In Canada’s arsenal of possible responses to a Trump tariff, the nuclear option is the threat to withhold, reduce or place export tariffs on Canadian energy.
Already, the mere suggestion of such a tactic has caused a split between the government of Alberta, on one side, and the governments of Canada and all other provinces on the other.
Tariffs on imports from the U.S. have the potential to cause pain to certain industries and regions, but Prime Minister Justin Trudeau himself has acknowledged that the effect of Canada’s import tariffs would be diluted by the size of the U.S. population and economy.
The withholding or tariffing of Canadian resource exports, on the other hand, has the potential to cause real, generalized discomfort to the U.S. — albeit at great cost to Canada as well.
“The idea of the threat is hopefully going to do most of the heavy lifting,” said Sanjay Jeram, senior lecturer of political science at Simon Fraser University.
“It’s not as if it can’t happen — that we can’t impose either some sort of export tariff on oil and gas to raise the cost, or some kind of outright ban,” he told CBC News. “That could be done by the federal government alone. The Constitution does have ways of permitting that.”
But Jeram says Canada’s position has been weakened by the stance taken by Alberta Premier Danielle Smith, which opens the door for the Trump administration to play divide and rule.
“Does that division within the country make it more likely that Trump would see that we couldn’t really sustain that disunity … and perhaps would be more willing to wait it out?” Jeram said.
“That’s the real trouble, I think, in the demonstration of disunity.”
Canada’s strongest card
Nonetheless, there are reasons to believe that Canada’s strongest cards in a trade war are not what it would decline to buy, but rather what it would decline to sell.
Oil is not the only resource card that Canada holds, says Lawrence Herman, an international trade lawyer and former Canadian diplomat.
“It’s probably the maximum leverage we have — the weapon, if you want to put it that way, that would have the most impact on the U.S. side. But as we all know, it is highly divisive politically in Canada.
“There are ways, however, in which this could be done,” Herman told CBC News, pointing to Ontario Premier Doug Ford’s willingness to cut off electricity exports that many northern states heavily depend on.
“Why don’t we start there? With regard to Western Canada and oil and gas, I think that is something that we should indicate is on the table.”
Herman points out that unless the U.S. exempts crude oil from any general tariff on Canadian imports, Canadian action would be moot anyway.
“We don’t have to even think about [crude] export restraints or export restrictions in that context,” he said.
Herman says tariffs on potash, critical minerals, steel and aluminum would also put pressure on the new administration.
“Those are things that U.S. industries integrated with Canadian producers have come to rely on.”
Price of gas more important than price of eggs
While the icon of inflationary discontent in the recent U.S. election was the price of eggs, the price that has long been considered the most “visible” and politically influential is the price of gas at the pumps.
Researchers at Stanford University tracked 30 years of polling and found that a U.S. president, on average, loses 0.6 per cent of approval for each dime of increase in a gallon of gas.
That effect continued to the 2024 election, with three of every 10 battleground-state voters citing gas prices as their top priority. When gas prices rise, consumer confidence falls, as does the proportion of voters who say the country is on the right track.
All of that means that Canada could potentially put a political squeeze on a Trump administration that enters office with thin Congressional majorities, and is already thinking about the 2026 midterms.
A key question is whether Canada has the leverage to increase costs to U.S. consumers enough to make them howl to their elected representatives. Could refiners not simply replace Canadian imports with crude from other countries?
To answer that question, it’s important to understand how the U.S. refining industry came to rely on Canadian crude in the first place.
A mismatch of oilfields and refineries
A key fact is that, while the country is vulnerable to a cutoff of Canadian oil, that isn’t because it doesn’t produce enough oil for its own needs. It produces more than it needs, and is a net exporter.
The problem for the U.S. arises when it comes to turning all that crude oil production into usable gasoline, diesel and jet fuel.
There are about 130 refineries in the U.S., capable of refining over 18 million barrels of oil a day, but there is a mismatch between those refineries and the kind of oil the U.S. produces.
Back in the 1980s and ’90s, there were widespread fears that oil was running out. U.S. production was falling, and so the refining industry redesigned itself to be able to process Latin American oil, coming principally from Venezuela.
Venezuela has the world’s largest known oil reserves, much of it bitumen-heavy crude that is hard to refine and hard to drive through a pipeline unless diluted, just like the oil in Alberta’s oilsands.
Then in the early part of this century, new technologies such as horizontal drilling caused a U.S. oil boom in Texas fields such as the Permian and Eagle Ford, and in North Dakota’s Bakken. The “shale oil” produced in these fields is lighter and “sweeter” (less sulphurous) than Venezuelan or Canadian crude, and therefore theoretically easier to refine.
