US energy companies brace for tariff impact

There is a famous line in the great US comedy series ’30 Rock’, when the frazzled TV producer Liz Lemon is walking out of the office at the end of the day and says to her boss Jack Donaghy: “What a week, huh?” He turns to her and says: “Lemon, it’s Wednesday.” The past few days of drama over US tariffs on Canada, Mexico and China have felt a bit like that.

Wood Mackenzie analysts and consultants have been handling a wave of inquiries from clients needing to understand the impact of the tariffs on their businesses, in a volatile situation that at times was changing hour-by-hour or minute-by-minute.

By the end of the week, the position has stabilised somewhat. But events are still moving fast, and a number of different outcomes are possible. Companies need to understand the potential impact of the new tariffs and what they can do to minimise any additional cost and disruption.

Canada and Mexico escape new tariffs for 30 days, but China is hit immediately

President Donald Trump has described himself as “a tariff man”, and has long argued for the importance of tariffs as a tool to advance US national interests. He has talked about using tariffs to raise revenue, to support US manufacturing, and to provide leverage in international negotiations over other issues.

Last Saturday, when the White House announced proposed new tariffs of 25% on imports from Canada and Mexico, with a lower rate of 10% for Canadian oil and gas, and 10% for China, it made clear that their purpose was as leverage. The goal was to “hold Mexico, Canada, and China accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country,” the White House said.

The announcement caused uproar. There were threats of retaliatory tariffs from all three countries, and economists raised concerns about the impact on growth and inflation. Financial markets were tense, with the S&P 500 index down 2% at one point on Monday.

But that same day, there was a partial reprieve, at least for the moment. Mexico and Canada both announced measures to strengthen border security, and the tariffs were paused for 30 days, until 4 March. The White House said further time was needed “to assess whether these steps constitute sufficient action to alleviate the crisis”.

What happens next is uncertain. Some commentators have said the border security measures announced by Canada and Mexico “lack substance”, and in some cases were just re-announcements of policies already being implemented. So far there has been no guidance from the White House on how it will judge whether the two countries’ actions have been effective, or on what more it might ask them to do.

Meanwhile, China did not make any attempt at conciliation, and the new 10% tariff on its exports to the US took effect on Tuesday. The tariffs will apply to almost all imports from China immediately, with an exemption for goods currently being shipped if they were loaded before 1 February and enter the US before 7 March.

China, in turn, has announced targeted retaliatory tariffs on selected imports from the US, including LNG and coal at 15% and crude oil, large cars, pickup trucks and agricultural machinery at 10%.

President Trump seems unlikely to stop there. He said this week that new tariffs on imports from the EU were likely to be announced “pretty soon”.

The Wood Mackenzie view

Following the drama of the past week, businesses are assessing the impacts of tariffs that have already been implemented, and preparing for the other tariffs that may come soon. Kelsey Coffman, a vice president in Wood Mackenzie’s supply chain consulting practice, says companies are responding to the threat of increased tariffs with three key actions.

They are identifying suppliers and products, such as transformers, that they know will be affected, and investigating alternative sources of supply. Where no adequate alternatives exist, they are looking at accelerating purchases to stock up on products that may soon be more expensive. And they are looking deeper into their supply chains to understand better how the impact of the tariffs might feed through.

Utilities, for example, have often not had good visibility beyond their tier one suppliers, Coffman says. Understanding their tier two and tier three suppliers and beyond will be important for them to know what impact the tariffs will have, and how those increased costs can be mitigated.

Power and renewables

Surging demand has meant that the US power industry has become increasingly reliant on imports for critical transmission and distribution (T&D) equipment. At the start of 2021, imports supplied about 65% of the US market for large power transformers. By 2023, that was up to about 80%. In volume terms, imports of those large transformers rose from about 50 a month in 2021 to more than 150 a month in the second half of 2024.

Mexico, Canada, China and the EU supply various types of electrical equipment to the US. In 2024, Mexico supplied about 39% of US imports of high-voltage transformers, while China accounted for 54% of imported low-voltage transformers. Canada accounted for 20% of US imports of high-voltage switchgear, and 100% of its imported utility poles, representing about 15% of the US market.

