Trump, Tariffs, and Trade: Impacts on Canadian Oil and Gas
The threat of tariffs on Canada’s trade with the United States continues to be top of mind, with Alberta’s Premier, Danielle Smith, recently returning from Mar-a-Lago after meeting with President-elect Donald Trump over the weekend.
This week on the podcast, our guest is Marcus Rocque, Vice President at the ARC Energy Research Institute. Marcus joins Jackie and Peter in discussing the potential for Canadian oil and gas tariffs and the possible market implications. They review Canada’s trade surplus with the United States, which is smaller than Donald Trump often claims, and whether the trade surplus is the only motivation for his threats to Canada. Next, they consider the amount of oil and natural gas Canada sends to the United States and the US’s ability to substitute some of this consumption with alternative supply. Finally, they consider how the tariffs could impact US consumers and Canadian oil and gas producers.
Content referenced in this podcast:
Please review our disclaimer at: https://www.arcenergyinstitute.com/disclaimer/
Check us out on social media:
X (Twitter): @arcenergyinst
LinkedIn: @ARC Energy Research Institute
Subscribe to ARC Energy Ideas Podcast
Apple Podcasts
Amazon Music
Spotify
Episode 267 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. Welcome back. Well, Jackie, the news flow is unrelenting in 2025, and we are inundated right now daily with the wildfires in California, which is really disturbing, frankly, and our thoughts go out to those who’ve lost their homes and have been displaced. Closer to home, it’s a constant din of noise that’s amplifying with the current political chaos in this country, lack of leadership, and of course, the momentum behind the Trump inauguration and how Trump’s inauguration is going to affect the political chaos in this country. So we want to talk about that and we want to talk about tariffs, and we want to talk about even things like the most recent news as we record. We have just come off the news that Danielle Smith’s trip, Premier Smith of Alberta, her trip on the weekend to Mar-a-Lago. There’s been some quotes on that.
Jackie Forrest:
Yeah, so a quote from Premier Danielle Smith this morning, it was in the Morningstar. “I’m not expecting any exemptions,” and she’s referring to the tariffs on oil and gas. “I’m expecting that we’re going to have a lot of work to do in arguing why this special relationship that we, U.S. and Canada have had, should continue.” So that’s the quote from Danielle Smith. CBC News also had a video of Danielle Smith this morning saying she doesn’t want to prejudice what will happen around tariffs, but she’s seen no indication Trump is inclined to change his approach.
So that’s disappointing news, although I guess it was a tall order to head down there and get that solved, especially when you think about the threats that were launched against Canada on January 7th. So everyone that listens to this podcast has heard this, but it’s worth just reviewing. He had a news conference at Mar-a-Lago and he talked about using economic force to annex Canada and calling the border an artificially drawn line. If there’s any good news, he ruled out using military force. So that was the good news. That was the only good news in that. He also called out that he doesn’t need Canadian cheese, lumber or cars. In that interview, he didn’t mention energy, but I understand he mentioned energy in a subsequent interview.
Peter Tertzakian:
How about maple syrup? Does he need that for his-
Jackie Forrest:
Yeah, that wasn’t called out, so we need to get into the maple syrup business, Peter. So what do you think of this 51 Canada becoming the 51st state, Peter?
Peter Tertzakian:
Well, I think we have to think about it broadly in the geopolitics of the world. What is Donald Trump talking about? And in my view, it’s not just Donald Trump, it’s this whole entourage of thinkers, global thinkers who really are looking at what’s going on on the other side of the world with the alliances being formed between China, Russia, you can even throw in North Korea, Iran, and their expansionist policies, whether it’s in Africa or South America. And so I really believe this is really part of a response by the Americans and particularly the Trump administration, to think about Fortress North America. I mean, this is why he wants Greenland. The whole control of trade routes is going to become paramount over the course of the next decade or two. The Chinese have realized that. So that’s why he’s talking about the Panama Canal. For Canada and Greenland, it’s the Northwest Passage in a world of global warming.
So I think that we have to acknowledge that whereas we focus on the short-term impacts of the tariffs, and we’re going to talk about that, that there may be some short-term pain on both sides of the border. What the Americans are really talking about is the long game, and this is the long game that the Chinese have been playing now for the better part of 10, 15 years. And in my opinion, it’s actually a response to that, and we can have a debate about whether that’s a necessary and essential response or whether it’s part of something else. But I think that as we talk about tariffs today, we have to think about the big global geopolitical picture that’s emerging and how the world is being redefined in this new era of East versus West or country versus country, empire versus empire competition.
Jackie Forrest:
Right. Well, I mean, I would argue we could have alliances without them annexing us. We’ve had a alliance around military for a long time, right?
