limits the ability of refiners to replace Canadian crude with alternative sources quickly.
By contrast, Mexico’s crude and product exports to the U.S. totaled 517,000 barrels per day in December, and since they are transported by sea, they could be redirected to other global markets. However, just as with Canadian fuel, this rerouting could disrupt existing trade flows and create inefficiencies that ultimately push up prices.
The tariffs on Canadian refined products are set to have an almost immediate impact on New England, where Irving Oil’s price hike provides an early glimpse of potential market adjustments. Whether other suppliers will follow suit or explore alternative sourcing options remains an open question. Meanwhile, shifts in global trade flows could increase costs and inefficiencies as suppliers work to mitigate the effects of the tariffs. As the situation evolves, market participants will be watching closely to see how supply chains adjust and what the ultimate consequences will be for fuel prices across the U.S.
