WSJ: Tariffs Won’t Sink Canadian Oil Companies

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President Trump has said he could slap 25% tariffs on Canadian imports as soon as Saturday. While that is bad news for Canadian oil producers, it isn’t nearly as bad as it looks.

Canada depends heavily on the U.S. to sell its crude. In 2023, it produced 4.6 million barrels a day, out of which more than 80% ended up in the U.S. But the dependency goes both ways. About 60% of U.S. crude-oil imports are from Canada, in part because U.S. refineries are designed to process the heavy crudes it pumps, not domestic varieties.

Any tariff’s cost will ultimately be shared between Canadian oil producers, U.S. refiners and American consumers. Refiners are most exposed in parts of the country where they have few, if any, alternatives to Canadian crude. These landlocked regions are where most Canadian oil goes: The Midwest received about 62% of Canadian crude-oil imports in 2023, while the Rocky Mountain region got 6.8%, according to the Canada Energy Regulator.

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Refiners located in such places as the Gulf Coast do have access to heavy crude from other countries, but options are limited. While U.S. refiners already source heavy crude from Mexico and Colombia, those sellers don’t have much additional volume to send to the U.S., according to Dylan White, analyst at Wood Mackenzie. Iraq is the biggest available source of incremental heavy crude imports for the U.S., he added.

And even existing alternatives could be at risk. If Trump imposes 25% tariffs on Mexico, it would leave U.S. refiners with fewer cheap heavy crude oil options, according to Menno Hulshof, equity analyst at TD Cowen. And if Dos Bocas Olmeca, the largest refinery in Mexico, ramps up further this year as planned, the country will have fewer spare barrels to export to the U.S., he added. Another small offset: Canadian producers now have more export capacity to Asia after the Trans Mountain pipeline, which connects Canada’s oil to its western coast, was completed last year.

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Canada also has a potential retaliatory trick up its sleeve: curtailing oil production. Even a little bit could go a long way. In early 2019, the Alberta government ordered oil producers to reduce production to narrow the wide discount that Canadian crude was getting compared with the U.S. benchmark. Even with a modest 325,000 barrels a day curtailment, the discount narrowed from about $49 a barrel to $10 a barrel once the curtailments had taken effect, according to TD Cowen’s report.

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