Peter Tertzakian:
Mm-hmm.
Jackie Forrest:
Where we have U.S. bases here in Canada. Apparently, there’s bases in the U.S. and Greenland as well. So you don’t need to annex countries, I think to achieve that.
Peter Tertzakian:
No, but that could be an opening position. I think it’s more about controlling the situation. They may not have to buy Greenland outright, but if Greenland gains its independence and becomes closely aligned with the United States, if Canada becomes more, I’ll call it surrogate to the United States in terms of its policies and things, then it effectively accomplishes the same sort of thing.
I mean, if you think about the colonial era, Spain, Netherlands, England, expansion into other parts of the world to gain access to resources and to control trade routes, very mercantile paradigm. I think we’re seeing the same kind of thing manifest itself today, is there is a global competition between countries. And I think we can’t ignore it and that we have to choose as Canada, whether we want to be an outright colony of the United States, which is like the 51st state or whether we choose to participate and say, “Yes, we are part of Team North America in the face of this very serious geopolitical challenge.” If I can tell you the wrong thing to do in my opinion, is basically to say, “Oh, if you do that, we’re going to hurt you back.” Well, I think, as we’ll show with some numbers and things, that it really in the near term, we could maybe inflict some pain on the trade, but in the long term, and this is very much a long game, I’m not convinced. So we have to pick our strategies carefully.
Jackie Forrest:
Right. Well, and this weekend, also so much news this weekend. Foreign affairs minister Melanie Joly says, “Canada is not ruling out restricting our energy exports to the United States as a possible countermeasure to President-elect Donald Trump’s tariff threats.” And Danielle Smith immediately rejected this idea. So you’d be in her camp there in that.
Peter Tertzakian:
I would be in Premier Smith’s camp because what Melanie Joly, minister Joly is basically saying is we’re not going to be a team player in Fortress North America, whereas Premier Smith is saying, “Okay, let’s think about how we can work together.” I mean, even Doug Ford, Premier of Ontario, is also saying, “Okay, let’s forge some sort of an energy alliance,” that speaks more to, okay, we recognize the new world order that’s emerging. Let’s work together to be part of a North American powerhouse if we want to preserve the lifestyles and such that we’ve been accustomed to.
Jackie Forrest:
Right. well-
Peter Tertzakian:
That’s the way I view it. I mean, personally, as I’ve said many times on this podcast, I’m a child of the Cold War and it’s like a movie that’s sort of replaying itself in many ways. And that this actually is not becoming reminiscent of the Cold War, but even more broadly reminiscent of the mercantile era of the 1700s where there was expansionism, colonialism, scramble for world’s wealth in terms of resources and control of trade routes. That’s a very mercantile way of thinking. And if you look at what is happening right now geopolitically, globally, it’s a competition for global resources, whether it’s critical minerals, energy, and other types of resources.
Jackie Forrest:
Right. Well, if they’re going to put tariffs though on our energy, which Danielle Smith is saying this morning that there’s a high likelihood, that doesn’t speak well to working collaboratively. So I hope that we can find a way to be part of a trading block that doesn’t have tariffs. And that’s going to be the topic for the podcast today. We want to talk about the trade surplus between Canada, the U.S. I think there’s a lot of numbers being thrown out there. A quick review on oil and gas flows between Canada, the U.S., and where the flows go to, and then explore how tariffs could impact the Canadian oil and gas market. And I’m excited today to introduce our special guest, Marcus Rocque, Vice President at the AEC Energy Research Institute. I worked with Marcus for 10 years. He does a lot of great work for us, and he’s spent a lot of time helping to analyze the tariffs as well. So welcome, Marcus.
Marcus Rocque:
Yeah, thanks, Jackie. Peter, I’m excited to be here. It’s a very topical topic to discuss today, so looking forward to getting into it.
Jackie Forrest:
Okay, well, let’s start off with these trade surplus. As Marcus knows, I dug into the numbers on this last week and went in circles for a while. So Trump has accused Canada of accepting a $100 billion subsidy from the United States. And I think it’s still kind of a mystery where that number’s coming from, but I wanted to get to the bottom of it. So I looked at the annual trade of goods and services, both goods and services, and I found out, these are 2023 annual numbers because we don’t have a full year 2024, that the U.S. sold Canada $440 billion of goods and services in 2023, and that Canada sold the U.S. 481 billion, so that works out to a $40 billion difference, Canada having a $40 billion trade surplus selling that much more than we bought. So where does like the hundred come from if you consider the 40, Marcus?
