Leveraging oil and gas could be Canada’s 'trump card' in a tariff war

OTTAWA, Feb. 6, 2025 – U.S. tariffs are on hold for at least 30 days, but the threat of economic war is a Damoclean sword that continues to dangle over Canadians.

Canadian officials are attempting to convince the White House to abandon its tariff threat, but a bruising trade war is still on the table and experts say Ottawa must thoughtfully consider its options. Restricting or taxing oil and gas exports into the United States is a major point of leverage Canada could use that federal officials have not ruled out, despite calls to do so from the oilpatch and Alberta government.

Using fossil fuels as leverage could inflict pressure on the American economy, though it’s controversial — and some say could backfire. 

The U.S. needs Canada’s oil because their refineries aren't tooled to refine anything else, said Stuart Trew, trade researcher with the Canadian Centre for Policy Alternatives in an interview with Canada’s National Observer. “It's an absolute dependency at this point, and we should be leveraging that.”

“The goal, first and foremost, is financial pressure on these importing companies, which will put financial pressure on the entire economy and Trump administration.”

Unlike tariffs, which tax imports, an export tax is paid to the government by the company that wants to export its goods. By putting export taxes on oil exports, the federal government could increase its revenue and make it more expensive for U.S. refineries to purchase Canadian crude. 

The argument for an export tax is that U.S. refineries, particularly in the Midwest, have few other options. If refineries could purchase heavy crude from elsewhere, an export tax would only incentivize them to do so — but most can’t. Canadian crude makes up virtually 100 per cent of Midwest oil imports according to the U.S. Energy Information Administration. 

Underscoring the point, in August the U.S. Energy Information Administration noted Canadian oil imports have become increasingly important to U.S. refineries across the country. “In 2023, 60% of U.S. crude oil imports originated in Canada, up from 33% in 2013,” the agency found. 

Because the Americans are a captive consumer for Canadian crude, one option for Canada in a trade war would be to put export taxes on oil and gas to ratchet the price for U.S. refineries to the point where it's no longer profitable. In that scenario, the U.S. would be staring down the barrel of fuel shortages or companies forced to operate at a loss, creating enormous economic pressure on President Trump. 

Lisa Young, a political science professor with the University of Calgary, said she understands the appeal of an export tax given it’s quick and impactful, but warned there could be significant blowback. For her, the two issues are how Americans would respond, and whether Canadian national unity could withstand the stress. 

Young said Canada’s approach to the tariff threat to date has involved pointing out to Americans — whether through official channels like government officials meeting their counterparts in Washington or talking to U.S. media to speak more directly to the public — that tariffs are damaging to U.S. consumers as well. 

“It's one thing to be able to point to something really immediate like an increase in the price of gas in the Midwest to say ‘this is a consequence of a decision the American government made, and Canada has nothing to do with this,’” she said. “But if it's an export tax, then I worry it feeds into the notion that Canada is trying to take advantage of Americans … and you might see a rallying of American public opinion against Canada, in the way that Canadian public opinion has rallied against the United States over the past week.”

The U.S. might very well retaliate by ramping up tariffs in response, as Trump has threatened. Another potential risk of export taxes is that Canada (particularly, Ontario, Quebec and New Brunswick) also reimport crude oil from the United States to refine, potentially pushing up the cost for Canadian consumers. 

“Canada would need some kind of plan for keeping costs down in Canada for this kind of move,” Trew said.

‘Oil is the trump card’

Canadian labour leaders support increasing pressure on the United States if a trade war breaks out. The Canadian Labour Congress said in a statement the U.S. must feel immediate consequences for targeting the Canadian economy and called for a “full-scale” response including dollar-for-dollar retaliatory tariffs, support for impacted workers, and cutting the U.S. off from Canadian resources including electricity, lumber, critical minerals, oil and gas. 

Similarly, Lana Payne, national president of Unifor, the country’s largest private sector union, and a member of the Prime Minister’s Council on Canada-U.S. relations, called Trump’s tariff announcement a “turning point for our country.”

Not everyone favours the use of fossil fuel exports as leverage. Following the pause on tariff implementation, Alberta Premier Danielle Smith, who previously warned of a national unity crisis if the federal government restricted oil and gas exports, said she was once again calling on federal officials and other premiers to “de-escalate rhetoric, abandon any non-tariff measures for the time being, and turn our efforts entirely to advocacy and good-faith negotiation.”

