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REALITY – COMMENTARY: Trump’s Dream of Energy Dominance Relies on Canada


These translations are done via Google Translate

Why risk our relationship with a giant, friendly oil producer that US refiners depend upon?

Trading partners.
Trading partners.

In theory, President Donald Trump’s threat of sweeping tariffs against Canada, a major oil producer, fits with his desire for US “energy dominance.” In practice, the drive for dominance has relied heavily on Canadian oil.

Trump’s animus is mercurial, encompassing everything from securing the US-Canadian border to, most grotesquely, erasing that border. Whatever the cause, this is the largest trading relationship for both countries and energy, especially oil, defines it. The US imports more oil from Canada than all other foreign countries combined. Strip out that import bill and the US trade deficit with Canada would flip to a surplus.

Canada’s Dominance of US Oil Imports

US oil imports, broken down by source and importing region, in million barrels per day, 2023

Source: Energy Information Administration

Canada is particularly exposed to US tariffs on oil because internal divisions, both geographical and political, have largely stymied pipelines to its east and west coasts. Out of the 4.8 million barrels of crude oil it produces each day, it exports about 4.1 million and the vast majority of those flow south across the border. “We have the least export optionality; the Midwest remains a monopsony for us,” says Rory Johnston, Toronto-based publisher of the Commodity Context newsletter. (See this recent explainer he co-authored on the US-Canadian oil relationship.) Since US refiners know Canadian producers are mostly locked in by pipelines, they would likely push at least some of the cost of any tariff back onto those producers.

Equally, though, virtually all oil imports to the US Midwest and Rocky Mountain regions are Canadian. This is codependence, not independence, let alone dominance.

It might seem odd that the US, now a net exporter of oil, is dependent at all. But not all barrels are the same. First, the US is only a net exporter when you factor in crude oil plus refined products together. For crude oil alone, the US remains a net importer and, on a gross basis, takes in more than 6 million barrels a day.

The reason is that US refineries are mostly configured for a pre-shale world of far higher oil imports, able to process denser (or ‘heavier’) barrels, which are generally cheaper. As refiners maxed out their appetite for lighter domestic crude oil from the shale boom, so their imports skewed heavier and heavier, with Canada’s barrels being the obvious choice.

As US Oil Lightened Up, Imports Turned Heavier

Share of heavy barrels in US crude oil imports

Source: Energy Information AdministrationNote: Crude oil with an API gravity of 30 degrees or less (lower gravity denotes heavier grades.)

US Refiners Have a Taste For Foreign, Heavier Oil

US crude oil production and imports segmented by API gravity, 2023

Source: Energy Information AdministrationNote: Lower API gravity denotes heavier barrels.

The result is a mismatch of US crude oil production and the slate of crude oil imported for US refineries — exactly as the economics of comparative advantage and free trade would dictate. Surplus light oil from shale has naturally been exported. This is the foundation for America’s vaunted oil “independence” and Trump’s dream of dominance.

The Shale Export Boom

US oil exports by type, trailing 12 month averages, in million barrels per day

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Source: Energy Information Administration

Like Canada’s alternative export capacity, alternative import capacity for the US Midwest and Rockies is constrained. Pre-shale, many pipelines flowed imported oil north from the Gulf of Mexico1 to inland US refineries. Now a lot of those have been reversed to send domestic oil to the coast for export; some 2.3 million barrels per day of capacity, according to figures compiled by the Energy Information Administration.

Those pipelines could be reversed again but only at a cost and with time. The biggest prior reversal, that of the 1.3 million barrel per day Capline, took almost two and a half years from project sanction to completion. While lighter US crude oil would be comparatively more economic if Canadian barrels were made more expensive by tariffs, it still wouldn’t be optimal for Midwestern refineries, limiting their appetite. You can’t manufacture Canadian geology.

The likely result would be lower refinery utilization, and so higher costs per barrel. Attempts to ship more crude and products into the Midwest from sources other than Canada would also add cost. Refiners would likely seek similar heavy grades from elsewhere. Yet the two obvious alternatives, Mexico and Venezuela, also face tariffs and tightened sanctions, respectively, according to Trump. The Middle East is another option, but how exactly would replacing imports from our closest ally with barrels from Iraq enhance energy security?

Canadian producers would suffer as they absorb some of the tariff, but co-dependency means some cost would also fall on those Midwestern refiners, and so onto customers. At current Western Canadian Select crude oil prices of about $60 per barrel, a 25% tariff equates to $15. Assuming half of that was absorbed on the US side and passed onto Midwestern drivers, it could add 13 cents to a gallon of gas there.2This would ding another of Trump’s promises — to slash energy costs — though hardly spell political disaster.

Yet that misses a far bigger, if more subtle, cost. Trump has also pledged to refill the Strategic Petroleum Reserve. That would involve adding 382 million barrels, according to ClearView Energy Partners, a Washington-based analysis firm.3But Canada sells that amount of oil to the US about every three months. It takes a special kind of myopia to call for refilling a few hundred million barrels of storage while simultaneously damaging our relationship with a giant, friendly oil producer that is effectively a continental strategic reserve.

Canada Is the Other Strategic Reserve

Days of US oil imports covered by the Strategic Petroleum Reserve

Source: Energy Information Administration

Note: Total barrels in the SPR divided by total US oil imports and total imports less those from Canada.

Canadian political infighting about responding to tariffs, particularly the split over whether to threaten an embargo, no doubt encourages Trump. Yet Washington should remember that foreign aggression can unite even the most divided nations. Don’t be surprised if, over time, Canada finds a way to agree on more east-west pipelines. We shouldn’t kid ourselves. The mismatch of economic heft and dependence on oil production means Canada would suffer proportionately more in a trade war. This wouldn’t be quite mutually assured destruction. It would be mad all the same.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy. A former banker, he edited the Wall Street Journal’s Heard on the Street column and wrote the Financial Times’s Lex column.


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