The Dust Has Not Settled on Trump’s Canadian Oil Threat

Oil prices retreated on Monday after the Trump administration pulled back from sanctions threats against Colombia over illegal immigration, alleviating concern about oil supply disruptions. Washington swiftly reversed plans to impose tariffs and sanctions on Colombia after the South American country agreed to accept deported migrants from the United States. 

While the issue has been settled for now, it has left the market jittery about Trump’s ongoing muscle-flexing. To wit, Trump has repeatedly threatened to impose 25% tariffs on all imports from Canada and Mexico for failure to clamp down on drugs and migrants crossing the border, with Canadian oil imports not exempt. Analysts have pointed out that imposing tariffs on Canada would drive up fuel prices for Americans, and throw into turmoil the biggest supplier of crude to the U.S.

And now commodity analysts at StandardChartered have painted a dire picture of the situation, saying oil buyers in the Midwest will almost certainly pay the price of the tariffs thanks to the limited substitutability of Canadian crude with other oils resulting in strong pass-through to retail prices.

According to the analysts, the U.S. imported ~ 6.6 million barrels per day (mb/d) of crude oil in the first 10 months of 2024, of which 4.0 mb/d was heavy oil for use in upgraded refineries with cracking units. Canada provided 75% of U.S. heavy crude oil imports in 2024, with its market share having steadily increased since 2000, squeezing out flows from Mexico, Venezuela and Colombia.  Unfortunately for Midwest refineries, heavy oil cannot easily be substituted with the light oil that makes up most of U.S. shale oil production.

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StanChart has pointed out that such a switch would create a significant loss of optimization in the highly expensive cracking units that require feed from vacuum distillation of the heavy residual obtained by simple distillation. Canada has supplied 99.89% of all heavy imports into Midwest refineries over the past decade; the low substitutability of this flow implies that a tariff would largely feed through to local retail prices.

And, the increase in fuel prices would be substantial: According to GasBuddy analyst Patrick De Haan, consumers in the Midwest could end up paying ~10% extra for their gas if Trump goes ahead with his tariffs.

Interestingly, the incoming trade wars under a second Trump administration have not dissuaded Canadian oil and gas majors from drawing up plans to drill even more. Canada’s oil sands producer, Suncor Energy (NYSE:SU), has unveiled plans to increase its oil and gas output next year as it continues to work to improve its performance and lower costs from its assets. Suncor has set a target to grow oil and gas production to between 810,000 and 840,000 barrels per day in 2025, up from its 2024 estimated range of 770,000 to 810,000 barrels per day, and sees annual refining utilization of 93% to 97%. In terms of capex, the oil sands giant plans to spend in the range of C$6.1 to C$6.3 billion, with 45% allocated to economic investments. That marks a reduction from C$6.3 billion to C$6.5 billion for 2024 capex. Suncor's lower cash operating costs per barrel reflects its initiative to reduce its corporate WTI breakeven by $10 per bbl versus 2023, the company said.

Canada’s Imperial Oil (NYSE:IMO) and Cenovus Energy (NYSE:CVE) have unveiled similar plans, even as Canadian oil and gas stocks continue to outperform their American brethren. Canada’s oil and gas benchmark, the S&P/TSX Equal Weight Oil & Gas Index, has returned 17.6% in the year-to-date, more than 4x the 4.3% gain by the S&P 500 Energy Sector.

Transitioning Away From Emissions, Not Oil

Over the past decade, major oil companies, under pressure from investors and environmentalists, have been fleeing Canada's oil sands, the fourth-largest oil reserve in the world, while investment in existing projects has stalled. A lack of pipelines and heavy emissions have weighed on the Canadian heavy crude sector for years, with some companies exiting after coming under pressure to invest in projects with lower emissions. According to research firm Rystad Energy, oil sands production in Alberta generates ~160 pounds of carbon per barrel, the highest of any oilfield in the world.

But Alberta’s politicians have no plans to ditch the province’s main cash cow any time soon. Alberta Premier Danielle Smith has declared that the energy-rich region will transition away from emissions, not oil.

"We're transitioning away from emissions, we're not transitioning away from oil and gas. We're not going to phase out production of oil and natural gas, we're just going to change the way in which we use it," Smith has said at the World Petroleum Congress in Calgary, Alberta.

According to her,  hydrogen from natural gas will likely become an increasingly important fuel in the province while carbon capture, utilization and storage (CCUS) will play a role in cleaning up emissions. Smith has differed radically with Canada's minister of energy and natural resources Jonathan Wilkinson who the previous day had supported IEA’s prediction that world oil demand will fall to just 25 million barrels per day by 2050, or a quarter of current global demand, an assertion Smith has dismissed as ‘ludicrous’.

Wilkinson had argued that oil and gas after 2050 would primarily be used in applications not requiring combustion, such as petrochemicals,  lubricants, solvents, carbon graphite, asphalt and waxes.

Canada considers CCUS a key tool in helping the country’s high-polluting oil and gas industry slash emissions without cutting back on production. The North American country has set a target to achieve net-zero emissions by 2050. A number of companies including Enbridge Inc.(NYSE:ENB), TC Energy Corp. (NYSE:TRP) as well as a coalition of Canada's six largest oil sands producers called Pathways Alliance have proposed building major CCS storage hubs. However, Canadian companies have been holding back on final investment decisions mainly because of the high costs associated with carbon capture and have been lobbying for more government support. 

Unfortunately, the fate of Canada’s largest proposed carbon capture and storage project now hangs in the balance after Prime Minister Justin Trudeau announced that he would resign after a new leader of his Liberal Party is chosen. According to industry watchers, the $16.5B project faces an uncertain future with a new federal government to be elected later this year. To be built by the Pathways Alliance, the high-profile project would capture harmful carbon dioxide emissions from the Canadian oilsands, the country’s heaviest-emitting sector. 

“I can’t imagine a huge project like that could really move forward in a time like right now,” Michael Bernstein, executive director of the non-profit group Clean Prosperity, told Bloomberg. “When you’re looking at a project that has at least a 15-year time horizon, you want as much certainty as possible. And there’s just more uncertainty than I can remember in my whole time doing this work right now,” he added.

By Alex Kimani for Oilprice.com

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