Trump’s trade war hits energy sector

President Trump’s North American trade war, if continued, will cause disruptions for both the Canadian and U.S. oil and gas industries.

The U.S. imposed a 25 percent universal tariff on goods coming from Mexico and Canada, which took effect on March 4th. The economic fallout was immediate. The S&P 500 fell more than 2 percent on Monday and by an additional 1.2 percent on Tuesday.

Canadian Prime Minister Justin Trudeau called it a “very dumb thing to do.” He added that Trump is trying to bring about “a total collapse of the Canadian economy” because he thinks that will “make it easier to annex us.” He announced retaliatory tariffs on $125 billion worth of U.S. goods, with $30 billion effective immediately and the rest to be implemented in three weeks’ time.

But that wasn’t all. Ontario threatened further action at the subnational level. “If they want to annihilate Ontario, I will do anything, including cutting off their energy, with a smile on my face,” Ontario Premier Doug Ford said at a press conference on March 3rd. “They need to feel the pain. They want to come at us hard? We’ve got to go back twice as hard.”

Ford said that Ontario would place a 25 percent export levy on electricity sent to the U.S. if the tariffs are not immediately removed, and he said that he would even consider a complete cut-off of electricity exports. Ontario exports electricity to northern U.S. states, particularly to Minnesota, Michigan, and New York.

Ford added that he would consider cutting off exports of nickel, needed for a range of electronic goods, and potash, a key agricultural ingredient.

By Wednesday, Trump backtracked on some of the tariffs, giving a one-month reprieve for tariffs on auto sector imports from both Canada and Mexico.

But tariffs remain on everything else. Undoubtedly, the economic pain will hit Canada and Mexico worse than the U.S.

“With the Bank of Canada expecting a roughly 300bps decline in economic output (GDP), Canada is now, effectively, in a recession,” investment bank Jeffries wrote in a note to clients on Tuesday.

At the same time, the Canadian public and the government have expressed resolve that they are willing to withstand economic pain in order to exact a price on Washington.

Energy and economic contraction

The escalating trade war could affect the energy industry in multiple ways. Trump placed tariffs on Canadian energy at a lower level of 10 percent, a recognition of the fact that the U.S. buys enormous quantities of oil and gas from its northern neighbour. Oil imports from Mexico did not receive the same treatment and are now subjected to the full 25 percent tariff.

Roughly 90 percent of 4.4 million barrels per day of Canadian oil exports head to refineries in the U.S., particularly in the Midwest. The additional cost could filter through to higher gasoline prices for American motorists. The Northeast is most exposed to the impacts of the trade war, with gasoline prices potentially rising by 20 to 40 cents per gallon by mid-March.

Flows of oil, gas, and petroleum products will be scrambled because of the tariffs. For instance, refined diesel in eastern Canada may be exported to Europe instead of the U.S., and upwards of 200,000 barrels per day of crude oil from Alberta that typically heads to the U.S. Midwest could instead move on the TMX pipeline to the Pacific, to be exported to Asia. 

Other analysts said the uncertainty of U.S. trade and foreign policy, which can turn on a dime depending on the mood of the President, will have a lasting impact, even if the trade war is short-lived.

“Even without escalatory interruptions of cross-border energy flows—and, notwithstanding price pass-throughs by U.S. players who face higher factor costs and logistical frictions—sustained uncertainty could plant the seeds of higher end-user prices by quashing investment,” ClearView Energy Partners, a Washington-based energy consulting firm, wrote in a note to clients.

While the tariffs on energy could push up prices, the broader impact of the trade war could be economically damaging, dragging down prices. Oil prices fell to their lowest levels since 2021 as investors see a slowdown ahead.

On top of the tariffs on Canada and Mexico, Trump has announced a barrage of other trade levies, including an additional 10 percent tariff on imports from China, effective March 4th, which came on top of a pervious 10 percent tariff hitting China in early February. Meanwhile, Trump is implementing steel and aluminium tariffs from all countries scheduled to begin March 12th. Finally, Trump is planning “reciprocal” tariffs at the beginning of April, although the details remain vague. At that time, the delayed auto tariffs on Canada and Mexico will be revisited.

U.S. shale and offshore projects could see costs increase by 5 to 10 percent from the steel tariffs alone, according to Rystad Energy.

The American energy industry criticise the tariffs, although in a subdued tone. “Imposing tariffs on energy, refined products and petrochemical imports will not make us more energy secure or lower costs for consumers,” American Fuel & Petrochemical Manufacturers President and CEO Chet Thompson said in a statement. “So, we continue to hope quick resolution can be found with our North American neighbor.”

The effects on gas markets are more complex. The potential cut-off of electricity from Canada into northern states in the U.S. would put upward pressure on U.S. gas markets as American power plants are needed to compensate for the sudden loss of capacity.

Moreover, the slide in crude oil prices could hamper drilling activity. That, in turn, could reduce the supply of associated gas, produced as a byproduct in the oil-rich Permian. The counterintuitive result of falling crude oil prices is to increase natural gas prices.

Indeed, Henry Hub prices surged to nearly $4.50 per million Btu (MMBtu), levels not seen for a sustained period since the global energy crunch in 2022.

It’s unclear how long the trade war will last. But the Canadian government and public feel a sense of betrayal and are steeling themselves for economic malaise. Resisting the unwarranted economic assault from Washington is seen as paramount. Canadian investment banks are warning that trust in trade agreements with the U.S. is a thing of the past.

For its part, the Canadian oil and gas industry has tried to capitalise off of the turmoil, making the case that a rapid build-out of oil and gas pipelines to the east and west coasts is needed to break Canada’s export dependence on the U.S.

“As Canadians we must now recognise the relationship with our closest friend, ally, and trading partner has fundamentally changed. In this moment, we must act with urgency to focus on the Canadian national interest. Without greater global market reach and energy security, Canada has little leverage in our trade relationship with the United States,” the Canadian Association of Petroleum Producers, an industry lobbying outfit, said in a statement. “Diversifying exports beyond North America into Asian and European markets will promote long-term stability.”

The big question is if the trade war will persist, potentially even expand.

Morgan Stanley estimates that U.S. tariffs and the Canadian and Mexican response could increase U.S. inflation by an additional 0.3 to 0.6 percent and lower GDP growth by 0.7 to 1.1 percent compared to a previous baseline over the next three quarters.

But others issued more dire warnings. The International Chamber of Commerce warned that the trade war could push the global economy into a downward spiral not seen since the Great Depression of the 1930s.

(Writing by Nick Cunningham; editing by Sophie Davies)