Mind the gap: Why Trump's tariffs could blow out the WCS and WTI differential
‘No way to look at it in a positive way,’ says economist
While the price gap between a barrel of North American benchmark oil and a barrel of Canadian oilsands crude has long existed, some market watchers say if the tariffs proposed by U.S. president Donald Trump were applied to Canadian oil exports, that gap would widen even further — limiting revenues for Canadian producers and negatively impacting the economy as a whole.
West Texas Intermediate, also known as WTI, is the benchmark North American oil price, representing a blend of light, sweet oil. It's easier to refine and it's good for making gasoline. Because of this, it's sold at a higher price than Canadian crude, called Western Canada Select (WCS).
WCS is a much heavier, sour blend of crude oil that comes from Canada's oilsands. While it's better for making diesel, it's more difficult to refine, therefore it's priced at a discount to WTI.
"Our WCS is priced lower than WTI because they're just different qualities. They fit into refineries differently, they make a different slate of products and they're at different locations," said Richard Masson, executive fellow with the University of Calgary School of Public Policy and former CEO of the Alberta Petroleum Marketing Commission.
Trump reiterated his tariff threat as recently as Thursday afternoon, where he told reporters in the Oval Office the U.S. would be deciding whether the levies would apply to oil by Thursday evening. As of Friday morning, there had been no definitive announcement from the White House related to tariffs on energy.
Lodging a 25 per cent tariff against Canadian energy exports would widen that price gap, or "differential," because if Trump follows through, Canadian oil producers may need to ramp down production, Masson says. Reducing production would push that differential out.
"When we have more oil than there is pipeline capacity or refinery demand, we end up with wider differentials. And that's a problem for Alberta because it reduces revenues, royalties and taxes," said Masson.
Alberta's budget
About 97 per cent of Canada's oil exports went to the U.S. in 2023, with about 87 per cent of that coming from Alberta, according to data from the Canada Energy Regulator (CER). Alberta is also the largest source of crude oil exports to the United States.
"There's no way to look at [tariffs] in a positive way, it's going to be negative for Canada as a whole," said Charles St-Arnaud, chief economist with Alberta Central, the central banking facility for the province's credit unions.
"Not everyone will be affected the same way. It's clear when you look at the data, Alberta will be more impacted than the rest of the country … in terms of industries, oil and gas and manufacturing are going to be the most affected."
In Alberta's second-quarter fiscal update, the government forecasted the average WTI price of oil at $74 US, marking a $2.50 US per barrel decrease from its first-quarter fiscal update (oil prices are reported in U.S. dollars).
Because the province's budget relies on relatively strong oil prices, St-Arnaud believes tariffs have the potential to uniquely impact the province responsible for the vast majority of Canadian oil exports.
"Over the past decade or so, that differential has been about $18, $20 a barrel wide … usually it should be closer to $10, $12 a barrel," he said.
"So if we lose $10 a barrel in revenues, that's a lot of revenues that we're leaving on the table."
According to data from the Alberta government's economic dashboard, WTI prices averaged at $71.99 a barrel in October 2024, 15.9 per cent lower than it was a year earlier.
WCS — the price obtained for many Alberta oil producers — averaged $57.86 a barrel that same month, which was 13.9 per cent lower than the year before.
A wider differential means Canadian oil producers would fetch less for every barrel of oil sold, according to St-Arnaud, who says keeping the price spread between WTI and WCS low means more revenue for the province.
"And that's why if it widens post-tariffs, it's basically going to hit revenues for the oil sector and also influence a lot of our fiscal revenues," he said.
The economist also suggests tariffs could hurt the Canadian dollar.
"Oil prices are traded in U.S. dollars, so suddenly the oil we purchase will actually be more expensive," he said, adding that — depending on how tariffs are absorbed through the exchange rate and differential — what Canadians pay at the pump could rise.
Canadian crude still needed
Thanks to the completion of the expanded Trans Mountain pipeline, Canadian crude exports to the U.S. reached a record high last summer, climbing to 4.3 million barrels per day according to October 2024 figures from the U.S. Energy Information Agency (EIA).
Partly because of this pipeline's profitable trend, some believe there's still a chance Canadian energy could be exempt from Trump's tariffs.
"They really need our four million barrels a day," said Paul Colborne, president and CEO of Surge Energy, a Calgary-based junior oil producer that operates in Alberta and Saskatchewan.
Though tariffs would be paid by U.S. refineries and importers, it doesn't mean there would be no financial pressure on Canadian producers.
Should tariffs land on Feb. 1, Colborne says he'll be watching for companies that didn't hedge price risks.
Hedging is a risk management tool that can help mitigate the impact of unanticipated price drops for oil and gas producers and their revenues.
"If you didn't hedge your differential, it would be a big shot, negative shot, to your cash flow per barrel," he said.
"When the market's there, we like to take that risk out of our business."
Colborne believes the market has already started to price in an increase to the differential, in response to Trump's tariff musings.
He added that, while he believes a 25 per cent tariff isn't a good thing, he doesn't expect the energy industry to be hit as hard as industries like auto manufacturing or exports such as lumber, contrary to St-Arnaud's analysis.
'Shipping crude to the U.S. is not risk-free anymore'
Even though the expanded Trans Mountain pipeline, often referred to as TMX, has so far delivered on narrowing the price spread and contributing to some added global market diversification, one energy analyst said it still wouldn't be enough to absorb the shock of American tariffs.
"I mean, the pipe doesn't ship all of our crude, right? It certainly has helped narrow the differential a little bit.… But just looking at the sheer numbers, how much the TMX ships versus how much crude we produce, it doesn't solve all of it," said Al Salazar, head of macro oil and gas research at Enverus Intelligence Research.
Salazar believes tariffs challenge the U.S. refiners' bottom lines, and he suggests the added cost of levies would then be passed on to the public. He also added that if the seemingly uncertain tariff threat were to land as soon as this weekend, U.S. refiners wouldn't be able to immediately find another, non-Canadian source for how much heavy crude they need.
"The refiners have been hooked on Canadian crude, so to speak, and now it's going to cost them more for that barrel. So a refiner really doesn't care where it gets its crude from, just as long as it could profit from the product it develops," he said.
"When we talk about the differential and passing [it] on to the consumer … we complain a lot about gasoline prices, but we have to drive to work. So what suffers is other things, other parts of our spending."
Overall, it seems Trump could decide any minute whether to slap tariffs on Canadian oil exports. In the meantime, Canadians are watching the president's every move with bated breath.
"It feels like all the clients we speak to on the U.S. side, they think this is all a negotiation process," said Salazar.
"Canadians, on the other hand, I think it's a wake-up call to say that shipping crude to the U.S. is not risk-free anymore."
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