We turn to one of Canada’s foremost experts on oil markets—Toronto-based market analyst Rory Johnston—to discuss the potential impact of tariffs on Canda’s oil exports to the U.S. As the founder of Commodity Context, a data-driven research platform, Johnston is widely recognized for his expertise in energy markets. He is also a lecturer at the University of Toronto’s Munk School of Global Affairs and Public Policy and a Fellow with both the Canadian Global Affairs Institute and the Payne Institute for Public Policy at the Colorado School of Mines.

Johnston’s insights have been featured in leading global publications, including the Financial Times, New York Times, Wall Street Journal, Bloomberg News, Reuters, BNN Bloomberg, CBC, and Financial Post. He is also a frequent guest on industry podcasts, including Bloomberg’s Odd Lots.

The possibility of tariffs or other protectionist measures on Canadian crude would have profound implications for an industry that has long depended on free access to U.S. markets.

In this exclusive Q&A, Johnston shares his insights on the risks, challenges and strategies for navigating this uncertain landscape.

**“We’ve become extremely reliant—existientially so, even—on the U.S. market, so there’s no way to entirely inoculate ourselves against this threat.”**

RORY JOHNSTON, COMMODITY CONTEXT FOUNDER

M&W: You’ve just released a report that maps out the potential impact of U.S. tariffs on Canadian oil exports. But you don’t believe it’s a likely outcome. Can you elaborate why you think it’s not probable?

It remains my base case that, at the end of the day, Trump will back off from imposing blanket tariffs on Canada but especially the tariffs on Canadian crude because it doesn’t actually make economic sense. They run counter to his own stated goals of reducing pump prices for U.S. motorists, are being vehemently opposed by Republican-allied industries like oil refiners and more generally Trump has a history of pressing on these kinds of extreme tail risk pressure points to build leverage in other negotiations—for example, dairy supply management and softwood lumber. He will typically be satisfied with some token win he can claim. At the end of the day, the incoming president hasn’t demonstrated an appetite for pulling policy triggers that lock him into a challenging path; he’s all about the easy wins.

M&W: In a scenario where all U.S. crude imports are tariffed, you mention that the incidence largely falls on U.S. consumers and refiners? Can you elaborate?

A tariff remains fundamentally an import tax, so the burden or “incidence” of the tariff begins with the importing entity—tyically a refinery and, in the case of Canadian barrels, likely a Midwest refinery. That tariff—$15 on a $60 barrel of Western Canadian Select (WCS) crude—would go straight to the refinery’s cost structure, a burden that the refiner would immediately try to pass on to both consumers—through higher pump prices—and suppliers—by pushing down the price of those imports. Most U.S. sources of non-Canadian oil imports have plenty of options for where to ship their crude, so U.S. refiners would still need to pay globally competitive prices for those barrels; however, because Canadian crude exports are largely locked into the U.S. market, our barrels would likely share in some of the tariff pain given a lack of ready access to alternative markets.

M&W: Under a Canada/Mexico-only tariff scenario, you suggest that Canadian crude would struggle to compete globally? How much more damaging would this be for us?

Mexico, which exports its oil by tanker, would still be able to sell to other markets, but Canadian oil exporters would not only need to feel the shared tariff pressure with U.S. refiners, as discussed above, but would also need to contend with less expensive, non-tariffed competition in markets like the U.S. Gulf Coast. The USGC still represents the marginal demand for Canadian barrels. In other words, because we need to discount barrels to compete in the USGC, those heavier discounts also end up reducing the value of all our exported barrels, even those that go to the U.S. Midwest, where they wouldn’t face the same foreign competition.

M&W: What would the impact of widened crude differentials mean for Canadian producers in both the short and long term?

Wider crude differentials mean lower realized prices for Canadian oil and gas producers, which would lead to reduced profitability, a slower pace of future growth—if it didn’t flatline the outlook entirely—job losses and lower fiscal transfers to government in the form of royalties and taxes.

