Canada could weaponize oil and gas tariffs in trade war with U.S., experts warn

President Donald Trump’s escalating trade war with Canada has a nuclear option. Though it’s highly unlikely, Canadian officials could send the tariff battle into overdrive by raising the possibility of weaponized oil and gas levies.

But officials and economists on both sides of the border are warning that a clash of tariffs on oil and gas between the neighboring nations could be “devastating” and push their intertwined economies to the brink.

Canada has already hit back with “targeted” counter-tariffs to “level the playing field” after Trump rolled out new duties on cars, steel and other imported goods last month. But Canada has even more leverage that could be potentially crushing for Americans.

Trump would likely retaliate with more punishing tariffs on oil and gas exports, but the pain would be especially acute in the United States. Americans, already in the grips of an affordability crisis, would likely end up with sky-high prices for gasoline, jet fuel and virtually any good that relies on them.

The president, meanwhile, claims the U.S. doesn’t even need Canada. He says an ungrateful Canada “thinks it’s a state” as he dangles threats of making it the nation’s 51st. In reality, the U.S. is deeply reliant on a steady and predictable flow of oil from its northern neighbor.

The U.S. is the largest buyer of Canadian crude oil, accounting for 90 percent of its crude exports last year. Canada exports roughly 4 million barrels per day to the U.S., or about 20 percent of America’s daily consumption.

By comparison, the U.S. only exports about 400,000 barrels of crude to Canada per day, or roughly 10 percent of what Canada sends. Any loss in either direction would be enough to see gas prices spike during politically volatile midterm elections with the cost of living at the center of nationwide campaigns.

That is a huge amount of U.S. daily consumption that would be impacted, according to Paasha Mahdavi, an oil and gas policy expert and associate professor of political science at UC Santa Barbara.

“Both sides suffer from any trade war. The problem is, Canada could sell that oil anywhere,” he told The Independent. “The world, as we look around right now, is not lacking for buyers for oil.”

The U.S. on the other hand, will be hard-pressed to compensate for any loss in foreign oil; the Strait of Hormuz is closed during the U.S. war in Iran, stranding millions of barrels and choking off global fuel supplies, while refineries throughout the region and in Russia are also offline.

Oil refineries dotting the U.S. Gulf Coast have expanded over the last several decades to process imported heavy crude from Venezuela and Mexico, making them also well-suited to process similarly heavy crude from Alberta oil fields as Canadian production expanded.

The U.S. has meanwhile become the world’s largest crude producer, though much of that production is lighter “sweet” oil — so the country is simultaneously exporting large quantities of domestic light crude while importing millions of barrels of heavier crude to be refined every day.

That integrated economy has put the two countries into something of a standoff, with mutually assured destruction should one of them pull the trigger.

Alberta Premier Danielle Smith has warned against any proposals to impose levies on oil and gas, while Ontario Premier Doug Ford has argued that all options should be on the table.

“The United States would immediately respond with a 50 to 100 percent tariff on oil and natural gas they export to Ontario, along with millions of barrels of diesel fuel and gasoline that Ontario and Quebec import from the midwest,” Smith said in remarks last week. “This would bring the economies of Ontario and Quebec to a grinding halt.”

Former Alberta premier Jason Kenney, however, has argued that Canada could put the squeeze on the U.S. by raising the prospect of oil and gas tariffs, which he said “would affect Republicans who drive F-150s and lay fertilizer on their farm fields.”

“They should be mindful that if they really want to escalate, it will not end well for the American economy two months before mid-term elections,” he said last week. “Let it be known we’re prepared to defend ourselves.”

Oil and gas royalties account for roughly 20 to 25 percent of Alberta’s government revenues, “so an export tax or restriction on crude oil could cause significant damage,” according to G. Kent Fellows, an associate professor at the University of Calgary’s School of Public Policy.

Alberta also is facing a first vote in an independence referendum on October 19, and any retaliatory export tax would harm its economy at a vulnerable moment — a move some analysts see as Trump’s intentional attempt to drive a wedge between Alberta and the rest of Canada as part of a dubious campaign to annex the province.

Canada is the leading crude oil supplier to the midwest and Rocky Mountains. Choking off supply would likely trigger increases in gasoline and diesel prices, “putting additional economic pressure on those regions who are already suffering fuel price inflation as a result of the Iran war,” Fellows told The Independent.

But such a move would be considered “a disproportionate response” compared to Prime Minister Mark Carney’s stated strategy of “dollar for dollar retaliatory tariffs,” Fellows said.

The decades-old flow of energy between the countries isn’t limited to oil barrels. Natural gas pipelines cross the Canada-U.S. border roughly two dozen times in a network that spans the continent — powering and heating homes and businesses and generating electricity across the country.

In remarks last month, Carney said that “Canada fuels American growth,” pointing to natural gas exports.

“The U.S.’s narrow merchandise trade deficit only exists because the U.S. buys so much of its energy from Canada,” he said. “Canada supplies 99 per cent of their natural gas imports, 85 per cent of their electricity imports, 60 per cent of their crude oil imports.”

But that represents roughly 8 percent of all U.S. natural gas consumption, according to the U.S. Energy Information Administration.

It’s where that energy goes that makes the difference. The vast majority of natural gas on the West Coast is coming from Canada. Levies on those imports could be both a mess for the western U.S. and a blow that Canadian industry may not necessarily be able to absorb. If those shipments don’t go anywhere, prices may plunge while storage reaches capacity.

Still, any further collapse of a relationship between the two trading partners in a long-held alliance, particularly on energy, “would be something that’d be pretty hard to to come back to where things were,” Mahdavi said.

“They have the higher ground, but still doesn’t mean they’re going to take it, given the damage it will do to Canadian consumers in the short term,” Mahdavi said. “I would be more surprised to see this being done unilaterally by the Canadians. Of course, it’s in response to what Trump is doing, but I think the cooler heads seem to be prevailing over there more than not here.”