Amid escalating tensions over potential tariffs under Donald Trump’s administration, Canada is weighing its most impactful response: restricting or taxing energy exports to the United States. While this “nuclear option” could pressure the U.S., it carries significant risks for Canada.
A Divided Front
The prospect of withholding oil has created a rift within Canada, with Alberta Premier Danielle Smith opposing a united stance among premiers and the federal government. Political science expert Sanjay Jeram warns that this division could embolden the U.S. to exploit Canada’s internal disunity, potentially undermining the effectiveness of any retaliatory measures.
Canada’s Strongest Card
Canada’s energy exports are crucial to U.S. refineries, particularly in the Midwest and Rocky Mountain regions, which are heavily reliant on Canadian heavy crude. While the U.S. produces more oil than it consumes, its refineries are designed to process heavier oil, like that from Canada or Venezuela. With Venezuelan output constrained by political and economic instability, Canadian oil remains irreplaceable for many refineries.
Challenges for U.S. Refineries
Retooling U.S. refineries to process lighter domestic shale oil would be expensive, time-consuming, and impractical given the declining peak of the U.S. shale oil boom. Importing heavy crude from alternative sources, such as Russia or Iraq, is logistically and politically challenging, especially for landlocked refineries connected to Canadian oilfields via extensive pipeline networks.
Economic and Political Stakes
Restricting Canadian oil could significantly impact U.S. gasoline prices, which have proven politically sensitive. Studies show that even small increases in fuel costs can erode presidential approval ratings, making energy a powerful leverage point. However, such a move would also come at a cost to Canada, as its producers depend on U.S. refineries, leaving them vulnerable to price negotiations.
Weighing the Risks
Trade experts like Lawrence Herman argue that Canada must keep this option on the table to counter threats to its economy and sovereignty. However, implementing such a strategy would require careful management to balance the economic fallout across Canadian regions and sectors.
While the stakes are high for both nations, the threat of leveraging Canada’s energy exports may serve as a deterrent in the ongoing trade conflict, emphasizing the need for unity and strategic planning in Canada’s response.