Marcus Rocque:
Well, I think it’s pretty hard to see where he’s actually getting the hundred. I think one way you can get a little bit closer is if you start looking at just goods and not services, because Canada actually does buy more services from the United States than they buy from us. So if you strip away the services aspect, then the trade deficit does increase to about $72 billion. And then if you really want to try to give him credit and get closer to the hundred billion, you could look at that on a Canadian dollar basis, and that does get you to the $100 billion. So if you squint at it, you can maybe get there, but it does seem like a bit of an overstatement of the trade surplus.
Jackie Forrest:
Right, yeah. And all those numbers I quoted before and you quoted were U.S. dollars. And the other thing, as I looked into this, that kind of surprised me, is the fact that he’s pointing this out as a big problem for Canada is surprising because if you look at the goods and services, which I agree. I think if you’re looking at the over and all economic relationship, you need to include all goods and services, not just goods, to understand the economic relationship, which is actually pretty balanced. At $40 billion U.S. trade surplus Canada has with U.S., it’s small relative to lots of other partners. So the U.S. trade surplus with China is 250 billion. With Mexico, it’s 160. With even countries like Vietnam, it’s a hundred billion. The EU, it’s 125 billion, if you look at all the countries. So it seems like a mystery to me. Why is this metric, why is Canada being positioned as being a real outlier here, Peter, when really we’re actually probably one of the better performers?
Peter Tertzakian:
Well, we are, which tells me that actually it’s somewhat of a moot issue. If you put these numbers in context, $100 billion, let’s say it is a hundred billion, it’s still a rounding error. The U.S. economy is $30 trillion in GDP. Canada’s is 2.2. As a side note, we always used to use the rule of thumb, 10 to one. The United States is 10 times as big as Canada. Well, guess what? Now it’s almost, what is it? 13 or 14 to one. So we’re a lot smaller than them, which should be noted because it also is an indication of our economic weakness relative to the United States, which we’ll talk about when we talk about these counter tariffs and things about like that. But whether it’s $40 billion or $100 billion, it’s just pales compared to the big economic numbers. So to me, that’s not the reason for waging a tariff war. As I said before, to me, this is about the long game. It’s about control of resources, it’s about trade routes, the importance of the Arctic, of the Northwest Passage. As global warming takes root in the Arctic, the passages start to open up. It’s a very much a long game. So to me, it’s an excuse to gain broader control over what goes on around here.
Jackie Forrest:
Right, this Fortress America idea.
Peter Tertzakian:
Yeah.
Jackie Forrest:
Now, the other little point that’s worth pointing out is that energy, if you look at, well, just oil, gas, refined products and NGL, so just like hydrocarbons is 120 billion of that 480 billion U.S. that Canada sold to the U.S., so that’s about 25% of the trade. I would argue that there is no trade surplus when you consider that because, Marcus, you can explain it better. We’re basically sending them a bunch of low-priced oil and gas and hydrocarbons, and then they’re exporting their own domestic production that they don’t need because we’re providing them lower-cost products and they’re exporting it at a much higher global price.
Marcus Rocque:
Yeah, no, that’s exactly right. And if you look at crude oil, for instance, we export to them a little over 4 million barrels a day. They’re exporting about the same amount to international markets. The products that they get from us are discounted because we’re essentially landlocked. They’re also very well-suited to their refining complex, so they’re cheap and they’re the products that they need, and then they’re exporting off of their Gulf Coast light oil that’s more expensive. So their trade deficit with Canada actually helps enable their trade surplus with other nations.
Peter Tertzakian:
[inaudible 00:13:25] still high.
Marcus Rocque:
Exactly.
Peter Tertzakian:
Yeah.
Jackie Forrest:
Well, and the good news is I saw some of the media reports with Premier Danielle Smith had made some of those same points that was covered in the media, or at least she had said she’d covered them, so I’m glad that those points are being raised down in Mar-a-Lago.
Marcus Rocque:
Yeah, no, exactly. And I believe I saw Pierre Poilievre make the same point as well. So it is an important point, and hopefully that message can get across.
Peter Tertzakian:
And do you think the tariffs then therefore serve to make the purchase of Canadian goods even cheaper in the long run and to facilitate an export economy?
Marcus Rocque:
Yeah, well, we can definitely get into the pricing impacts, and there is some case that our products might end up being a little bit cheaper if there are tariffs, but it could introduce some inefficiencies into the system as well.
Peter Tertzakian:
Because our Canadian dollar weakens too.
Marcus Rocque:
Yeah.
Jackie Forrest:
Yeah, so we’re going to get into that in the last section, but let’s first of all go over how the flows are, and then we’ll get into the potential implications. And we’ve never seen broad tariffs on our oil and gas and our systems are so integrated. I will just say it, there’s certainly a ton of uncertainty in thinking of how this is all going to work out and what it’s going to do to price and volume and that sort of thing.
