Exxon Mobil and Chevron are feeling the heat as their profits take a hit from falling fuel margins, especially with the looming threat of US tariffs on two major oil suppliers that could worsen the refining situation. 

Exxon reported a staggering 67% drop in refining profits for 2024, while Chevron's numbers were even worse, showing a 72% decline. These leading North American oil companies are facing the same challenges that are impacting fuel producers globally—an oversupply of oil combined with stagnant demand.

These disappointing results come at a time when President Trump is intensifying his threats to impose hefty tariffs on Canada and Mexico, both vital sources of crude for US refineries. If these tariffs, which Trump hinted could start as early as this weekend, go into effect, it would raise the costs of producing everything from gasoline to jet fuel.

On Thursday, the president reiterated his commitment to the long-discussed 25% tariffs on products from Canada and Mexico, although he didn’t clarify if oil would be part of that list. He set a tentative start date of February 1.

Refineries in the Midwest rely heavily on Canadian oil, sourcing up to 75% of their crude from there. Mexican oil has also been a key ingredient for Gulf Coast refineries that focus on processing heavy crude. If the price of oil from these countries rises, it could lead to a ripple effect, pushing refiners to scramble for alternative crude sources with similar properties.

Chevron’s refineries are mostly located along the coast, giving them a better shot at accessing crude shipments from abroad compared to their inland rivals, according to CEO Mike Wirth.

“We tend to be more around the coasts so we’ve got more flexibility because you can bring in product on ships as opposed to by pipeline from Canada,” Wirth said during an interview with Bloomberg Television. “Last year, less than 10 per cent of our feedstock came from either Mexico or Canada and so our company wouldn’t probably feel it quite the way the others would. But it could create some impacts depending upon where your assets are.”

Exxon reported that its refining earnings for the entire year fell to $4 billion, a significant drop from $12.1 billion in 2023, as stated on Friday. Meanwhile, Chevron's worldwide plants brought in only $1.7 billion last year, down from $6.1 billion. 

The fourth quarter was particularly tough for Chevron's US refineries, which faced losses nearing $350 million, according to a company announcement.

“The largest downside surprise came from the oil major’s US refining segment, which reported its first quarterly loss since early 2021 and was well below expectations,” said Peter McNally, an analyst at Third Bridge.

Exxon shares climbed 0.8% at 9:33 AM in New York, while Chevron saw a drop of 2.5%.

Potential tariffs on Canada and Mexico could limit oil shipments by about four million barrels a day from the north and 500,000 barrels a day from the south. These two countries are the leading sources of foreign crude for US refiners.

Valero Energy, the third-largest independent refiner in the US by market value, cautioned on Thursday that the industry might reduce fuel production if Trump follows through on his tariff threats. Mexico is Valero's primary oil supplier. Independent refiners are those that don’t engage in oil drilling.

Exxon reported adjusted earnings of $1.67 per share for the fourth quarter, surpassing the consensus estimate by 12 cents.

On the other hand, Chevron announced quarterly earnings of $2.06 per share, which was a nickel short of expectations. This shortfall came just a day after Shell revealed its own disappointing year-end profits.

Last month, Exxon surprised investors by increasing its capital spending to over $30 billion annually for the next five years, as CEO Darren Woods aims to ramp up production to levels not seen since the 1970s.

Woods believes that new oil projects in Guyana and the Permian Basin, along with investments in liquefied natural gas, will yield such high margins that they could lower Exxon’s breakeven oil price to just $30 a barrel by the end of the decade, ensuring profitability regardless of how the energy transition unfolds.

During the fourth quarter, the international Brent crude benchmark averaged around $74 a barrel, which is an 11% decrease from the previous year. This decline has put pressure on the largest oil companies' ability to fund shareholder-friendly initiatives like dividends.

In 2024, Exxon generated $36 billion in free cash and returned nearly all of it to shareholders through buybacks and dividends, making it the sixth-highest cash distributor in the S&P 500 Index. The company plans to buy back $20 billion in shares each year through 2026.

“We’re seeing higher and higher production but that production is coming at lower cost of supply, higher profit barrels,” chief financial officer Kathy Mikells said in an interview. “It’s important to remember that all barrels are not created equal and ours are very advantaged.”

Chevron increased its dividends by 5 percent despite a decline in profits. The company reported US$4.4 billion in free cash flow for the quarter, which fell short of the approximately US$7.5 billion allocated for dividends and share buybacks.

He mentioned, “We’re building from strength to strength and have US$10 billion of additional free cash flow growth through the end of 2026,” Wirth said. New projects in Kazakhstan and the newly named Gulf of America will drive the increase.