From the Fraser Institute

By Tegan Hill

After recently meeting with president-elect Donald Trump, Premier Danielle Smith warned that Trump’s tariffs could include oil. That’s just one more risk factor added to Alberta’s already precarious fiscal situation, which could mean red ink in the near future.

Trump has threatened a 25 per cent tariff on Canadian goods, which includes oil, and could come as early as January 20 when he’s sworn in as president. Such tariffs would likely widen the price differential between U.S. West Texas Intermediate (WTI) crude oil and Alberta’s Western Canadian select (WCS) heavy oil.

In other words, the average price difference between Canadian oil (WCS) and U.S. oil (WTI) could increase, reflecting a larger discount on Canadian oil. According to the Alberta government’s estimate, every $1 that WCS is sold at discount is a $600 million hit to the government’s budget.

To maintain its $4.6 billion projected budget surplus this fiscal year (2024/25), the Smith government is banking on oil prices (WTI) averaging US$74.00 per barrel in 2024/25. But every $1 decline in oil prices leads to a $630 million swing in Alberta’s bottom line. And WTI has dropped as low as US$67.00 per barrel in recent months.

Put simply, Trump’s proposed tariffs would flip Alberta’s budget surplus to a budget deficit, particularly if paired with lower oil prices.

While Smith has been aggressively trying to engage with lawmakers in the United States regarding the tariffs and the inclusion of oil, there’s not much she can do in the short-run to mitigate the effects if Trump’s tariff plan becomes a reality. But the Smith government can still help stabilize Alberta’s finances over the longer term. The key is spending restraint.

For decades, Alberta governments have increased spending when resource revenues were relatively high, as they are today, but do not commensurately reduce spending when resource revenues inevitably decline, which results in periods of persistent budget deficits and debt accumulation. And Albertans already pay approximately $650 each in provincial government debt interest each year.

To its credit, the Smith government has recognized the risk of financing ongoing spending with onetime windfalls in resource revenue and introduced a rule to limit increases in operating spending (e.g. spending on annual items such as government employee compensation) to the rate of population growth and inflation. Unfortunately, the government’s current plan for restraint is starting from a higher base level of spending (compared to its original plan) due to spending increases over the past two years.

Indeed, the government will spend a projected $1,603 more per Albertan (inflation-adjusted) this fiscal year than the Smith government originally planned in its 2022 mid-year budget update. And higher spending means the government has increased its reliance on volatile resource revenue—not reduced it. Put simply, Smith’s plan to grow spending below the rate of inflation and population growth isn’t enough to avoid budget deficits—more work must be done to rein in high spending.

Trump’s tariffs could help plunge Alberta back into deficit. To help stabilize provincial finances over the longer term, the Smith government should focus on what it can control—and that means reining in spending.

Tegan Hill

Director, Alberta Policy, Fraser Institute

Marathon Petroleum’s Detroit refinery in the U.S. Midwest, the largest processing area for Canadian crude imports. Photo courtesy Marathon Petroleum

From the Canadian Energy Centre

By Deborah Jaremko

More than 450,000 kilometres of pipelines link Canada and the U.S. – enough to circle the Earth 11 times

As U.S. imports of Canadian oil barrel through another new all-time high, leaders on both sides of the border are warning of the threat to energy security should the incoming Trump administration apply tariffs on Canadian oil and gas.

“We would hope any future tariffs would exclude these critical feedstocks and refined products,” Chet Thompson, CEO of the American Fuel & Petrochemical Manufacturers (AFPM), told Politico’s E&E News.

AFPM’s members manufacture everything from gasoline to plastic, dominating a sector with nearly 500 operating refineries and petrochemical plants across the United States.

“American refiners depend on crude oil from Canada and Mexico to produce the affordable, reliable fuels consumers count on every day,” Thompson said.

The United States is now the world’s largest oil producer, but continues to require substantial imports – to the tune of more than six million barrels per day this January, according to the U.S. Energy Information Administration (EIA).

Nearly 70 per cent of that oil came from Canada.

Many U.S. refineries are set up to process “heavy” crude like what comes from Canada and not “light” crude like what basins in the United States produce.

“New tariffs on [Canadian] crude oil, natural gas, refined products, or critical input materials that cannot be sourced domestically…would directly undermine energy affordability and availability for consumers,” the American Petroleum Institute, the industry’s largest trade association, wrote in a recent letter to the United States Trade Representative.

More than 450,000 kilometres of oil and gas pipelines link Canada and the United States – enough to circle the Earth 11 times.

The scale of this vast, interconnected energy system does not exist anywhere else. It’s “a powerful card to play” in increasingly unstable times, researchers with S&P Global said last year.

Twenty-five years from now, the United States will import virtually exactly the same amount of oil as it does today (7.0 million barrels per day in 2050 compared to 6.98 million barrels per day in 2023), according to the EIA’s latest outlook.

“We are interdependent on energy. Americans cutting off Canadian energy would be like cutting off their own arm,” said Heather Exner-Pirot, a special advisor to the Business Council of Canada.

Trump’s threat to apply a 25 per cent tariff on imports from Canada, including energy, would likely “result in lower production in Canada and higher gasoline and energy costs to American consumers while threatening North American energy security,” Canadian Association of Petroleum Producers CEO Lisa Baiton said in a statement.

“We must do everything in our power to protect and preserve this energy partnership.”

Energy products are Canada’s single largest export to the United States, accounting for about a third of total Canadian exports to the U.S., energy analysts Rory Johnston and Joe Calnan noted in a November report for the Canadian Global Affairs Institute.

The impact of applying tariffs to Canadian oil would likely be spread across Canada and the United States, they wrote: higher pump prices for U.S. consumers, weaker business for U.S. refiners and reduced returns for Canadian producers.

“It is vitally important for Canada to underline that it is not just another trade partner, but rather an indispensable part of the economic and security apparatus of the United States,” Johnston and Calnan wrote.