Image credit: Trans Mountain
by Rory Johnston and Joe Calnan
November 2024
Table of Contents
- Introduction
- Canada-U.S. Co-Dependence
- Possible Election Implications
- Talk of Tariffs
- Conclusion
- About the Authors
- Canadian Global Affairs Institute
Introduction
The United States and Canada are the two fastest growing sources of non-OPEC oil production today and, for more than a decade, have made up the bulk of non-OPEC supply growth. While supply from the rest of the world has contracted, combined U.S.-Canada crude output is up by around 1.3 million barrels per day (MMbpd) compared with this time last year. More than that, both the Canadian and U.S. oil industries have grown together, becoming increasingly dependent in both directions across the 49th parallel. This growing mutual dependence has been enabled by the complex of pipelines, oil terminals, and refineries meant to supply the United States with Canadian oil and Canada with American oil.
However, the just-completed U.S. presidential election — and the policy rhetoric throughout the electoral contest — refocuses attention on Canada’s unique vulnerability to U.S. policy risks, both broadly and specific to Canada’s oil and gas sector. Canada and the United States have developed mutually dependent, integrated oil supply systems over decades of stable and friendly relations. In the long decades of declining American oil production, Canadian oil supply was a cornerstone of North American energy security and American refineries adapted to this reality. Today, the Canada-U.S. oil trade relationship is the largest bilateral energy trade relationship in the world. However, it is far from a relationship between equals.
This paper will take stock of the recent strength of Canada-U.S. petroleum production; how each country has displaced overseas imports to now account for more than half of each other’s foreign crude purchases; and the different factors that will drive both producers' trajectory. Owing to the nature of energy trade as both commercial and political, we will then consider the political implications of the victory of Donald Trump on Canadian oil production and export.
Canada-U.S. Co-Dependence
Roughly one-tenth of U.S. crude oil exports flow north to Canada where the U.S. has become the dominant source of Canadian crude imports. Today, U.S. shipments from the Gulf Coast account for more than half of Canada’s imports, replacing what were, historically, barrels from the Middle East and West Africa. But a far larger volume of crude oil flows south; Canada has been the largest source of U.S. crude imports for more than two decades. Over time, Canada has steadily, and then rapidly, consolidated that position, now accounting for more than half of total U.S. foreign crude purchases or nearly 4 million barrels per day.
Canada is the world’s largest producer of heavy sour crude while American crude oil production is now dominated by tight oil pumped out of prolific shale basins, like the Permian. This American crude oil is exceptionally light and sweet and, as such, is a poor fit for many U.S. refineries, which, over earlier decades of falling U.S. production, invested tens of billions of dollars into complex equipment upgrades suited to heavy, sour foreign crude oils. Simply running the growing volume of U.S. - produced light sweet crudes through domestic U.S. refineries would leave those expensive investments unused and unmonetized. The internationally valuable light sweet crudes are, instead, exported. U.S. crude (specifically, WTI Midland priced at the U.S. Gulf Coast) is shipped everywhere, disrupting previous light sweet market dynamics and becoming the dominant stream underpinning the global Brent price benchmark in the North Sea.
Meanwhile, Canada’s heavy sour crude, mostly marketed as Western Canadian Select (WCS), is exactly the type of crude best suited to many U.S. refineries. These barrels contain a mix of roughly 75 per cent bitumen and 25 per cent lighter hydrocarbon diluent. WCS can be further diluted and mixed with lighter crudes to achieve a wider array of refiner needs and often trades at a discount ($10-20/bbl or more) to the U.S. benchmark (WTI), which creates additional economic incentive for the processing required to turn heavy sour crude oil into useful products.
U.S. refineries are uniquely positioned to handle heavy Canadian crude. The most important piece of refinery equipment for profitably refining heavy crudes, like WCS, is known as a coker and transforms heavy residual fuel oils left over from the distillation process into precursors for higher value fuels like gasoline and diesel. There’s a substantial overlap between the capacity of U.S. refinery cokers and deliveries of Canadian crude. The largest destination for Canadian crude is the U.S. Midwest, followed by the Gulf Coast.