The wind, solar and storage sectors will also be affected. US imports of wind equipment have fallen sharply since 2020, but the industry’s supply chain remains highly globalised, particularly for turbine blades. Last year, US manufacturers supplied only about 30% of the country’s blade market, with Mexico accounting for 63% and Canada 6%.

The storage industry will also be hit because it relies on batteries from China. Costs were already under upward pressure after the Biden administration announced an increase in tariffs to 25% on lithium-ion battery imports from China, effective from 2026. The Trump administration’s 10% rate will add to that. Manufacturers that use Mexico to integrate equipment for export to the US will also be affected if the new 25% tariff comes into effect.

Solar could be the sector least affected. Solar modules, cells and wafers from China already face steep tariffs in the US market, and neither Mexico nor Canada are important suppliers to the US.

Crude oil and products

Canada and Mexico are both significant exporters of crude oil to the US. In 2023, the US imported about 3.9 million barrels a day of crude from Canada, and about 730,000 b/d from Mexico. Tariffs on those imports would cause significant disruption, and that prospect has shaped the Trump administration’s plans. The threatened tariffs on Canada include a special lower rate of 10% on oil and gas, intended to mitigate the impact on US consumers.

Mexican crude facing a 25% tariff would be diverted away from the US towards Europe or Asia. It would be replaced by supplies from other countries, with Iraq particularly well placed to step up its exports to the US.

However, Wood Mackenzie analysts say a 10% tariff does not create enough of an incentive for Canadian producers to re-export crude from the US Gulf coast. That means most of the Canadian crude that flows to US markets would continue to flow, and Canadian producers would have to bear the brunt of the tariff in reduced selling prices. The administration would achieve its goal of limiting the rise in fuel prices paid by US consumers.

In the longer term, the threat of tariffs could reshape Canada’s oil strategy. Export capacity for Canadian crude to reach other markets is strictly limited. We think only about an extra 100,000 to 150,000 b/d of capacity will be available to increase the flows on the Trans Mountain Pipeline from Alberta to Canada’s west coast. But there has been an upsurge of interest in Canada in building new pipelines, to create more options for Canadian oil and reduce dependence on the US.

Depending on how the current dispute plays out, broader support for more oil pipeline construction could be one of the lasting legacies of the trade tensions between Canada and the US.

Gas and LNG

The lower rate of 10% on energy imports from Canada would also help limit the impact on US consumers of higher natural gas prices. Canada is an important gas supplier to the US. It sent more than 8 billion cubic feet per day in 2024 through pipelines into the US Pacific Northwest, Midwest and Northeast markets, meeting more than 9% of US domestic demand.

Tariffs on those imports would put upward pressure on natural gas prices in the US, and downward pressure on selling prices for Canadian producers. But with a 10% rate, we estimate that initially the impact on US gas prices would be negligible.

Even if the 10% tariff lasts for 12 months or more, it might add only 5 to 10 cents per million British thermal units (mmbtu) to the price of benchmark Henry Hub gas, which is around US$3.40/mmbtu today.

Meanwhile, China’s retaliatory tariffs are not expected to have much immediate impact on the US LNG industry. Gas sold under contract to Chinese companies accounts for only about 5% of US LNG exports. The most significant effect is likely to be longer term. If the tariffs persist, they could deter Chinese buyers from signing contracts with US LNG suppliers in the future.

US tariffs on imports from China will also raise the cost of some equipment and components used for LNG plants. That could mean higher capital costs for some new US LNG export projects.

Steel

Another sector where new tariffs could have a significant impact is steel, with knock-on effects across the energy and natural resources industries. In 2024, Canada supplied about 23% of the steel imported into the US, and Mexico about 12%.

The story of steel tariffs during the first Trump administration illustrates some of the issues that can arise. In 2018, the administration announced new tariffs on imports of steel and aluminium. Initial exemptions for Canada, Mexico and the EU soon lapsed, and imports from those economies were included in the tariffs. The result was supply chain disruptions and increased costs for steel-consuming industries, particularly in the automotive and construction sectors.