But let’s first just talk about the flows between oil and gas in the U.S. and Canada. I do think some key messages though before we get into that are important, is that the reason we trade with the U.S. is because it’s the most efficient and results in the lowest cost energy for both countries, right? Yeah, we could have built pipelines to send our crude oil and gas to international markets, but yet when you have a client right on your doorstep, which is the world’s largest consumer of oil, 20 million barrels a day I think is our oil consumption in that range, and they use a ton of natural gas, something like 90 BCF per day, and then there’s even more when you consider the exports. Why would we send our oil and gas further afield? It would actually have higher transportation costs and be less efficient. And it’s been good for them too, because obviously they’re getting cheaper energy than if they had to bring it in from offshore. So I think we have to keep that in mind, that actually trade is kind of good for both countries, and I hope that’s part of the education that’s going on.
And there’s been a ton of investment by companies on both sides of the border around this continued trade of oil and gas. We talked about that, Peter, in our last podcast around how uncertainty means stopping investing. Well, there’s been a lot of belief that this trade goes on, and a lot of investors and companies have made big investments led, whether it be refineries in the Midwest that have reconfigured their refineries exclusively to take Canadian oil or Canadian midstream companies that have built infrastructure in the U.S. to move critical products, not only the Canadian products, but American products too. So I think it’s been just such a successful trade relationship. So back to your Fortress of America thing. I think we have that, so I hope that gets communicated and understood.
But let’s start then on crude oil. Marcus, you kind of mentioned it a little bit, but just quickly, how much crude oil do we send them and how much do they produce?
Marcus Rocque:
Sure, yeah. So I mentioned before, we send a little over 4 million barrels, so that’s a little over 1 million barrel of light oil and NGOs, and then over 3 million barrels of heavy oil, which is largely coming from our oil sands. That is their biggest import share. So we’re around 60% of U.S. imports of crude oil. They import from some other countries as well. Mexico, about 900,000 barrels a day, and then 3.2 million barrels a day from all other countries combined, and that would be OPEC making up about a third of that, and then various other countries mixed in there. So that all compares to their own domestic production of 13 million barrels, so they are a very large producer now. They’re the largest producer in the world, particularly now that Russian and Saudi production have dropped below 10 million barrels a day. But their oil production is a little bit different than ours. It’s largely light oil. So they have an excess capacity of light oil and are currently exporting about 4 million barrels a day of that off of the U.S. Gulf Coast. I mentioned before, that’s fairly similar to the amount of oil that they import from Canada.
Now, the fact that they have all of this domestic light oil, it does mean that they have a slightly higher ability potentially to replace the Canadian barrels of particularly the light. If they see a price signal that really justifies it, they could decide to bid back some of those barrels destined for export and display some of our light barrels.
Jackie Forrest:
Right, so we’ll maybe move ahead a little bit. So if you assumed that the refiner, and theoretically this is how it would work. The refiner, whoever was the importer on record has to pay this tariff to the U.S. Government. And if it’s a 25% tariff on today’s oil and gas prices for oil, it would be in the range of a 14 or $16 per barrel additional cost, they would have to pay that. Well, now suddenly Canadian oil is looking kind of expensive. So they would have the opportunity to say why don’t I just use domestic oil? We’re sending 4 million barrels a day offshore. Let’s use that to replace that light Canadian oil, which is pretty much a substitute. Now, of course, there’s logistical constraints. The pipelines coming from Canada wired into certain refineries, maybe means that it’s hard to get the domestic light crude into them, but there’s some opportunity to do that. And even on the heavy oil refineries, if Canadian oil is suddenly in the range of $15 of additional cost, could they start to substitute some domestic light crude into those heavy oil refineries?
Marcus Rocque:
Yeah. So I think heavy is one of the areas that compared to light, we’re certainly safer. I think it’s a lot harder to replace, but to your point, if a refiner is looking at a much more expensive barrel now because it’s tariffed, there’s a strong incentive to tinker at the margins where they can. So for a refiner that usually runs heavy oil, maybe they start looking at blending a bit of light into there. They probably can’t replace it fully with light, but at the margins start backing out some of that heavy oil with a cheaper product. Now, that’s less efficient for them. They’d rather run that heavy barrel. It is what their refineries were geared for, but economics dictate what you’re going to put through the refinery, and if the prices are significantly more expensive for Canada, they will think about doing more light in their refineries.
