Will OPEC+ need major strategy rethink if Trump does hike tariffs?

After the high tariffs US President-elect Donald Trump's administration is expected to impose on the EU and China - ranging from 25% to 60% - the focus is now shifting to Canada and Mexico, the two US neighbours with strong economic and trade ties, including the USMCA (earlier known as NAFTA) free trade agreement.

However, these two are not exempt from the looming tariffs, which could significantly alter trade relations between them and the U.S., as well as on the global stage.

While the repercussions of higher tariffs on China and the EU have been discussed, those on Mexico and Canada are a different matter. They will have a direct impact on oil-producing countries, particularly those in the Arab Gulf.

Canada and Mexico are the largest exporters of oil to the US. The proposed tariffs would cover US imports of oil and energy products by 25, the same rate that would apply to other goods imported from these two countries.

Impact on GCC oil producers

This has prompted a significant shift in trade dynamics, with Canada reminding the US of its vital role in supplying oil and other energy sources. During a meeting in Florida, when Canadian Prime Minister Trudeau urged Trump to lower tariffs, Trump reportedly quipped, "Let Canada become the 51st US state, and we’ll make you governor—we’ll figure it out."

Mexico, meanwhile, has expressed a willingness to cooperate with the Trump administration on issues such as curbing illegal immigration, with the goal of softening the president-elect’s stance on the tariffs or at least reducing them.

What does this mean for oil-exporting countries? If the tariffs are implemented, Canada and Mexico's oil exports—comprising more than 50% of their total exports—could face significant market restrictions in the US, which means reducing those volumes. This would also force them to seek new export destinations.

Asian markets, a key alternative, would see an influx of new competition, as Russia and Middle Eastern oil exporters are already vying for a stronghold there. Additionally, countries under Western sanctions are offering large discounts on their oil exports, intensifying the competition.

As oil markets are expected to face weakness in the coming years due to the anticipated imbalance between supply and demand—partly caused by violations of OPEC+ production quotas—the entry of new suppliers into Asian markets will further intensify competition and increase the availability of discounts.

This could lead to lower prices, including for Middle Eastern exports.

OPEC+ will therefore face additional burdens and pressures, alongside the existing challenges of oversupply and the failure of some major oil-producing members to adhere to production quotas. These issues recently contributed to a decline in prices, despite these countries' commitment to the production agreement.

In response, the US is likely to try to offset the reduction in imports from Canada and Mexico by ramping up shale oil production and increasing imports from certain Caribbean countries, where new oil reserves have been discovered.

OPEC+ needs to switch fast

This shift will require OPEC+ countries to adapt, with the most important measure being stricter enforcement of production quotas across all member countries.

Offering discounts and taking advantage of lower transportation costs—compared to those from the Western Hemisphere—may also be necessary to remain competitive.

Otherwise, oil prices could experience successive declines, further impacted by the looming trade war between major powers, the US, China, and the EU. This conflict will affect global trade, impacting both exports and imports.

The hardest hit will be poorer countries, which could see a decline in the value of their exports, particularly agricultural and primary materials, or face challenges in importing essential goods at the same rates as before.

It is crucial to prepare for this potential shift in global trade, which will help mitigate the expected repercussions and losses.