Overview
As the Trump administration goes about resetting global trade relations to secure better terms for the US through a new and comprehensive tariff regime, US trading partners are first focused on negotiating better terms for themselves. As those negotiations stall, however, many are facing the prospect that the terms will be dictated, not negotiated. With President Trump’s announcement that the US will impose a 35% tariff on Canadian imports next month, the US’s enduring friend and ally is finding that the special relationship will not insulate US-Canadian trading ties from Trump-era turbulence.
Ottawa has choices: accept the increased cost of doing business with the US, retaliate by raising tariffs on US imports, or begin the hard task of diversification away from the US market. For some sectors that are deeply integrated, such as the auto industry, diversification would be very difficult. For others, such as energy, the change in the business environment alters the risk environment, with no guarantee that the current tariff carveout will not become political leverage against Canada when Ottawa next displeases President Trump. Thus, there are new incentives for Canada to invest in export infrastructure to transport Canadian crude to other markets, with consequences for US oil access and the global energy market.
Trans Mountain Expansion Pipeline Test Case
Canada is the world’s fourth-largest oil producer. Its main oil-producing province is landlocked Alberta. Geography, politics, and economics led Canada to export the bulk of its oil through pipelines that run north-south, to the US, where it is refined for domestic consumption or further export.
The Trans Mountain pipeline (TMX) is Canada’s only east-west oil pipeline, which transports crude from the Canadian sands oil fields to the Pacific Coast, where the crude is loaded onto tankers for export. The pipeline expansion began operations in May 2024, with a capacity of 890,000 barrels per day. While the US was expected to be the main market for exports via TMX, geopolitical and economic uncertainty pushed Chinese buyers to the front of the line.
China has not been the only buyer, however. In the first year of operation, Canadian crude exports to countries other than the US grew nearly 60%, with top destinations including South Korea, Japan, India, and Taiwan. There is room to further increase exports, as TMX was on average operating at three-quarters of capacity in its first year.
TMX is an important test case to demonstrate that there is demand for Canadian heavy crude at a cost that meets market conditions. Canadian crude sells at a discount compared to “sweeter” (an industry term meaning less sulfurous, and thus easier to refine) Saudi and US grades, accounting for added refining costs. However, the upsides for Canadian crude are mounting: Canadian energy companies have invested in new technology and cost-cutting efforts, so that they have a lower break-even price than US shale producers. Additionally, Canada is a lower-risk jurisdiction compared to crude sourced from the Persian Gulf, Iran or Venezuela. Canada also embraces free trade and is a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (which includes Japan, Malaysia, Singapore, and Vietnam) and has a free trade agreement with South Korea. Canada is currently negotiating a free trade agreement with the Association of Southeast Asian Nations (ASEAN), which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. With increasing demand from Asia, Canadian producers see an opportunity to reduce the per-barrel discount on their crude exports, making the Asian export market more profitable than the US market.
Carney Signals Openness to New Pipeline
Canada has had a love-hate relationship with its fossil fuel industry. While it is a significant source of revenue, it is also singled out as a significant emitter of greenhouse gases. Under the Trudeau government, taxes and environmental regulatory requirements hindered industry growth. The new Carney government, however, is signaling a change in Ottawa’s outlook. In late June, Canada's Senate passed a bill to fast-track approval for natural resources and infrastructure projects. The bill is designed to speed up the approval process for “national interest” projects. Subsequently, Prime Minister Carney, whose campaign promises included making Canada an energy superpower, stated that a new oil pipeline to the coast of British Columbia would likely be designated as a national interest project.
The pipeline under discussion would transport up to 1 million barrels of crude per day and be integrated with Alberta’s Pathways Alliance project for carbon capture and storage, designed to reduce emissions by up to 80 million tons annually by 2025. Preliminary estimates of the cost of the Alberta-Prince Rupert pipeline run up to $20 billion. The Canadian government would need to provide significant funding for the project in order to spread the risks and entice industry to move forward with major upfront investments. There is no proposal in the books as of yet, as industry leaders indicate that they would need regulatory certainty, which the current framework does not provide. There is provincial opposition in British Columbia to a new pipeline and lifting the ban on oil tankers steaming through northwest British Columbian waters due to environmental concerns.
Another alternative is the expansion of the TMX to increase capacity and dredging of Burrard Inlet to load higher volumes of Alberta oil from TMX at the port of Vancouver.
Neither project is without risks. The future demand curve is uncertain. There is disagreement among energy experts on demand growth, with OPEC+ offering more bullish assessments and the International Energy Agency forecasting a slower pace of growth. OPEC dismisses the idea of “peak oil” even being on the horizon. The International Energy Agency, on the other hand, forecasts global oil demand to peak by the end of this decade, with China's demand peaking earlier than previously anticipated. If oil demand drops, the pipeline expansion—which could take years—risks a diminished return on investment.
What is certain, however, is that the Trump administration’s upending of normal trading relations with its northern neighbor is creating unintended consequences. Ottawa is working more diligently towards increasing its energy trade with other nations and rebalancing energy trading with the US in a way that could reduce American access to cheaper Canadian crude.
