The US-Canada oil trade could face serious consequences following the sudden collapse of commercial negotiations between the two countries last week, unless tensions ease.
The basic reality is straightforward: the United States and Canada need strong cross-border trade in oil, natural gas and electricity to maintain high levels of energy security.
While natural gas and electricity trade remain important, maintaining stable cross-border crude oil flows is an absolute priority.
More than 4 million barrels of Canadian crude enter the United States every day, 365 days a year, accounting for 63% of US crude oil imports in 2025. Those volumes represent the overwhelming majority of Canada’s oil exports, for which there is no readily available alternative market.
Most of this oil consists of heavy, sour crude produced from Alberta’s oil sands. These grades cannot easily be replaced, while US refiners cannot immediately switch to lighter crude from the Permian Basin or other exporting countries.
US refining infrastructure, particularly complex refineries in the Midwest and Gulf Coast, has been designed over decades to process precisely this type of crude.
Canadian heavy oil, combined with lighter domestic grades, feeds the production of petrol, diesel, jet fuel and other products that support the US economy.
Without direct access to Canadian imports, operating rates at these refineries would fall significantly. Product output would be affected, while petrol and diesel prices could rise from already elevated levels.
Uncertainty threatens oil flows
The interdependence is an advantage for both countries when relations are stable, but becomes a clear vulnerability when relations deteriorate.
The collapse of trade negotiations, with 50% tariffs now taking effect on billions of dollars of Canadian goods and Prime Minister Mark Carney’s government announcing retaliatory measures, has introduced precisely the kind of uncertainty that markets and investors dislike.
Tensions escalated further when Carney told reporters that negotiations had collapsed because “we were attacked. When you are attacked, you are at war.” The Canadian prime minister has also left open the possibility of using oil as leverage in the trade dispute.
However, Carney would need to proceed carefully if he chooses that approach, given Canada’s own vulnerabilities in the oil trade.
Oil exports to the United States are a crucial source of revenue for the Canadian economy and cannot be redirected quickly or easily to other markets.
A second vulnerability stems from the federal government’s long-standing reluctance to allow sufficient domestic pipeline capacity. Canada’s eastern provinces currently obtain much of their oil either through direct imports from the United States or via pipelines carrying Alberta crude eastwards through northern US states, including Minnesota, Wisconsin and Michigan.
Because the eastern provinces contain the overwhelming majority of Canada’s population, including the major urban centres of Ottawa, Toronto and Montreal, any disruption to these flows could have major consequences for the Canadian economy.
If the situation genuinely develops into the “war” described by Carney, both governments have a range of energy tools at their disposal. The problem is that many could also backfire, hurting domestic interests almost as much as those of the other side.
Pipeline projects face new uncertainty
The dispute also puts billions of dollars in planned pipeline projects under greater pressure as Canada seeks to move more crude towards the United States.
President Donald Trump has repeatedly expressed a desire to revive the long-cancelled Keystone XL project. In the days before the negotiations collapsed, he was publicly promoting the idea and suggested that the project could “rise from the grave”.
A full revival of Keystone XL remains unlikely for several reasons. However, a revised project known as Prairie Connector has made significant progress.
The plan would use part of the existing Keystone pipeline system on the Canadian side and work with a US partner.
Prairie Connector has secured commitments from shippers for up to 550,000 barrels per day, pending a final investment decision scheduled for 2027.
Other expansions of existing systems and new transportation corridors have also been discussed, with the aim of increasing capacity to the US market by hundreds of thousands of barrels per day.
The question is whether the collapse of trade negotiations could lead to the cancellation of these and other potential projects.
The risk is real and growing.
Cross-border energy infrastructure requires not only regulatory approvals but also a basic level of political trust and commercial certainty. Tariffs, retaliatory measures and the public confrontation following the departure of the Canadian delegation last Friday undermine both.
A breakdown would hurt both economies
The broader conclusion is clear: the US refining industry and the fuels it produces remain deeply connected to Canadian crude.
At the same time, the Canadian economy relies heavily on revenue from oil exports to the United States, while the country’s major cities could face serious consequences from a prolonged disruption to oil flows from the US.
A sustained deterioration in bilateral relations will not suddenly create new supplies of heavy crude for US refineries or new pipelines dedicated to supplying Canada’s eastern provinces.
Instead, a prolonged impasse would increase the likelihood of tighter oil product markets, higher prices for American and Canadian consumers and businesses, and lost opportunities to develop secure domestic and cross-border energy infrastructure.
Energy security is a national priority for both countries and is as closely linked to national security as a strong military and secure borders.
Real security is not measured by threats, arguments or slogans. It is measured by barrels of oil reaching their destinations on time, pipelines being financed, approved and built, and trade relations that prioritise mutual economic strength over short-term political leverage and political appearances.
The collapse of negotiations and its potentially serious consequences for cross-border oil trade have made that critical balance considerably more fragile.
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