Backgrounder on energy and trade

Trade War

Tariffs on Canadian oil imports and exports can change price calculation in the USA, making the market more susceptible to local conditions. Moves to increase the price of oil in the USA will bring more domestic production online and will speed-up ongoing transition of refineries and pipelines to use Permian/fracked oil.

Backgrounder on energy and trade
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Energy tariffs

Trump Administration has threatened 25% USA protective tariff on Canadian exported goods, including oil and gas.

Canada government threats of retaliatory export tariff on Canadian oil and gas products to the USA.

Alberta government is opposed to any tariffs on the export of Canada's oil and gas products from Alberta.

Costing numbers

  • Canada imports $27.9B in Energy products from the USA. Comparable with metal, electronics, and paper products categories.
  • Canada export 4 million barrels a day to the USA.
  • Canada's trade surplus with the USA that is cited by the Trump Administration is only because of energy exports.
  • Cenovus (and other extraction companies) have refineries that they own in the USA where tariffs will have limited effect.

Prices and price changes:

  • Western Canadian Select (WCS): $66/b
  • The break-even price for Canadian oil sits somewhere around $45-$50/b.
  • West Texas Intermediate (WTI) oil price of $71 per barrel is expected at year-end 2025; responses ranged from $53 to $100 per barrel. (Dallas Fed)
  • WTI oil price of $74 per barrel expected two years from now and $80 per barrel five years from now. But, could go as low as $66/b by 2026. (Dallas Fed, Kansas City Fed)
  • The discount on Canadian oil (price between WCS and WTI) increased to $17.75 less per barrel than WTI on Wednesday, compared with ~ $14.70 now.

Impact on the USA: An 25% export tariff on Canadian crude could increase gas prices at the pump by up to 30 cents or more per gallon.

However, the slightly un-intuitive part of tariffs is the likelihood that WCS will decline in price as much or more than it will affect the price at the pump for the American consumer.

There are a lot of moving parts to the oil export market, the price of gasoline, other oil products, and price of Canadian oil.

Additional concerns

Canadian refineries in Ontario and Quebec rely on western Canadian oil shipped via pipelines that cross into the US. Therefore, Canadian refiners could end up subject to American tariffs on Canadian crude.

  • Only 16% of Canada oil exports can be shifted to markets in Asia via the expanded Trans Mountain pipeline to the Pacific Ocean.
  • Only 4% of offshore production in the Atlantic also could be routed to new buyers.

Canadian (WCS) oil sells at a discount to US benchmark (WTI), allowing the US to sell its higher-value crude and products abroad while keeping American fuel prices low.

Alberta Oil

Increased costs of imported pipeline oil will increase the rate of change in the sector over the medium to long term. In the short term, it is likely that refiners will simply pay in the increased costs that tariffs add.

  • USA refinery investment is based on the import of heavy Canadian oil.
  • Canadian crude oil accounted for 24% of all its refinery throughput.
  • Canadian crude is refined in the USA at the Rocky's and Midwest refining centres.
  • Heavy crude results in a different mix of oil products which could lead to a reduction in supply of those products to the USA market, including lubricants, diesel, and jet fuel. Fuel makers in the region rely on Canada for 46% of the crude that they turn into gasoline and diesel.
  • Refiners are making investments to adapt their production to lighter crude, but the investment cost is significant.
  • Current infrastructure and expertise is aligned with heavy Canadian crude and the debt on that investment has not been paid off. Changes at mid-life investment is doubly expensive.

Newfoundland Oil

  • Offshore deep water Hibernia-style extraction is sweet crude.
  • Export of Hibernia oil is to the Texas/Gulf of Mexico region refineries.
  • Gulf refinery imports have increased faster than the rest of the USA.
  • Sweet crude is used to balance significant refining processes in the USA Gulf of Mexico region.
  • New deep water extraction that has come online will affect this export market.
  • Export tariffs will likely have limited impact on USA import as those refineries need Canadian sweet crude to continue to operate.

Natural Gas

Without LNG terminals for export, all natural gas production in Canada for export is dependent on the USA.

The USA has increased natural gas production to a point that it is now a net exporter, displacing Canadian export growth in natural gas.

It is likely any tariff action around natural gas will continue the decline in imports of Canadian natural gas.

Analysis

Trump's tariffs alone are not likely to have much impact on global oil production and use. However, sanction regime changes on Russian, Venezuelan, and Iranian oil as well as threats to Europe to buy American gas may. We must look in detail at the Trump renewed sanctions regime impact.

  • prices are near $73 per barrel
  • Current American producer breakeven price is near $64 per barrel
  • To increase drilling the price needs to be $89 per barrel (30% higher)

There is slow demand growth for oil and oil products because the slowdown of the global economy, which is keeping a lid on production. This tendency in the global economy dwarfs even the USA's power of the energy markets.

However, tariffs on Canadian oil imports and exports can change this price calculation in the USA, making the market more susceptible to local conditions. Moves to increase the price of oil in the USA will bring more domestic production online and will speed-up ongoing transition of refineries and pipelines to use Permian/fracked oil.

This is not the first time the USA has used geopolitical and trade responses to change its local energy program.

Canadian oil imports into the USA was used to remove the dependency on Saudi oil since 2003. This has worked as oil imports from Saudi Arabia have gone down from 1.6 million b/day to below 0.3 million b/day.

Moves to affect local prices in the USA of certain oil products could affect investment decisions of refineries. The long-term consequences is a decline in reliance on Canadian oil exports. This is likely the goal of the USA irrespective of Canadian response to current tariff threats.