It has become passé to talk about “energy independence” because markets are global — no one can truly be independent of price influences— nevertheless, the U.S. and Canada have indeed become much more functionally, physically independent over the past decade. The United States is very much dependent on Canadian crude oil supply; however, Canada is even more dependent on the United States. Canadian barrels remain almost entirely in the continental refining system, with ~98 per cent of shipments processed by American refineries. Unlike all other major oil producers who ship the bulk of their crude to end consumers via tankers in seaborne markets, Canada’s crude bounty is landlocked and gets to market primarily by fixed pipelines. These pipelines provide safe, reliable, and efficient egress—but are also inflexible.
The recently completed Trans Mountain Expansion pipeline (TMX) adds 590 thousand barrels per day (kbpd) to Western Canadian pipeline capacity, providing Canadian oil producers with more headroom than they’ve enjoyed in roughly a decade. This additional pipeline space has helped keep a lid on WCS differentials (i.e., that discount to the U.S. benchmark) — currently, less than $12/bbl under WTI at Hardisty, AB — despite record-high Western Canadian production. But, with Canadian crude production growth accelerating, TMX egress capacity headroom will likely provide only a few good years before Canadian producers overrun pipeline capacity once again.
Possible Election Implications
Trump will return to the White House in the new year with a strong mandate and minimal checks on his policy agenda. The Republicans have retaken the White House, flipped the Senate, and, very likely, will maintain control of the House of Representatives, in addition to holding a majority on the Supreme Court. Now, the oil market analysis shifts from superficial party platform assessments to more critical predictions about what a second Trump term could bring to the oil market. Of course, Trump policy forecasting is particularly challenging because he has said so many things along the campaign trail, many of which are mutually exclusive and/or highly unlikely. At the same time, it’s important to explore the potential implications of his various claims to both better understand the risks and opportunities created by Trump’s re-election and appreciate Canada’s uniquely vulnerable position.
First, there’s Trump’s campaign promise to make America drill again. The prospect of Trump’s second term was often discussed as bearish for the oil market given the former and future president’s repeated “Drill, Baby, Drill” proclamations during his campaign. He’s committed to accelerating U.S. production growth by slashing regulations on the sector and, thereby, lowering U.S. energy prices. But, while Trump’s policy agenda will undoubtedly lower the regulatory burden on domestic producers, the White House arguably has more immediate influence on Iranian production than Texan production.
U.S. crude production has risen at historic rates across both Democratic and Republican administrations. U.S. output is driven, above all, by the profit-motivated decisions of hundreds of comparatively small companies; prices are the single largest factor in these drilling decisions. And prices are notably lower on the year with the outlook for 2025 still seeming tilted to the downside. Furthermore, U.S. producers overinvested in drilling during the decade prior to COVID, incinerating a half trillion dollars of investor capital. As a result, their growth appetites have shrunk in favour of more sustainably profitable production. A lighter regulatory burden over a prolonged period of time should decrease the breakeven production cost faced by producers and, thus, gradually accelerate growth potential (compared to the counterfactual of a Kamala Harris win) — but it would take years to be seen in production trends.
More tangibly, sanctions are the most direct avenue through which Trump will be able to alter the trajectory of oil markets once he returns to office. Iranian exports have risen by roughly 1 MMbpd over the past couple of years despite no formal change in sanctions policy by the Biden administration, which critics have chalked up to “weaker enforcement” of existing sanctions given a desire to both improve relations with Tehran and reduce oil prices. Similarly, Venezuelan production is up 200-300 kbpd over the Biden administration thanks to mixed relief on oil-related sanctions imposed on the Maduro government. Soon, Trump will once again have effective control over the sanctions lever and, in his first term, he used that lever to drive Iranian exports to near-zero.
In both cases, Trump could more aggressively enforce existing sanctions, cancel exemption waivers, and/or impose new — and even harsher — sanctions. In the case of Iran, in particular, new sanctions would be near-required to repeat the export-crushing of Trump’s first term: while looser U.S. enforcement possibly played a role in the rebound in Iranian exports, other key parts were the shift towards far more sanctions-insulated counterparties (e.g., independent Chinese refineries) and the emergence of a stronger shadow fleet to service sanctioned barrels. Furthermore, it’s possible that Trump will begin winding back sanctions against Russian crude (e.g., the price cap), though there’s even less to go on based on public comments. Overall, the Trump administration's sanctions policy will likely be the largest shift come January and net-bullish for the market outlook.
