INSIGHT: US tariffs on Canadian oil would harm the US and Canada

Stefan Baumgarten

17-Jan-2025

TORONTO (ICIS)–US President-elect Donald Trump is expected to quickly move forward with his proposed 25% tariff on all imports, including oil and energy, from Canada and Mexico after taking office on Monday 20 January.

  • Tariffs to hurt US industry and consumers
  • US refiners rely on Canadian crude
  • Canada oil embargo could jeopardize national unity

So far, Trump has given no indication that he may exempt Canada’s oil from the tariffs.

Canada supplies more than 4 million barrels per day of oil to the US, accounting for the majority of US oil imports.

The oil goes mainly to US Midwest refineries, such as BP’s Whiting plant in Indiana, that are configured to process heavy Canadian crude.

The move could be felt in the US as well as Canada.

IMPACTS ON US

  • The US Midwest refiners buy the Canadian oil at a discount, a price advantage they would lose with the tariffs.
  • The refiners will not be able to quickly secure alternative sources of heavy crude, and neither will they be able to quickly reconfigure their processing units to lighter oil.
  • The tariffs will raise US domestic energy prices, in particular gasoline prices – running counter to Trump’s campaign promises to address inflation and reduce costs for consumers.
  • US inflation expectations have already been rising, partly because of the planned tariffs.
  • Higher inflation expectations could prompt the US Federal Reserve to delay further rate cuts and possibly even raise rates, slowing the economy.
  • The imported cheap Canadian crude frees up higher-priced US oil for export to other nations, allowing the US to run a trade surplus in oil with those countries, an advantage that may be lost if tariffs are imposed.

ICIS feedstocks and fuels analyst Barin Wise said that it was hard to believe that Trump would place tariffs on Canadian oil as this would cause a big problem for US refiners processing the oil, with very limited alternatives to run in their plants.

“This would cause prices to rise, which is the last thing Trump would want to see,” Wise said. “I suppose we will know for sure shortly.”

IMPACTS OF OIL EMBARGO ON CANADA
There was much discussion this week in Canada about responding to the US tariffs by imposing an oil embargo or putting an export tax on oil.

However, analysts noted that those counter-measures would have self-defeating impacts on Canada:

  • Producers in oil-rich Alberta province ship oil to eastern Canada on a pipeline system that passes through Wisconsin and Michigan (Enbridge’s Line 5) before re-entering Canada near the Sarnia refining and petrochemicals production hub in Ontario.
  • In case of a Canadian oil embargo, Trump would likely stop the flow of Canadian oil on Line 5 to destinations in eastern Canada.
  • As a result, an embargo would not just hit the US but cause a supply squeeze and higher energy prices in Ontario and Quebec, which are home to much of Canada’s auto, aerospace and other manufacturing.
  • An oil embargo could also give new life to the Michigan state government’s efforts to shut down Line 5, because of environmental concerns.
  • Canada could use rail to ship oil from Alberta to eastern Canada, but this would be expensive and there is not enough railcar capacity to replace the lost pipeline volumes.
  • Canada could import oil through Montreal and other Canadian East Coast ports to replace the Alberta oil, but that would also be expensive.
  • Furthermore, the flow of a pipeline (Enbridge’s Line 9) supplying refineries in Ontario and Quebec goes from west to east, and not from east to west. A flow reversal would be a costly undertaking.
  • Once the US Midwest refiners have reconfigured their refineries to lighter oil or found alternative sources of heavy crude, they may not want to go back to Canadian crude if the tariffs are lifted later.
  • Alberta, as well as Saskatchewan, would lose substantial revenues from their oil exports to the US. Both provinces have said they oppose an embargo.

CANADA MUST AVOID UNITY CRISIS
However, there is much more at stake for Canada.

The premier (governor) of Alberta, Danielle Smith, has warned that the country’s national unity would be jeopardized if the federal government imposes an embargo.

She refused to endorse a joint statement by the federal government and 12 of Canadas 13 provincial premiers at a summit this week, on Canada’s position in facing the US tariff threat.