Peter Tertzakian:
I mean, the other dynamic here is that a refiner can easily pass the cost onto the consumer, basically right to the gas pump. And our view is that this would create a lot of increased cost for the U.S. driver, if we’re talking about gasoline or diesel and that it’s going to be painful. But actually, if you run the numbers, a 25% increase in the price of the oil because of the tariff, you actually run that through and say, “Well, what would that actually constitute as a price increase in the price of gasoline?” I mean, I estimate it’s like between 30 and 40 cents a gallon, which you say, “Whoa, I don’t know what, I haven’t checked recently, but I mean I think it’s in the low $3 right now. So you go from 3.10 to say 3.50, 3.60. To be honest, it’s really not that much. And if you look over the course of the past 12 months, it’s been at 3.60 before.
Jackie Forrest:
Yeah.
Peter Tertzakian:
And so it’s not like it’s tripling the price of gasoline or anything like that. It’s certainly something that, okay, it might be a little painful certainly to income-constrained people in the United States, but generally speaking also, Americans are wealthier than Canadians. So I just don’t see this as being as painful to the Americans as it is potentially to the Canadians.
Jackie Forrest:
Yeah, and I would actually say I don’t think they’re going to see all of that because in some of these markets, there’s refined products that come in from overseas that set the price, so the refiner really can’t pass on the price. And then if you look at all of the consumption of crude oil in the United States, because they actually produce 13 million barrels a day. They use a lot of their own crude, so Canada and Mexico are maybe like a third of all the feed stocks into the refinery. So I think it’s going to be a lot less than that, Peter. So I agree with you. I don’t think it’s going to really register too much with the consumer in the United States.
Peter Tertzakian:
Right. So I mean, I think that leads us to, we’ve sort of touched on it already, but the tariffs are going to be less impactful to the U.S. consumer than to the Canadian producer. I don’t know about other industrial sectors, steel, but certainly for energy, I think it’s going to be notable in the near term. But in the long term, I mean, as you said, Marcus, the U.S. is the largest producer of oil and gas in the world. New technology has given them more runway to produce more particularly natural gas. Yes, there are pipeline constraints and so on, which we should talk about. But if you’re thinking about this as the long game, you would say, “Okay, near-term pain, long-term gain.” And I think for us to sort of fight it on a short-term basis and think very near term is a mistake.
Jackie Forrest:
Yeah, yeah. Well, and let’s talk about natural gas. Canada exports about eight BCF per day of natural gas to the U.S. This mainly goes to the western market, down to California, Oregon State, all of that area where there’s actually limited opportunities to send other gas. I mean, they have some Rockies gas there a little bit from Texas, but there isn’t so much room to replace Canadian gas there in the short term.
And then the other big market for us is the U.S. Midwest, which there’s plenty of pipelines coming from every direction, yet if you look at a natural gas pipeline map, that area is just very, very congested, busy with lots of pipelines. But we understand that a lot of the pipelines from the gas fields in the U.S., the domestic gas fields are full and can’t really move more gas into the Midwest in the short term. So there may be limited opportunity in the short term to not use Canadian gas, but over time, you can imagine you could see the economics. Because actually, Marcus, what is the tariff then for gas if the importer on record had to pay it?
Marcus Rocque:
Yeah. So I mean, I think right now based on current pricing we’re seeing, it’s something like 30 to 40 cents U.S. per MMBtu. Of course, that depends a lot on what the price of gas is. And right now for anyone who’s selling gas in the Canadian market, it’s very cheap. So the tariff impact is lower now, but if prices were more expensive, it would be a higher impact.
Jackie Forrest:
Yeah, yeah, that’s the issue. Gas prices are so low now, and we’re oversupplied here in Western Canada. So in the near term, I’m not sure the tariff would result in too much change. But hey, if we get a tighter market, which a lot of people are hoping for, and the futures market is certainly expecting a tighter market by the end of the year, then that tariff can become more impactful because it goes up in absolute price as the price of the gas goes up.
Peter Tertzakian:
Right. As a side note, this is why LNG Canada, which was scheduled to open, what is it, May or June this year, is so important. But, Marcus, maybe put this eight BCF a day into context, because eight BCF a day, 8 billion cubic feet a day used to be a big deal 15 years ago, but today what does the U.S. produces? It’s over a hundred now.
Marcus Rocque:
Yeah, it’s over a hundred. So it is not as big of a share of the total U.S. production as it used to be, certainly. To Jackie’s point, it’s not necessarily easy to replace based on the markets that it’s being delivered into. But yeah, ultimately we are a smaller share than we used to be of their market. And eight BCF per day potentially even overstates it because that’s the exports, but we also do import some natural gas from them in eastern Canada, so on a net basis, the number’s even smaller.
