Energy Market Report

May 2025

Market Report

At times it seems that there is so much going on in the world, that it is almost impossible to keep up! However, having run a Portland office in Hamilton, Ontario for the last 6 years, one event that did not pass us by was the recent General Election in Canada. The election was won by the incumbent party (The Liberals), who had jettisoned their unpopular leader (Justin Trudeau) for the steady hand of Mark Carney – known in the UK as the Governor of the Bank of England from 2013 to 2020. In his new role as Prime Minister of Canada, Carney faces an increasingly belligerent southern neighbour, that is now waging economic warfare on his country and threatening to upend the whole Canadian economy.

There can be no doubting that US tariffs – if fully implemented – will cause havoc in Canada. 25% tariffs on steel, aluminium, copper and automobiles will hammer industrialised Southern Ontario (which makes up around 30% of the country’s total GDP), whilst timber and dairy product levies (also 25%) will damage Canada’s strong and vital rural economies. Canada has responded in kind of course, with its own tariffs on US steel and aluminium, plus consumer goods including food and wine. On a recent visit to Canada, Portland noticed that the LCBO (Liquor Control Board of Ontario – in Canada, alcohol sales are controlled by the state) was completely devoid of Californian wine and southern bourbon. At the same time, Canadian supermarkets have emptied their shelves of almost all US food products.

No doubt these retaliatory actions will play well to a domestic Canadian audience, but Carney will be aware that as the smaller partner in the North American trading relationship, Canada will be the ultimate loser in any general “tit-for-tat” tariff war. Nonetheless, the new Prime Minister does hold one “ace in his pack” and that of course is Canadian crude oil. Despite his green tendencies (some have described Carney as an environmental zealot), as a native of Alberta, not to mention a Doctorate in Economics (Harvard and Oxford), the Prime Minister is only too aware of just how important this oil region is to the Canadian economy. Alberta’s oil sand deposits alone, represent the world’s third largest crude reserves and the province produces more oil than any country bar the USA, Saudi, Russia and China! Overall, Canadian crude oil production is Canada’s most valuable product, accounting for over 15% of the country’s total exports and at a value of around $135bn per annum.

Over 90% of these crude exports go to the USA and put quite simply, the USA is dependent on Canadian crude. Over 70% of US refineries are configured around the heavy, sour oils coming from Canada and these refineries also enjoy the very significant price discounts (around $15 per barrel versus the US WTI benchmark) on the heavier Canadian oils. Furthermore, Trump’s simplistic notion that US oil producers will replace lost Canadian volume is deeply flawed. Not only do the US refiners not want US crude, the reality is that the world is one big oil market, so if Canadian oil stops flowing south, it will simply be diverted to the Far-East. Over time, China, Japan and South Korea will all happily pick up this volume, because Canada is not simply going to stop producing oil just because the USA doesn’t want it anymore! We saw an exact parallel of this in 2022/23, when Russian oil – no longer welcome in Europe – simply reappeared in India and China.

The US oil industry knows all of this and so any idea that the US oil producers will step in to replace lost Canadian supply is pie in the sky. To do so would duplicate production and create a global supply glut, which of course no oil producer wants because it pushes prices down. And irrespective of how many times Trump says he loves the oil industry, crashing prices will do more damage to US producers than any number of Democrat Administrations! So, the reality is that a 25% tariff on Canadian oil will significantly push up US fuel prices and there are few subjects more important to US voters than the price of gasoline…

This will not be the first time that Canada’s oil industry comes to the country’s rescue. In the Financial Crisis of 2007-09, Canada was just about the only developed nation on the planet that didn’t suffer a commercial meltdown and this was largely the result of Alberta and Saskatchewan’s booming oil production and the healthy financial reserves that this had built up. At the same time, the sheer complexity of the tariff mechanisms proposed by the USA will inevitably delay implementation. It has now become clear for example, that some of Canada’s US car manufacturers (Ford in Oakville and Windsor, General Motors in Oshawa and St Catharines, Chrysler in Brampton and Windsor) are sending raw materials and components up to 6 times back and forth across the US border, before manufacture completion! Such complications have bought Canada some time and the country’s formidable oil industry provides strength in its negotiations. Mark Carney will no doubt need both these advantages if he is to successfully manage the extraordinarily difficult balance of protecting the Canadian economy, whilst standing up to the USA but also at the same time, maintaining a positive personal relationship with President Trump.

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