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What If NAFTA Fails?


It’s not on everyone’s radar yet but over the last several months the 1994 North American Free Trade Agreement (NAFTA) between the U.S., Canada and Mexico has been the subject of several trilateral meetings aimed at the possible re-negotiation or outright withdrawal, as threatened by the Trump Administration.

At stake is the world’s largest free trade zone which sees most goods and services exchanged freely between the three countries. A change or failure to reach a solution agreed to by all three members, could have far-reaching implications for most consumers as duties and tariffs could be restored causing prices for almost everything to rise, including energy.

The U.S. driver is as much a benefactor of cheap Canadian energy, like oil, which is sold to U.S. refiners at the bargain basement price of about $38 a barrel, as are Canadian oil and gas producers. With few alternative markets for its valued bulk oil exports, a trade disruption in Canadian oil exports to the U.S. would seriously impact the two nation’s bilateral trade of about $700 billion U.S. a year. Conversely, a tariff or restriction on the sale of 4 million barrels a day of cheap Canadian oil to U.S. motorists could add 25 to 40 cents a gallon to the cost of filling up in markets where Canadian oil is processed at deep discounts to the WTI benchmark (West Texas Intermediate).

Growing trade in oil and petroleum products to Canada would also be affected. Increasingly, Canada is becoming a larger market for U.S. shale oil, as is Mexico. But it is in refined petroleum products like diesel and gasoline that big changes are taking place. A decade ago, Canada exported 5.8 billion gallons of fuel to America per year, while in turn, importing 2 billion gallons from the US. Today, the U.S. now exports 3.8 billion gallons with Canada supplying 6.6 billion gallons in return. In other words, the U.S has seen exports of fuel to Canada grow over 45%, while Canada has seen comparatively weaker export growth of only about 13%. For Mexico, the increase in U.S. fuel exports since deregulation has almost been one-sided in favor of America. Though Mexico is a major supplier of heavy oil to U.S. Gulf Coast refineries, according to the Energy Information Administration (EIA) of the U.S. Department of Energy, “U.S. export value is more than twice the import value in 2016”. Indeed the EIA report noted this was in stark contrast to the period between 2006 and 2010 when “the value of U.S. energy imports from Mexico were two to three times greater than the value of U.S. energy exports to Mexico”

NAFTA negotiations are therefore going to come into sharper focus over the next several weeks this month. Should the President decide to withdraw from this 24-year-old treaty, it is likely that the American Congress will begin getting an earful from America’s energy sector and drivers alike.

Stay tuned.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.