Other countries retaliated against the US with their own import duties and other measures, prompting negotiations that led to agreements to lift the tariffs, for Canada and Mexico in 2019 and for the EU in 2021.

That history is a reminder of the complexity and instability of the competitive landscape when tariffs are used as a principal instrument of economic policy. And looming over it is the threat of a global economic downturn.

Peter Martin, Wood Mackenzie’s head of economics, says the risk is that this initial round of tariffs turns out to be the first step on a path to a tit-for-tat global trade war that escalates rapidly, which would make a global recession seem inevitable.

Wood Mackenzie will continue to closely follow the changing positions of the US and other governments, and tariffs’ impacts on the energy and natural resources industries. Keep following WoodMac.com, or get in touch with us, to find out more as the situation evolves.

Other news

The Trump administration is attempting to freeze or claw back hundreds of billions of dollars in grants, loans and guarantees for the energy industry committed under President Joe Biden. John Sneed, the new director of the Department of Energy’s Loan Programs Office, which supports energy projects, reportedly told staff that the administration planned to reshape the office to support its priorities, including nuclear power and LNG. Any attempt to reallocate funds, particularly loans and grants that have already been committed, would be expected to face legal challenges.

Meanwhile, there has been uncertainty over the administration’s position on issuing permits for renewable energy development. The news service Heatmap reported that the Trump administration had “paralysed renewables permitting”, with companies unable to secure approvals from the Army Corps of Engineers. The Corps, which has responsibility for regulating waters and wetlands in the US, stopped evaluating 168 applications for permits related to renewable energy projects, under orders from the White House. However, it was reported on Thursday that the pause had been lifted, and the Corps would start evaluating permit applications from renewables projects again.

The three Baltic nations Lithuania, Latvia and Estonia are this weekend cutting their electricity connections to Russia and Belarus, more than 30 years after achieving independence. Transmission links between the three nations and Russia have been gradually removed, and new connections built to integrate them into the central European and Scandinavian grids. On Saturday, the last links to the Russian grid will be shut off. There have been warnings of possible cyber attacks over the weekend, intended to demonstrate that disconnecting from Russia was a mistake.

Other views

Walking Japan’s energy tightrope – Simon Flowers, Joshua Ngu, Alex Whitworth and Johnson Quadros

US oil tariffs on Canada and Mexico would significantly impact North American crude flows

The Danish government charts course through offshore wind headwinds – Søren Lassen

Industrial demand, shrinking production fuel rise in Indian LNG imports – Johnson Quadros and others

Quote of the week

“Climate change is a real thing. I’ve studied, spoken, written on it for 25 years. It is a very real thing. But there’s climate change the physical science and our understanding, and then there’s the words ‘climate change’, used politically to pursue agendas that may or may not be at all related to what we actually know about climate change.”

Chris Wright, the new US energy secretary, took over at his department this week. He talked about his approach to energy and climate in an address to staff, and praised the Department of Energy as “the gem of the American government”, highlighting in particular the work of its national laboratories.

Wright also issued a memo setting out his policy agenda. He listed three key priorities: expanding energy production and reducing costs, leading the world in innovation and technology breakthroughs, and removing barriers to infrastructure development. His plans for achieving those goals included streamlining permitting; unleashing commercial nuclear power; focusing support for R&D on fossil fuels, advanced nuclear, geothermal, and hydropower; and refilling the Strategic Petroleum Reserve.

Chart of the week

This comes from a recent Wood Mackenzie note on China’s overseas investment in the power sector. Last year, Chinese companies’ installations of generation capacity in Belt and Road (B&R) countries hit a new record of 24 gigawatts. About half of that was in fossil fuel technologies and half in zero-carbon sources, including solar, hydro and nuclear. Solar power, in particular, boomed in B&R countries last year, with Chinese companies’ installations approximately double the 2023 levels. And the rise of carbon-free technologies is set to continue – they make up over two-thirds of the project pipeline.

Alex Whitworth, Wood Mackenzie’s head of Asia Pacific power and renewables research, said: “As Chinese manufacturers drive down the costs of renewable power technology, Chinese companies are leading its deployment in many developing markets that could not previously afford it.”

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