Her position was echoed by the Pathways Alliance, whose member companies (Suncor Energy, Canadian Natural Resources, Cenovus Energy, Imperial Oil, MEG Energy and ConocoPhillips Canada) represent 95 per cent of oil sands production. In a statement ahead of expected tariffs, the alliance’s president Kendall Dilling urged the federal government to “avoid worsening the situation by restricting energy trade or imposing export tariffs on Canadian energy to the U.S.”

In Alberta there is a sense of suspicion and frustration at the federal government built over many years that could be exacerbated if Ottawa uses oil and gas as leverage, Young said. 

Using oil “to win this fight, to protect Ontario manufacturing, is going to press so many buttons in Alberta and parts of Western Canada around national unity that it's going to spark something that looks like a crisis at a time when unity is a strategic advantage,” she said. 

Asa McKercher, research chair in Canada-U.S. relations at St. Francis Xavier University, told Canada’s National Observer that Ottawa would likely consider an export tax on oil if not for the domestic political struggle. 

“The nastiness of Danielle Smith when it comes to asserting Alberta independence within the federation is the thing preventing that lever from being pulled,” he said. “But if the tariffs go through, and there's no negotiation, or negotiations go nowhere, or Trump says the only thing I'll accept is if you become the 51st state, pulling that lever will be more and more attractive to a Liberal government.”

McKercher said the language used by Trump in his tariff directive “gives the game away.” Essentially, by proposing 25 per cent tariffs on Canadian goods, except energy which was set at 10 per cent, Trump is revealing the country’s dependency on cheap Canadian energy and a concern about prices rising too high for Americans. 

“Oil is the trump card, to use a terrible term,” he said. 

This week the Canadian Centre for Policy Alternatives (CCPA) published a list of a dozen strong responses Canada could adopt, including export taxes on energy products of at least 15 per cent, taking over U.S.-owned assets, implementing an aggressive green industrial strategy, and targeting U.S. oligarch and Trump allies — like blocking, freezing, or punitively taxing Elon Musk-owned companies including X, Starlink and Tesla. 

A ‘shitstorm of uncertainty’

President Trump has given a plethora of reasons for the tariffs, ranging from fentanyl and immigrants crossing the border to a desire to annex Canada to a lowering of the trade deficit. Regardless of what reasons Trump publicly uses to threaten economic war, McKercher said it’s clear the real reason is to disrupt the country's major trading partners to the U.S.’s economic advantage. This is leading to a paradigm shift in the relationship between the two countries, he said. 

“The fentanyl issue is just a smokescreen for what is a long term goal of reshoring American jobs and reshoring American investment, and stirring up the shitstorm of uncertainty for investors,” McKercher said. 

If Trump’s goal is indeed to bring investment back to the U.S. by deterring investment in Canada by making cross-border trade more expensive using tariffs, or simply sowing uncertainty for investors, Canadians will be in for a rough economic ride with no clear short term path out, McKercher said. That’s because if Trump wants to bring industries back to the United States, Canadian industries could be hit hard, and there is no incentive on either side to give in during negotiations.

“I think we should be looking seriously at decoupling as much as possible to lessen our susceptibility to future grunts by the beast,” he said. “Canadian governments have talked a lot about trade diversification, have talked a lot about internal trade barriers, and I think we're literally staring down the barrel of economic ruin, so I think this is a good time to be doing that and thinking about those things.”

For McKercher, delaying tariffs for a month, like both Canada and Mexico have now secured, doesn’t achieve much in the grand scheme of things because the tariff threat remains.

Monday afternoon, Prime Minister Justin Trudeau said Canada would commit $1.5 billion ($200 million more than what he announced in December) for border security to deal with fentanyl and illegal border crossings. McKercher characterized it as a “largely symbolic gesture to give Trump an off-ramp,” given most of the measures were ones Canada had already announced.

“I'd like to think that the tough Canadian response gave Trump pause,” he said. “In his tariff announcement Trump stated that he would increase the tariffs if Canada retaliated and instead he put this pause in place. So, he blinked.”

John Woodside is a Local Journalism Initiative reporter with Canada's National Observer in Ottawa. Image by Vilius Kukanauskas from Pixabay.