Talk of Tariffs
From the Canadian perspective, the central concern surrounds broad tariffs on the Canadian economy, which the Trump administration is threatening to use as a bargaining chip in the CUSMA review in 2026. Indeed, Trump has proposed tariffs of 10-20 per cent on all U.S. imports. A recent estimate from Michael Davenport and Tony Stillo from Oxford Economics estimates that a 10 per cent tariff on all Canadian exports to the United States, combined with retaliatory tariffs on Canadian imports from the U.S., could cause a major hit to Canadian GDP of 0.9 per cent below baseline by 2029. Another estimate from Marc Ercolao at TD Economics estimates a Canadian GDP hit of 2.4 per cent below baseline over the next two years.
Energy products are Canada’s single largest export to the United States, accounting for about a third of total Canadian exports to the U.S. Crude oil alone amounted to around $124 billion in Canadian exports in 2023. There is growing concern in Canada about the resulting economic impacts if these tariffs are levied on Canadian goods, and especially if the tariffs extend to energy. It certainly remains an open question as to whether broad tariffs will be implemented at all and, if implemented, whether there would be specific exclusions for energy products — given Trump’s promise to lower energy prices.
For the sake of argument, let’s review the implications. Tariffs are an import tax and, in general, there are three potential parties that could be expected to pay the extra fees: refiners who import crude (i.e., downward pressure on margins), U.S. consumers (i.e., higher pump prices), and producers of crude (i.e., a lower price earned by the import partner). Broadly, most sources of U.S. crude imports have alternative markets for their barrels so the incidence of any tariff should fall within the U.S. in the form of weaker refining margins and higher U.S. pump prices. Generally speaking, U.S. refiners would be expected to pay 20 per cent more for crude imports, which would either erode refining margins (i.e., profitability) or increase the cost for U.S. consumers (i.e., pump prices).
This gets more complicated for Canadian exporters, who have no other real alternative outlets for their oil. Since U.S. refiners hold the market power here, they could, theoretically, press at least some of the tariff burden up those fixed pipelines across the border and into the Western Canadian Select differential in Alberta. Overall, the degree of broader market impact (e.g., could this boost the price of domestic U.S. WTI crude?) will depend on the capacity of U.S. refineries to increase the processing of domestic light sweet crudes — although a ~20 per cent price difference should certainly create some incentive to run those light barrels even if they’re less ideal for refineries. Still, the incidence would likely be spread across all three parties: higher U.S. pump prices for the consumers, weaker U.S. refining margins for refiners, and a wider WCS differential for Canadian producers.
To provide a sense of scale for those Canadian producers, current WCS prices are trading at around $60/bbl or at a $12/bbl discount to U.S. benchmark WTI. A 20 per cent tariff, if borne entirely on the Canadian side of the border, would add another $12/bbl, doubling the WCS differential and costing billions in foregone revenue and royalties. For comparison, Canada has, historically, seen an additional $5/bbl widening of the WCS differential through modestly tight periods and, in late-2018, a truly gargantuan $30+/bbl widening of the differential to clear the barrels from the domestic market vis-a-vis the use of far more expensive trucks.
However, it is much more likely that Canadian oil and gas will be exempt from tariffs. In fact, Trump’s tariff promise even caught the attention of the American press, which discovered the level of dependence on Canadian crude oil in the politically-sensitive Midwest. Applying tariffs to imports of Canadian oil makes little sense: the Trump-Vance campaign platform repeatedly underlined reliable and abundant low cost energy. Further, one of Trump’s first moves upon taking office in 2017 was to fast track approval of the Keystone XL pipeline, a major route meant to connect Canadian oil sands production with refiners in the U.S. Gulf Coast. Following the pipeline’s approval, Trump told reporters in the Oval Office that it was a “great day for American jobs and a historic moment for North America and energy independence”. More recently, former-Trump Secretary of Commerce Wilbur Ross told CBC News that he “can’t imagine” Trump taxing Canadian energy because of the costs borne south of the border.
A possible exemption for the integrated Canada-U.S. energy relationship could provide an opening for Canada to secure wider exemptions for other integrated industries such as auto manufacturing and steelmaking. The energy security and affordability argument can be levered into a broad argument surrounding joint North American economic security. It is vitally important for Canada to underline that it is not just another trade partner, but rather an indispensable part of the economic and security apparatus of the United States. In addition to the CUSMA ban on energy product tariffs, Canada should develop arguments under the 1977 Canada-U.S. Transit Pipelines Treaty to counter a new tariff regime.