M&W: How have U.S. refining groups responded to these threats?

U.S. industry groups—including the American Fuel and Petrochemical Manufacturers (AFPM) Group, representing U.S. refiners, and the American Petroleum Institute (API), representing the broader U.S. petroleum industry—quickly came out in opposition to the proposed tariffs, knowing full well not only how they would harm refinery profitability given the lack of alternative “fit for purpose” supplies, but more generally stoke chaotic policy uncertainty. These industries move slowly and build up interdependencies over decades, with few if any of the participants ever considering the possible contingency of heavy tariffs on a core supply and historic ally like Canada.

M&W: What could Canada do to mitigate the immediate impact of tariffs, if anything?

That Canada has developed closer and closer economic and industry ties over the past century makes a lot of sense given our close physical and cultural ties, but it does mean that we’ve become extremely reliant—existientially so, even—on the U.S. market, so there’s no way to entirely inoculate ourselves against this threat. However, there are tools that could potentially blunt the pain in the extreme cases, including revisiting Albertan crude production curtailment, which was last seen in 2018. At that time, output was curtailed to reduce demand for overwhelmed pipeline infrastructure, but the same tool could theoretically be used to reduce supplies to the especially and unfairly competitive USGC market in the case where only Canadian and Mexican crude was subject to the tariff. There’s also a possibility the Canadian oil industry could re-export barrels out of the USGC rather than delivering to USGC refineries, as was being done prior to the startup of TMX, which could also lessen our USGC market exposure—though the trade law experts with whom I’ve spoken are mixed on, or at the very least uncertain as to whether these re-exports could avoid the tariff.

“At the end of the day, the incoming president hasn’t demonstrated an appetite for pulling policy triggers that lock him into a challenging path; he’s all about the easy wins.”

— RORY JOHNSTON, COMMODITY CONTEXT FOUNDER

M&W: How much could the expanded capacity of the Trans Mountain Pipeline offset the tariff impact for Canadian oil exporters? How competitive would Canadian crude be in Asian markets under these conditions?

The expanded Trans Mountain Pipeline system effectively tripled the Western Canadian oil industry’s access to tidewater and ability to route barrels around the U.S. market, but it still accounts for less than a quarter of total oil exports. Shippers who have access to capacity on the system can avoid the U.S. tariffs by shipping to other Pacific Basin markets, so it’s not so much how competitive Canadian crude would be but how much more competitive the Asian buyer offers would be relative to U.S. purchases factoring in the tariff.

M&W: What long-term strategies could Canada employ to reduce its exposure to U.S. market pressures?

The only way to reduce the Canadian oil industry’s exposure to the U.S. market would be to build additional pipelines to tidewater around the U.S., but most previous attempts to do so—for example, Northern Gateway and Energy East—failed because of because of more challenged permitting, domestic political pushback and comparatively unattractive economics. In a world in which tariffs weren’t being threatened, the U.S. market is always an immensely economically competitive destination for our barrels, which is largely how we ended up in this position in the first place.

M&W: How would things be different today had the Northern Gateway pipeline been built? Would tariffs make any revival of Keystone XL untenable?

Northern Gateway would have added another 525 kbpd of capacity to the West Coast on top of the expanded Trans Mountain Pipeline system’s 890 kbpd, which would have further insulated us from U.S. market exposure. But even in that case we’d still depend on the U.S. for the lion’s share of our demand. I’d argue that the revival of Keystone XL is already effectively untenable, but just the threat of these tariffs—let alone their actual imposition—would be the final redundant nail in the coffin.

M&W: How might this tariff scenario shape the future of U.S.-Canada trade relations and North American energy integration?

Close relationships between the Canadian and U.S. oil industries require trust that things like these tariffs won’t happen or even be threatened. Both Canada and the U.S. could have remained more flexibly diversified both in energy supply and demand security, but that would have come at a higher cost to the industry itself and the consumers it serves—security is expensive.