Jackie Forrest:
So it’s six BCF per day on a net basis. But I think even that is really an important volume in the context of what the U.S. is preparing for. We’re going to have a real ramp up of LNG exports over the next several years, and then we’re talking about all these AI data centers probably needing natural gas power generation. And so, it’s going to be a challenge for Canadian and U.S. producers to meet that growing demand. And you can see that in the futures price. So I would argue that now is probably a time where they would really like to see Canadian molecules being available at the most lowest cost to meet that growing demand.
Peter Tertzakian:
Yeah, I agree. In fact, I saw in the last week, an article about a record number of gas-fired power plants that are now being permitted down there. So it’s coming. I mean, this whole ramp-up for electrification, for data centers and all sorts of other applications requiring natural gas as the favored expansionary fuel that is baseload and reliable is going to create some near-term constraints. But let’s not forget that the administration that Trump has put together is heavy with oil and gas people, people who understand the technologies of being able to bring another BCF of natural gas out of the ground using the new techniques, which are really quite remarkable, and the ability to bring and extract natural gas at quite low cost.
Jackie Forrest:
Well, and I think there’s plenty of resource of natural gas available in the U.S., it’s just a matter of building big pipelines from that Marcellus region. With oil, you could argue that there’s people that view that it maybe can’t grow that much. For sure, it can grow, but there may be some limits to the resource. I think there isn’t a lot of doubt that there’s a lot of resource there for natural gas.
Peter Tertzakian:
Yeah. Having said all that, let’s not discount the vast resources we have here in Canada, whether it’s hydrocarbons or critical minerals and all sorts of things. And I want to say it again, this is why there’s this talk about 51st state and so on and so forth. This is an understanding that resources of all type are going to be vital as this new world order manifests itself.
Jackie Forrest:
All right, we’re going to talk about some of the complications because, Peter, you had put forward the scenario and we’ve talked pretty much about the Americans absorbing this. I think there’s really a case to be made that they don’t absorb all of it, that some of it is absorbed through lower prices for Canadian gas and oil, and we’re going to get to that. But first of all, what do you think the chances are? Now, we just got this information from Danielle Smith, but what do you think the chances are that we actually do get tariffs in next week or early in the Trump administration?
Peter Tertzakian:
A hundred percent. I mean, I think it’s coming. I mean, he’s pledged it’s coming. It’s not a matter of if, it’s how much, and whether it’s 25% or 20% and how broad-based it is. I think initially, you’ll see it broad-based on the entire economy, and then as things settle out, there’ll be discussions and negotiations.
Jackie Forrest:
Okay. Well, let’s hope that there is some flexibility after that, Marcus.
Peter Tertzakian:
That’s my bet.
Marcus Rocque:
Yeah. I think more likely than not, for sure. I think one interesting data point though that I wanted to highlight more just for fun, but you can bet on a lot of these things actually. So if you look on Polymarket, there-
Peter Tertzakian:
Oh, yeah.
Marcus Rocque:
… is a betting line on whether or not Trump will introduce a 25% tariff, it’s worded on as Mexico and or Canada. So yeah, you can actually bet on these on Polymarket, they have that line. It’s currently trending upwards. It was bottomed out at about 15%. It’s looking more like 20%, 25% likelihood now, so certainly not-
Peter Tertzakian:
So only a 25% likelihood that the Trump administration will introduce tariffs on Canada and Mexico?
Marcus Rocque:
So it is broad-based tariffs and before January 31st, so it’s a fairly strict will he adhere exactly to the letter of what he said?
Peter Tertzakian:
Okay.
Marcus Rocque:
And I will also caveat that some of the betting lines have a lot of action-
Peter Tertzakian:
Where do I go to bet?
Marcus Rocque:
It’s Polymarket.
Jackie Forrest:
Well, we looked into this last week. Apparently, you need Bitcoin to make your bet. So that’s a little complication, but-
Marcus Rocque:
But yeah, there’s only about 300,000 of total trading volume. So maybe the price discovery isn’t perfectly there.
Peter Tertzakian:
Okay.
Marcus Rocque:
And I should caveat that it’s certainly not financial advice to go bet out-
Peter Tertzakian:
No.
Marcus Rocque:
… on these markets.
Peter Tertzakian:
Bet at your own risk.
Marcus Rocque:
But it’s an interesting data point. We saw during the presidential election, for instance, that the betting markets ended up having more predictive value than the polls, so for what that’s worth.
Peter Tertzakian:
Okay.
