Ten percent tariffs on Canadian oil by the United States are expected to have only a minor impact on Canadian oil production because both producers and American refineries need each other.The U.S. received about 97% of Canadian oil exports in 2023, and most of those (87%) came from Alberta, according to data from the Canada Energy Regulator. The remaining exports go to the Netherlands, U.K., Germany, Spain, France, Norway, Italy, and Hong Kong.Richard Masson, executive fellow at the University of Calgary School of Public Policy said a 10% tariff on a $60 barrel won’t change prices more than open markets do by themselves.“A $6 a barrel swing can happen pretty easily and wouldn't freak many people out,” he said.Masson says it’s not clear the tariffs will last anyway, so the oil sector will carry on as usual.“I don't think that much is going to change at least this year. People have their budgets, they book their rigs, their crews, and winter is going to be done soon. And so they'll just carry on with those things,” Masson said.U.S. refineries tailored to make diesel fuel from the Canadian oil sands will still rely on that supply. “They've already invested in all this heavy duty conversion equipment,” Masson said. “So, I don't expect a whole lot of retooling by U.S. refiners.”If tariffs last, other export options for heavy oil would become more feasible, though still not preferable. Canada has more than one third of the heavy sour oil in the world.“Spain was one of the customers that we were looking at for Energy East, India as well. India has built a number of big heavy oil refineries. They would be happy to be able to take more,” Masson said.In 2023-24, Alberta received royalties of $14.5 billion from bitumen, $2.9 billion from crude oil, and $1.0 billion from natural gas and by-products. Bitumen royalties are forecast to rise to $16.8 billion this fiscal year. Richard said if the tariffs lead to lower prices for Canadian oil, Alberta will feel the pain.“For every $1 change in the price of oil over the course of the fiscal year, it costs $750 million in revenue. That's a big number,” Mason said. “That can have a really [big] impact on the provincial budget, and, of course, the federal budget as well, because they get income taxes on top of the royalties.”Kevin Birn, a Calgary-based energy analyst with S&P Global, says Canada’s lack of pipelines to tidewater already lowered what Canadians get from U.S. buyers, something he likens to a self-imposed tariff.The differential between heavy crude Western Canadian Select oil and West Texas Intermediate, a light sweet oil, was $12.88 per barrel in January, but has been higher in recent years.In 2018, the price differential reached a record $46 a barrel, prompting the Alberta government to limit production. In 2022, the differential was almost $30 a barrel, while in 2023 it was just over $18.Birn said U.S. tariffs on Mexico will also affect imports of heavy sour crude from that country. California’s heavy oil is in decline. While some medium crude comes from the Gulf of Mexico, the best U.S. heavy oil refineries could do is “reshuffle the deck a little bit.”“In terms of the oil and gas side in the United States, there's no fire truck coming to save anybody on the supply side,” Birn said.Birn believes light sweet crude is somewhat more "exposed" than heavy oil due to the possibility of the U.S. finding other sources, but not by much. The analyst says Wall Street has little motivation to displace Canadian oil production, nor will tariffs affect investment in Canadian oil for awhile.“I suspect a lot of the investment plans are locked in for this year, and the oil prices are at a fairly sufficient level that they should be able to weather this. But over the longer term, you could see capital allocation be affected. The return on the required thresholds for ROI [return on investment] go up for Canada.”