But many refineries had already invested in expensive technologies designed to handle heavy crude, and their business model depended on the price discount that they demand for such oil, which sells for several dollars less than a barrel of light, sweet crude.
Consequently, much of that U.S. shale oil began to be exported to refineries overseas that were better suited to handle it. U.S. crude oil exports have soared from less than a million barrels a month in 2009 to well over 100 million barrels a month today, while the U.S. has continued to import foreign heavy oil.
Venezuela out, Canada in
The rise of the Chavez regime in Venezuela in 1999, which caused an exodus of petroleum engineers and a steep fall in oil production, set back the U.S. refining industry’s long-term plans. Fortunately, Canadian oilsands production was ramping up at the same time Venezuela’s was declining.
The next quarter-century would see a proliferation of pipelines and transportation networks designed to refine heavy Canadian crude in the U.S. Many Midwestern and western refineries in particular depend exclusively on Canadian imports.
Were Canada to close or tighten the taps, or simply increase the price, those refineries could theoretically source similar heavy oil from other suppliers. But in practice, both political and economic considerations would make that difficult.
In November 2022, the U.S. government eased sanctions on Venezuela, and Chevron returned to the country. But that relaxation was contingent on Nicolas Maduro allowing democratic elections. The Biden administration began to withdraw licenses in 2024 as it became apparent that Maduro did not intend to allow a free and fair vote and today, little oil is flowing.
Donald Trump could potentially lift sanctions altogether, allowing Venezuelan crude to flow once again to U.S. refineries. But there’s reason to believe he won’t do that.
As a Florida resident, Trump understands the importance of “MAGA-zuelans” and other anti-communist Latino voters to his winning coalition in the state. It’s hard to imagine Trump’s incoming secretary of state, Cuban-American Marco Rubio, would want to begin his tenure by lifting sanctions on the Maduro regime.
And in any case, Venezuela’s ramshackle industry is just a shadow of what it was before the socialist takeover — producing fewer than a million barrels a day total, much of which is already promised to China. It could never replace the four million barrels a day Canada exports to the country.
No viable alternatives
Colombian heavy sour Castilla oil, or Mexican heavy sour Maya, can be refined in the same plants that handle Western Canadian crude.
But Colombian production just isn’t big enough, and Mexico is moving forward with a strategic plan to refine its heavy crude in its own plants.
That leaves sources like Russia and Iraq, both of which produce heavy crude. But while Trump might be only too happy to lift the price cap imposed on Russian oil as a punishment for the invasion of Ukraine, those countries suffer from another problem, one that affects all non-Canadian suppliers: how to get their oil to the U.S. refineries that can handle them.
While Gulf Coast refineries — more accessible to seaborne tankers — do handle some Canadian crude, the refineries that really depend on Canadian imports are in the landlocked Midwest and Rocky Mountain states. They are deeply connected to Canadian oilfields by a fixed network of multi-billion-dollar pipelines that simply don’t connect to Russia, Venezuela or Iraq.
Retooling not a good option
But could U.S. refineries not simply retool in order to handle the light crude that’s coming from their own shale oilfields? Couldn’t they stop importing crude from Canada, and stop sending their own domestic crude to refineries in Mexico, China and the Netherlands?
They could, but the cost would be extremely high, and the transportation problems — though not as insurmountable as they would be sourcing crude overseas — would still be severe.
Such a retooling would also take time, and likely not show results until long after the next U.S. midterms, so it would do little to stave off the political impact of Canadian action.
Also, many in the industry believe the peak of the U.S. shale oil boom is now passed. Few would wish to spend hundreds of millions retooling for a resource that is becoming scarcer, only to have to do it all over again when they inevitably go back to processing heavy oil.
Questions remain, though. A big one is: who would end up having to eat those losses? Would it be the U.S. refiners themselves? Would they pass on all of the costs to the American consumer, as the Canadian government would hope? Or would they force the Canadian suppliers to lower their prices, since Canadian producers are also hostages of the same fixed transportation network, and would struggle to find other markets?
Some analysts believe that all three would end up sharing the cost, and past experience has shown that a 20 per cent increase in cost at the refinery level typically translates to about a 10 per cent increase at the retail pumps.
All of those considerations are at play as Canadian politicians ponder their nuclear option, along with the concerns about national unity.
But even though the cost would be high, says Herman, the threat should stay on the table.
“Trump is threatening the Canadian economy and Canadian livelihood, and in effect threatening Canada as a country. And we have to respond accordingly,” he said.
“It’s very hard to orchestrate something where the pain or the difficulties are felt equally across the country. Some regions, some sectors, may feel the pain more than others. But as Doug Ford rightly said, we’ve got to deal with this as a national matter, as something that affects Canada as a whole.”