Conclusion
Canadian crude production has been experiencing a recent acceleration in growth, largely supported by the completion of the Trans Mountain Expansion Pipeline (TMX). Looking forward, all forecasts continue to see the current pace of Canadian production growth persisting into next year. Meanwhile, U.S. production growth has started to slow as weaker prices have settled in. While it’s still far too early to declare time of death on U.S. production growth, there is no doubt that it has already notably slowed. U.S. liquids production growth fell to less than 800 kbpd y/y in July, roughly half the pace of growth achieved in 2023 and the slowest pace of growth since 2021. All major agency forecasters are expecting U.S. production growth to slow markedly this year and next to half or even a third of last year’s surprisingly strong pace of growth.
The Canada-U.S. oil industry relationship is based on a long history of deep-rooted friendly relations. While it is passé to speak of “energy independence”, the U.S. and Canada have co-evolved to become less physically dependent on the rest of the world over the past decade. Each country now makes up more than half the others’ crude imports, displacing imports from OPEC members or geopolitical adversaries such as Russia.
The United States is heavily dependent on Canadian crude oil supply, but Canada is even more dependent on demand of U.S. refineries, which process ~98 per cent of exported Canadian barrels.
The enormous, integrated North American pipeline and refining systems depend on cheap and easy transport of oil and refined products across the world’s longest border. Thus, egress continues to be a key determinant in the future trajectory of Canada’s oil industry. The TMX has bought some pipeline capacity headroom and also facilitated Canada’s first real foray into the global seaborne crude trade, with expanded export infrastructure allowing cross-Pacific shipments to heavy-crude-hungry buyers in Asia, namely China, India, and South Korea. Still, the lion’s share of early post-TMX shipments have ended up in California while Canadian shippers gradually improve relationships with Asian buyers, highlighting the inevitable and economically attractive pull of U.S. demand even with improved export optionality.
The re-election of Donald Trump presents both risks and opportunities to Canada’s continued oil production growth. The threatened tariffs serve to highlight the uniquely vulnerable position of Canada’s U.S.-dependent oil industry to southern protectionism. Canada should continue to take a proactive role in its engagement with the United States by underlining Canada’s indispensable contribution to the security of the United States on multiple levels, including but not limited to energy (e.g., defence, critical minerals). The potential for Canada to embrace continued growth, and even new opportunities (e.g., further sanctions on Iran/Venezuela) is stifled by the lurking specter of egress insufficiency that will return to haunt the Western Canadian industry. In the past decade, Canada has had multiple different pipeline projects on the go — both successful (TMX and Line 3) and unsuccessful (Keystone XL and Energy East) — but today the pipeline-of-pipelines is glaringly empty.
About the Authors
Rory Johnston is an oil market analyst and widely quoted expert in global commodities markets, specializing in the North American energy industry. He is the founder and CEO of Commodity Context, an independent oil market research platform, and a lecturer at the University of Toronto’s Munk School of Global Affairs and Public Policy. Rory previously led commodity economics at a major, resource-focused Canadian bank where he advised executives and clients, sat on the bank’s credit committee for commodity-related sectors, and oversaw the bank’s official commodity price forecasts.
Joe Calnan is an Energy Security Analyst and Energy Security Forum Manager at the Canadian Global Affairs Institute. Prior to joining CGAI, Joe held positions focused on public affairs and energy analysis at Sustainable Development Technology Canada and Canadian Natural Resources Ltd. Joe graduated from the University of Calgary's School of Public Policy with a Master's Degree in Public Policy in 2020. He received a Bachelor of Arts in Western Society and Culture from Concordia University in Montreal in 2019.
The Authors would like to acknowledge the editorial support and comments from Commodity Context Chief Operating Officer Justice Johnston.
Canadian Global Affairs Institute
The Canadian Global Affairs Institute focuses on the entire range of Canada’s international relations in all its forms including trade investment and international capacity building. Successor to the Canadian Defence and Foreign Affairs Institute (CDFAI, which was established in 2001), the Institute works to inform Canadians about the importance of having a respected and influential voice in those parts of the globe where Canada has significant interests due to trade and investment, origins of Canada’s population, geographic security (and especially security of North America in conjunction with the United States), social development, or the peace and freedom of allied nations. The Institute aims to demonstrate to Canadians the importance of comprehensive foreign, defence and trade policies which both express our values and represent our interests.
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