The statement is broad and does not even mention oil, but Smith said she could not endorse it as it did not rule out an embargo or an oil export tax.

“Alberta will simply not agree to export tariffs on our energy or other products, nor do we support a ban on exports of these same products,” she said on social media.

Smith added that an oil embargo was also unacceptable as politicians in eastern Canada, she claimed, had blocked the Energy East oil pipeline project to ship oil from Alberta to Ontario and Quebec and to export markets.

The cancellation of Energy East deprived Alberta of an important opportunity to reduce its dependence on the US market, she argued.

She failed to mention, however, the Trans Mountain oil pipeline.

The Liberal government under Prime Minister Justin Trudeau bought and expanded Tans Mountain by nearly 600,000 bbl/day, enabling oil shipments from Alberta to an export terminal near Vancouver.

Trudeau noted this week that the government did this to the benefit of Alberta’s oil industry, with funding from all of Canada’s taxpayers.

Smith has often disagreed with the federal government over oil and environmental issues. In 2022 she put in place an “Alberta Sovereignty Act” to challenge federal laws. The act has not yet been reviewed by Canada’s Supreme Court.

Canada’s Globe and Mail newspaper, siding with Smith, warned against imposing an oil embargo or other oil export restrictions.

Such measures would incite renewed separatist sentiment in Alberta, the paper said in an editorial on Thursday and reminded readers of the alienation caused in Alberta by former Prime Minister Pierre Trudeau’s National Energy Program (NEP) in the early 1980s. (Pierre was the father of Justin Trudeau).

The NEP was seen by Alberta as an unfair attempt to redistribute its oil wealth to Ontario, Quebec and other eastern provinces.

Instead of an embargo, Canada needed to use targeted tariffs that “inflict the greatest possible political damage on Mr Trump”, and it should particularly target exports from US swing states, the paper said.

Longer-term, Canada needed to have a fresh look at projects such as Energy East to reduce its dependence on the US market, it added.

However, Trudeau and Ontario premier Doug Ford insisted that Alberta put Canada first, ahead of its own needs.

All options must be on the table, including an embargo, in case the trade conflict escalates, they said.

Commentators said that even if Trump exempts Canadian oil, Canada should consider an oil export tax as it could not allow a large part of its economy being devastated by the US tariffs while Alberta does business as usual with the US.

Pierre Poilievre, leader of Canada’s opposition Conservatives, has yet to state whether he would use an oil embargo as a weapon in a trade dispute.

The issue of Canada’s response to the US tariff challenge is expected to be at the center of the upcoming election campaign. Elections that must be held before October but will likely be called earlier.

The Conservatives are far ahead of Trudeau’s Liberals in opinion polls on the elections.

Furthermore, the Liberals are in disarray. Trudeau last week announced his resignation, and the Liberals have opened the process of selecting a new leader who will then also take over as the new prime minister until the elections.

Meanwhile, the federal government has prepared a list of US products to be targeted with potential retaliatory tariffs. Details will be released only after Trump moves ahead with the tariffs, officials said.

According to public broadcaster CBC the list includes certain US-made plastics products.

In Canada’s chemical industry, trade group Chemistry Industry Association of Canada (CIAC) this week joined the Canadian Association of Petroleum Producers (CAPP) and others in forming a new group to jointly confront the imminent US tariff threat.

Canada’s chemicals and plastics industry accounts for more than Canadian dollar (C$) $100 billion (US$69 billion) in annual shipments.

Nearly two-thirds of those shipments are exported to the US, with a reciprocal value returning to Canada from the US, according to Ottawa-based CIAC, which speaks for Canada’s chemical and plastics industry

(US$1=C$1.44)

Insight by Stefan Baumgarten

Thumbnail photo of Imperial Oil’s Cold Lake oil sands site in Alberta; the Toronto-listed ExxonMobil affiliate is one of Canada’s largest oil companies, and it also produces petrochemicals. Photo source: Imperial Oil.

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