S&P Global — 25 February 2025
Daily Update: February 25, 2025
Mutual Dependence Complicates Tariffs on Canadian Oil
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
Energy markets are increasingly using the phrase “policy uncertainty.” Typically, trade policies for energy markets are not uncertain. Most countries aim to buy their energy at the lowest possible price and sell their energy at the highest price, or at least at a profitable one. The unyielding imperative of the bottom line makes most countries’ energy and trade policies predictable. Only when a country acts against its material interests does policy become noteworthy.
On Feb. 1, US President Donald Trump announced a 10% tariff on all Canadian energy imports to take effect three days later. The president then announced that the tariffs would be delayed until March 4, pending further negotiations with the Canadian government.
Imposing tariffs on Canadian oil and energy imports aligns with the administration’s commitment to expand oil drilling and production in the US. Canadian oil accounts for more than 60% of current US crude imports. By making Canadian oil more expensive, the administration could encourage US oil majors to focus their investments on domestic sources of supply.
In addition, Canada has few options but to continue to export its crude to the US. Canadian oil depends primarily on a system of pipelines flowing toward refiners in the landlocked Midwest. Apart from using the recently expanded Trans Mountain pipeline system, Canadian oil struggles to reach its coasts and, consequently, Asian or European markets. Without access to other markets, Canadian producers will have to accept a lower selling price to remain competitive after tariffs are imposed. This sounds like a straightforward win for the US — more domestic drilling and lower crude prices from Canada, with a fiscal benefit to offset planned US tax cuts.
However, there are difficulties with this plan. Refiners in the US Midwest and Rocky Mountains have physically integrated hardwired pipeline supply from Canada with no true alternative feedstock supply sources. These refiners are specially designed to process heavy, sour crude blends such as Canada's Western Canadian Select. If Canadian crude stops or slows its flow to these refineries, few convenient alternatives exist. Canadian crude producers and US refiners are locked in a trade relationship for their mutual benefit. This limits the ability of US refiners to demand price concessions from Canadian producers to compensate for tariffs and means that US refiners would assume some of the additional costs, which they would necessarily pass on to consumers.
Amid the policy uncertainty, one piece of positive news for Canadian producers and US refiners is that the threat of tariffs has meaningfully weakened the Canadian currency against the US dollar. This means that Canadian producers can pay for goods and services in Canada in devalued Canadian dollars but sell their crude in the US for US dollars. Some of the cost of new tariffs could be offset by this arbitrage.
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—Listen and subscribe to the podcast from S&P Global Market Intelligence
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