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The news that United States president-elect Donald Trump could slap a 25 per cent tariff on Canadian goods upon taking office in January sent a jolt of alarm through the entire Canadian economy, but the alarm in the oilpatch has only deepened as Ottawa and the provincial governments threaten to target energy exports in retaliation.

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Energy producers and fuel companies on both sides of the border are growing concerned that commodity flows could be disrupted if a tit-for-tat trade war erupts in response to Trump’s announcement on social media in November that he intends to impose a tax on all goods entering the country from Canada and Mexico.

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One of the country’s largest integrated oil producers, Cenovus Energy Inc., which owns refineries and interests in facilities in Canada and the U.S. Midwest and Texas, warned against tariffs or retaliations over oil.

“Any trade barriers that might be imposed on this free flow of trade could have a serious negative impact on both sides of the border,” Cenvous spokesperson Reg Curren said.

“A reduction in Canadian exports will inevitably lead to reduced revenues for industry and governments, and it will also increase the price American families and consumers pay for finished products, such as gasoline, diesel, aviation fuel and asphalt — of which Cenovus is a leading producer.”

Canada is reliant on U.S. demand for its energy exports, but U.S. refineries have also grown increasingly dependent on Canadian crude, the exports of which to the U.S. have doubled since 2010 to nearly four million barrels per day (MMb/d) from 1.9 MMb/d, according to data from the Canada Energy Regulator and the U.S. Energy Information Administration.

The American Petroleum Institute, one of the most powerful trade organizations representing the U.S. energy industry, has been urging the incoming administration to exclude crude oil, natural gas and related products from any tariffs. It said U.S. consumers rely on a free flow of energy products and that tariffs threaten North American energy security.

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The profound interconnectedness of the two countries when it comes to energy, thanks to critical infrastructure linkages and longstanding commercial arrangements, has prompted some to predict that Trump will exempt crude oil and natural gas from any tariffs he pursues against Canada.

Still, the sector could be drawn into a trade war if Ottawa and the provincial governments decide to throttle energy exports in a bid for leverage.

Ontario Premier Doug Ford has threatened retaliatory tariffs and to cut off energy supplies, including electricity and other fuels, to neighbouring states if Trump follows through on his tariff plan. British Columbia Premier David Eby said his province would support retaliatory tariffs as well.

The federal government said it is also considering retaliatory measures, including an export tax on key commodities, such as oil, potash and uranium, according to Bloomberg News.

The threats have not been endorsed by leaders within the Canadian oilpatch, where industry veterans fear that weaponizing energy exports, even temporarily, could have lasting consequences.

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“Americans right now feel they have a very reliable, secure supplier of energy, and if that were to change, they would look for alternatives, and that market may not come back and that would be devastating for the Canadian economy broadly,” one senior industry source said.

Threatening a move such as cutting off energy exports to the U.S. also flies in the face of the Canadian oilpatch’s staunch opposition to state-level attempts to shut down Enbridge Inc.’s cross-border Line 5 pipeline over the years.

The sector has so far successfully argued for preserving flows on the pipeline carrying oil and natural gas liquids between Wisconsin and Michigan to refineries in Sarnia, Ont., on the basis of Canada’s 1977 pipeline treaty with the U.S.

Alberta Premier Danielle Smith said her province won’t agree to cutting oil and gas exports.

“The federal government must also immediately cease any consideration of taxing Alberta’s energy exports,” she said in a statement. “This sort of taxation amounts to one thing: theft from the people of Alberta. It will not be tolerated.”

‘No real alternative’

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While Canadian political officials continue to debate how best to counter Trump’s threats, the energy sector is scrambling to determine the potential impact of tariffs on commodity flows.

“The potential impact of a big bump-up in the delivered cost of imported Canadian crude in particular is enormous,” RBN Energy LLC analyst Housley Carr said in a recent note.

U.S. refineries have increasingly been optimized to process heavy crude oils such as those exported from the Alberta oilsands. Midwest refineries (known as PADD 2) are particularly dependent on Canadian crude, which is a circumstance not easily remedied under current pipeline configurations, he said.

“Just as important, PADD 2 refineries have no real alternative … there is no cost-effective way to deliver vast quantities of comparable imported heavy oil (domestic production is almost exclusively light) from Gulf Coast docks to the Midwest,” Carr said, suggesting a tariff would hurt refining margins and result in higher prices for gasoline, diesel and jet fuel.

“Very likely, a tariff would lead many refineries in the PADD 2 to either ramp down their operations or even shut down.”

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Canadian crude accounts for 65 per cent of total crude runs in Midwest refineries, making it the No. 1 feedstock in the region, Chet Thompson, chief executive of the American Fuel & Petrochemical Manufacturers association, said in a recent statement.

“There is no easy, fit-for-purpose replacement for this crude oil,” he said.

There could be other casualties in a trade war targeting energy. Trump’s proposed tariffs are also expected to increase energy bills in the northeastern U.S. and to raise electricity costs on both coasts where U.S. consumers are reliant on electricity and natural gas imports from Canada.

Canada’s perennial problem

However, Canada is more reliant on the U.S. than the U.S. is reliant on Canada when it comes to energy.

More than 97 per cent of Canadian crude oil exports were destined for the U.S. in 2023, according to the Canada Energy Regulator. And while the Trans Mountain pipeline expansion (TMX) has opened new trade routes to Asia, the majority of tankers carrying Canadian barrels away from the B.C. coast are winding up in California.

A tariff on Canadian products should ostensibly be paid by U.S. importers, but, in practice, experts say tariffs on Canadian oil would likely drive discounts on barrels of Western Canadian Select (WCS), this country’s benchmark heavy crude blend.

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WCS typically trades at a discount of US$10 to US$20 per barrel compared to U.S. benchmark West Texas Intermediate, which creates additional economic incentives for refiners to use Canadian heavy crude, according to a recent report by the Canadian Global Affairs Institute.

“One of our weaknesses is that we don’t have a lot of other places to sell our product,” Jackie Forrest, executive director of the ARC Energy Research Institute, said. “If there’s a tariff where refiners have to pay more money for our crude oil than other options, then they may reduce the use of our oil. Maybe they still use quite a bit, but they use a bit less than they would have before.

Some refineries will be able to replace a portion of their Canadian imports with domestic supplies; with less demand for Canadian oil south of the border, inventories could start to build in Western Canada.

“I think there’s a good chance in that scenario that we see a discount for our products,” Forrest said.

For the past three years, Canadian crude oil production has been increasing, hitting record highs supported by growing global demand and a boost to export capacity via the Trans Mountain pipeline expansion.

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Three major Canadian oil and gas companies recently announced their intention to boost production in 2025: Suncor Energy Inc. said it would increase output by five per cent next year; Cenovus projected a four per cent increase; and Imperial Oil Ltd. forecasted growth of three per cent in 2025.

But those outlooks could quickly change if Canadian energy becomes a bargaining chip in a larger trade war.

Forrest said there’s one surefire way of avoiding the disruption of similar situations in the future.

“We need more customers for our products so that we’re not beholden to the Americans,” he said. “If we had one additional oil pipeline, let’s say the size of (Northern) Gateway, that would result in us not having to take price discounts because we would have alternative places to sell our products.”

• Email: mpotkins@postmedia.com

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