Jackie Forrest:
Okay. Well, let’s talk about on that. Everyone’s running now to look up Poly bet. Let’s talk about the complications. Because after these tariffs are added, if they are, Peter’s saying that likely they will be added and Polymarket’s saying maybe not. Let’s hope Polymarket’s right this time, but let’s say they’re added. The price of oil and gas in Canada I don’t think necessarily stays the same. So here’s some of the complications. Because we don’t have a lot of alternative markets to sell our products, you can imagine that when those U.S. refiners start having to pay more, as we just described, as you said, Marcus, they may just start to say, “Well, what are some other options here?” And that could erode the demand for Canadian oil and gas. And because we don’t have other places to sell our oil and gas, that puts us on our back foot and potentially we need to start dropping prices because anytime we see erosion in demand from our big market, we usually see lower prices here in Western Canada.
So for example, maybe we can talk about a really good classic example of this was in the end of 2018. For those that don’t remember that, or maybe they just put it out of their memory. We had in 2018, a glut of Canadian oil, and that was because some major oil sands projects started up and we didn’t have enough pipelines to take that production to the market. And this resulted in big discounts for Canadian oil. Western Canadian selector heavy oil differential relative to WTI went from the typical level of about $15 a barrel to over $40 a barrel, so we saw a $25 per barrel change in the price when we were oversupplied.
And then in January of 2019, the Alberta government implemented a policy of curtailment, forcing producers to restrict their production, and the production level was reduced by 270,000 barrels a day, which was only about 6% of our exports to the U.S. at the time and the price discount disappeared right away. So we know that when we have a glut, we can see like even a small glut, 270,000 barrels a day, too much production, we can see discounting for the price of our oil.
Peter Tertzakian:
Can you remind us how that was implemented? 270,000 barrels broad-based on every producer? Or was it selective? Do you remember?
Marcus Rocque:
So I think overall, the headline number I believe was 325,000 barrels, and each producer was granted an allocation and there was some ability to trade allocations between companies, and it was relative to a certain baseline. So it didn’t work out precisely based on the headline numbers that they had given, but essentially it was a mandate to reduce that was fairly broad-based with some exceptions for smaller companies.
Peter Tertzakian:
Yeah. So I mean, the notion of curtailment does not go hand in glove with Danielle Smith’s comments.
Jackie Forrest:
Well, yeah. I mean, she’s talking about, I think she would like to, and I think the first position should be let’s not have tariffs at all. But I do think that what could happen if the tariffs come on is there’ll be a reduction in demand for our products. Doesn’t have to be very big, as we learned with curtailment. Even a 300,000 barrel a day change in the demand can cause a price issue.
Now, the curtailment was different. It was an oversupplying situation. This would be a situation where through different mechanism, they use less. Suddenly, we have an oversupply. It’s not because we don’t have enough pipelines, it’s because refiners are just taking a bit less of our crude oil. So if that does then result in price discounts, the way to solve that would be, as we learned with curtailment, is just by cutting production a little bit, it creates scarcity. And now suddenly, we’re not oversupplying the market and now the buyers do have to pay up because there’s scarcity and not enough barrels to go around.
Peter Tertzakian:
Well, as I recall, Jackie, and you and I discussed this on the podcast, because we’ve been running for, what is it, almost over five years.
Jackie Forrest:
yeah , we talked about curtailment at the time, yeah.
Peter Tertzakian:
It was extremely contentious because it’s government intervening in free market dynamics. So if we play this through this notion of curtailment, which is effectively a constraint of supply, the other approach would be, okay, if the Canadian producer has to eat 25% tariff, then instead of getting the equivalent of $70 U.S. per barrel for WTI equivalent, it’s going to get, what is it? It’s like low $50, right? And so at low $50, what would happen is that there would be selective curtailment starting with high-cost producers not being able to produce, so they would see some declines and that in effect would constrain the supply. So it’s very much a market-induced dynamic that inefficient or higher-cost producers in our basin would fall off the map first.
Jackie Forrest:
I think the question is how long does it take for that to happen? It could take some time.
Peter Tertzakian:
Well, on the light oil side, it’s not long, right? I mean, we know that stopping drilling for the light oils, the impact is fairly immediate. I mean, we saw that in the pandemic on the U.S. side for sure, and the Canadian side as well.
Marcus Rocque:
I think that’s definitely true. We can see the unconventionals respond very quickly because of those high decline rates. I think one of the differences maybe with the pandemic is we’re probably seeing a smaller price impact here. Knock on wood, we’re not looking at negative crude oil pricing. So taking the incremental, call it $15 off of the Canadian price is certainly damaging, but probably warrants a slightly slower response in drilling activities.
Jackie Forrest:
Okay. Well, here’s another solution, one that I like better, is another way to solve this problem is to create more opportunity to move to markets outside of the United States. So for example, our East Coast.
Peter Tertzakian:
What a novel idea, Jackie.
