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Varcoe: Volatility and uncertainty is 'just madness': Trump says tariffs will target Canadian oil and gas

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U.S. President Donald Trump confirmed Friday that tariffs are coming on Canada, including on oil and natural gas.

Prime Minister Justin Trudeau has said Canada will respond.

For an integrated North American energy industry, get ready for a barrel full of chaos and confusion.

Both countries are the largest foreign energy suppliers to each other and a tariff wall is about to go up — although Trump indicated Friday it would probably be at 10 per cent for oil and gas, compared with 25 per cent for the rest of Canada’s imports.

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“The good news is it’s only 10 per cent, but there’s nothing good in any tariff,”?said Bob Geddes, president of Calgary-based Ensign Energy Services, which drills on both sides of the border.

“Budgets for producers will be modified to some extent, I expect, but the oilpatch is resilient . . . They’ll have to pull out their pencils and look at what this means for them, but it’s too early to tell at this point.”

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That sentiment of uncertainty is seeping throughout the Canadian economy as Trump reiterated that 25 per cent tariffs will be imposed on imports coming from north of the U.S. border, beginning Saturday.

Oil and gas, the largest single-export product that Canada sends to the United States, will likely be hit at a lower rate, beginning Feb. 18, Trump indicated.

“We’re not looking for a concession,” he told reporters. “We’re going to put tariffs on oil and gas . . . I’m probably going to reduce the tariff a little bit on that. We think we’re going to bring it down to 10 per cent on the oil.”

Alberta had hoped that energy tariffs would be fully exempted, as the U.S. buys more than four million barrels per day of Canadian crude and it’s by far the largest source of provincial exports.

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Energy trade between the two countries was worth US$152 billion in 2023, with Canadian imports making up the lion’s share — $125 billion — of that total.

Tariffs will squeeze U.S. consumers who rely on Canadian energy, but will also affect producers, said oilpatch veteran Hal Kvisle, the chair of ARC Resources and pipeline firm South Bow Corp.

“If you insert a tariff between the refiner in the U.S. and the producer in Canada, every party, I think, is going to lose,” said Kvisle.

“The refiner will probably pay a little more for oil, the producer will get less for their oil. The pipeline company in between the two will probably be under pressure because volumes may erode.”

However, the prospects of a larger 25 per cent hit for the sector would have been more severe, said Surge Energy CEO Paul Colborne.

His company has already locked in some of its oil prices this year through a hedging program, and he doesn’t expect the 10 per cent rate will cause Surge to alter its spending program.

“I think 10 per cent is a warning shot by them, but also recognition that they need our four million barrels of heavy (crude per day) for their refineries,” he said in an interview.

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“There’s no doubt it’s negative, but 25 per cent would have been harsh.”

Analysts and industry leaders believe tariff costs will be split between producers and U.S. customers, noting it will likely lead to lower prices for Western Canadian Select heavy crude — triggering a bigger discount on it compared with benchmark U.S. oil.

That would also reduce provincial revenues.

Federal Natural Resources Minister Jonathan Wilkinson recently said that American consumers in some regions could face a price hike of between 30 and 50 cents per gallon at the pump under a 25 per cent tariff.

Jonathan Wilkinson
Minister of Energy and Natural Resources Jonathan Wilkinson at a press conference at the University of Calgary on Wednesday, Jan. 29, 2025. Gavin Young/Postmedia

The lower tariff on oil and gas reflects some political movement by the White House, but it’s still a surprise given the importance of the energy trade between the two countries, said economist Rory Johnston, founder of the Commodity Context newsletter.

Tariffs will lead to a less efficient energy system in North America, which is highly integrated.

“It is going to inject additional costs, and it’s already injected uncertainty in the entire system,” said Johnston.

“Even beyond just the actual harm it’s caused, I think the volatility and uncertainty?is just madness.”

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One pressing question is what the federal government will do in response to the tariffs, and whether it will involve oil and gas.

Premier Danielle Smith has insisted that oil and gas should not be subjected to a Canadian export levy or restrictions in retaliation to U.S. tariffs, warning that such a move would lead to a national unity crisis.

Canada provides more than 60 per cent of all U.S. oil imports, and it’s the primary supplier of oil to refineries in the U.S. Midwest, which rely on Canadian heavy crude.

Meanwhile, Canada imported 508,000 bpd of oil through the first 11 months of last year, with 74 per cent coming from the United States.?Most of it ends up in New Brunswick, Quebec and Ontario, according to the Canadian Association of Petroleum Producers.

The U.S. also sends natural gas to parts of Central and Eastern Canada, while oil from Western Canada is shipped each day through Enbridge’s Line 5 system?to Ontario, but it transits through part of the U.S.

“That obviously would have to come into play in the context of discussions about what levers are the best levers to use in order to create pressure on the United States,” Wilkinson said in an interview earlier this week.

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“I’m not saying that we are going to curtail exports (to) the United States.?What I am saying is it would be really silly for governments in Canada to be negotiating our position in public.”

ARC Energy Research Institute executive director Jackie Forrest said Canada needs to be careful about using energy to gain leverage with the U.S., she said.

“We should think long and hard about what we do to retaliate against the potential for these tariffs, because we do really depend on the Americans for energy into Eastern Canada,” she said.

“They could do the same thing to us, and we don’t have any options.”

Chris Varcoe is a Calgary Herald columnist.

cvarcoe@postmedia.com

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