Jackie Forrest:
Yes, I know. Look, we haven’t talked about this. So our East Coast producers are not going to be impacted by this tariff at all. They’re just going to say, because they’re producing offshore, now those tankers are going to go to Europe or somewhere that isn’t going to tariff them, so there’s no impact. So here in Canada, obviously we have the Trans Mountain, it has about 180,000 barrels a day of unused capacity today, I would imagine in this scenario that fills, and those barrels avoid the tariff.
But yeah, if we could get more oil to Tidewater. Now, I don’t know what we can do in the short term. That’s the best thing for Canada to solve this problem. And I think a big part of this conversation has to be around the importance of market access. And of course the Canadian industry has been talking to Canadians about that for a long time, but hasn’t really resulted in much support, especially across the country for new pipelines, whether it be BC or Eastern Canada. I mean, let’s go back and talk about Energy East, there wasn’t a lot of support from Quebec and some of the other provinces. Do you think that this situation, if we get into it, where Canada has got a recession, that we’re getting lower price for our products, we’re seeing a decline in the production for oil and gas, and by the way, the currency is really dropping as well, which hurts all Canadians, your food prices are going up because the Canadian dollar is worth less, does that create more support, do you think, for Canada building pipelines?
Peter Tertzakian:
Well, I think in combination with whomever forms the next government, quite likely the CPC, I think there’s going to have to be a complete rethink in this new age of, as I called it at the front end of the podcast, the new geopolitical realities in this world, is that there’s going to have to be a complete rethink of all the policies. And that’s actually what we’re going to see is that carbon policy is going to be supplanted by fiscal policy.
Now, at the end of the day, we could have decarbonization because fiscal policy could include, and we’re already seeing huge investments into industries for the purpose of country on country competition. So what I mean by that? For example, Americans investing hugely into semiconductors to be competitive and to repatriate. I mean, this is one of the dynamics that’s going on in the world, it’s a repatriation of supply chains, the deglobalization effect. And so, one could imagine that investment into things like nuclear fusion, investment into other potential alternatives to energy sources and supplies, if you think about it as a long game, could achieve substantial decarbonization in completely different ways that we haven’t thought about it, it’s just that the drivers are different. And I do believe that carbon policy is going to yield to fiscal policies that are influenced heavily by the world geopolitical order that is emerging.
Jackie Forrest:
I mean, I would argue, all of this to me could mean that we don’t decarbonize very much in North America. And if you think about it, if energy security and sovereignty is the most important thing to you, then I kind of question some of the policies in the U.S. today to reshore some of the clean energy technologies, right? The reality is today, all of the knowledge and know-how to make batteries and solar panels is in China, and it’s going to take decades for us to learn that here in North America and to really have those technologies. So could you not just see, why don’t we just double down on hydrocarbons because they’re in our country? We know how to do them. We’re not dependent on foreign actors and actually see a real slowdown in terms of clean energy. I mean, that’s a potential solution and hopefully Canada would be part of that Fortress America, but you could sort of see-
Peter Tertzakian:
That’s a scenario, I don’t think it’s going to be the dominant scenario. It could be a near-term scenario, for sure. But I do think that you’re going to see breakthroughs in energy conversion technologies and things that are going to take us to a combination of energy security, affordability, and decarbonization over the course of the next five years or so. So again, I encourage people to think of the long game rather than the immediate and understand the global strategies that are emerging. So whereas you might think it’s negative that we’re shifting from carbon policy to more industrial innovation strategies for the purposes of de-globalizing and repatriating supply chains, it actually may be a net positive because I would argue that carbon policy-driven decarbonization wasn’t working, and actually the investment into industrial innovation could potentially lead to breakthroughs that will take us places that we haven’t thought about.
Jackie Forrest:
All right. Well, that’s a good way to end the podcast. I know one of your predictions was last podcast that Net Zero 2050 isn’t going to happen and it’s going to be redefined somehow. And maybe it is more of an innovation mandate that we’re going to get decarbonization, but it’s going to come through technologies that are developed within these different axes, North America and those technologies are going to be the ones that get developed and reduce emissions longer term.
Peter Tertzakian:
Yeah. I can give you several examples of energy security-driven energy transitions historically that move much quicker than policy-driven transitions. And I think this is what’s going to emerge. And that is really the genesis of my comments last time and when we kicked off 2025, and I think it’s going to take us forward. It’s just that we have to think strategically in the long game and not get wrapped up in the short term, as I’ve said several times on this podcast.
Jackie Forrest:
All right. With that, I think we’ll wrap up the podcast. Thank you so much, Marcus, for joining us.
Peter Tertzakian:
Yeah, thanks, Marcus.
Marcus Rocque:
Yeah, great. Thanks for having me. It was a great discussion.
Jackie Forrest:
And thank you to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
For more ideas and insights, visit arcenergyinstitute.com.