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Energy

Why are Western Canadian oil prices so strong?

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14 minute read

Macdonald-Laurier Institute By Rory Johnston for Inside Policy

While Canadian crude markets are as optimistic as they’ve been in months regarding US tariffs, the industry is still far from safe.

Western Canadian heavy crude oil prices are remarkably strong at the moment, providing a welcome uplift to the Canadian economy at a time of acute macroeconomic uncertainty. The price of Western Canadian Select (WCS) crude recently traded at less than $10/bbl (barrel) under US Benchmark West Texas Intermediate (WTI): a remarkably narrow differential (i.e., “discount”) for the Canadian barrel, which more commonly sits around $13/bbl but has at moments of crisis blown out to as much as $50/bbl.

Stronger prices mean greater profits for Canadian oil producers and, in turn, both higher royalty and income tax revenues for Canadian governments as well as more secure employment for the tens of thousands of Canadians employed across the industry. For example, a $1/bbl move in the WCS-WTI differential drives an estimated $740 million swing in Alberta government budget revenues.

Why are Canadian oil prices so strong today? It’s due to the perfect storm of three distinct yet beneficial conditions:

  • Newly sufficient pipeline capacity following last summer’s start-up of the Trans Mountain Expansion pipeline, which eliminated – albeit temporarily – the effect of egress constraint-driven discounting of Western Canadian crude;
  • Globally, the bolstered value of heavy crudes relative to lighter grades – driven by production cuts, shipping activity, sanctions, and other market forces – has benefited the fundamental backdrop against which Canadian heavy crude is priced; and
  • The near elimination of tariff-related discounting as threat of US tariffs has diminished, after weighing on the WCS differential to the tune of $4–$5/bbl between late-January through early March.

We break down each of these factors below.

A quick primer: differentials, decomposed

Before we dive in, let’s quickly review how Canadian crude pricing works. WCS crude is Canada’s primary export grade and is virtually always priced at a discount to WTI, the US benchmark for oil prices, for two structural reasons outlined below. More accurately referred to as the differential (in theory, the price difference could go both ways), this price difference is a fact of life for Canadian crude producers and sits between $11–$15/bbl in “normal” times. Over the past decade, WCS has only sported a sub-$10/bbl differential less than 10 per cent of the time and most such instances reflected unique market conditions, like the Alberta government’s late-2018 production curtailment and the depths of COVID in early 2020.

The structurally lower value of WCS relative to WTI is driven by two main structural factors: quality and geography.

First and very simply, WCS is extremely heavy oil – diluted bitumen, to be specific – in contrast to WTI, which is a light crude oil blend. Furthermore, WCS has a high sulphur content (“sour,” in industry parlance) compared to the virtually sulphur-free WTI (“sweet”). WCS crude requires specialized equipment to be effectively processed into larger shares of higher-value transportation fuels like diesel as well as the remove the sulphur, which is environmentally damaging (see: acid rain)l; so, WCS is “discounted” to reflect the cost of that additional refining effort. Quality-related discounting typically amounts to $5-$8/bbl and can be seen in its pure form in the price of a barrel of WCS is Houston, Texas, where it enjoys easy market access.

Second, Western Canadian oil reserves are landlocked and an immense distance from most major refining centers. Unlike most global oil producers that get their crude to market via tanker, virtually all Canadian crude gets to end markets via pipeline. So, this higher cost of transportation away from where the crude is produced (aka “egress”) represents the second “discount” borne by the relative price of Canadian crude, required to keep it competitive with alternative feedstocks. Transportation-related discounting typically amounts to $7-$10/bbl and can be seen in the difference between the price of a barrel of WCS in the main hub of Hardisty, Alberta and the same barrel in Houston, Texas.

Moreover, transportation-related discounting is worse when pipeline capacity is insufficient, which has so frequently been the case over the past decade and a half. When there isn’t enough pipeline space to go around, barrels are forced to use more expensive alternatives like rail and that adds at least another $5/bbl to the required industry-wide pricing discounting – because prices are always set at the margin, or in other words by the weakest barrel. In especially acute egress scarcity, the geographic-driven portion of the differential can blow out, as we saw in late-2018 when the differential rose to more than $50/bbl before the Alberta government forcibly curtailed provincial production to reduce that overhang.

Additionally, the election of US President Donald Trump – and, specifically, the threat of US tariffs on Canadian exports – has introduced a third factor in the differential calculation. Over the past few months, shifts in the WCS differential have also been reflecting the market’s combined handicapping of (i) the probability of tariffs hitting Canadian crude and (ii) the rough share of the tariff burden borne by Canadian exporters.

All three of these factors – global quality, egress availability, and market anticipation of tariff US risk – have shifted decisively and strongly in favour of WCS over the recent weeks and months.

More pipelines, fewer problems

The first reason that Canadian oil prices are remarkably strong at the moment is sufficient pipeline capacity. The perennial bugbear of Western Canadian oil producers, pipeline capacity is, quite unusually, sufficient thanks to last summer’s start-up of the Trans Mountain Expansion Project (TMX). TMX is the largest single addition to Western Canadian egress capacity in more than a decade and, since TMX entered service last summer, the transportation-related differential has remained low and stable, eliminating the largest and most common drag on Canadian crude pricing.

Without TMX, the Western Canadian oil industry would be suffering an all too familiar and increasingly acute egress crisis. Acute egress shortages would have dwarfed the threat of US tariffs and pushing differentials, in stark contrast to today, far wider – the spectre of provincial production curtailment would not have been out of the question. And it is also important to note that this pipeline sufficiency is inherently temporary. Current pipeline sufficiency will likely only last another year or two at most and then Western Canadian egress will require additional expansions to avoid the resurrecting of egress-scarcity-driven differential blowouts.

Heavy is the crude that wears the crown

The second reason that Canadian oil prices are remarkably strong now is the unusually strong global market for heavy crude. Heavy crude grades (e.g., Iraqi Basra Heavy and Mexican Maya), medium crude grades (e.g., Dubai and Mars), and high sulphur fuel oil (used in global shipping) have all seen their value rise relative to Brent and WTI benchmarks, which both reflect lighter, sweet grades of crude.

For WCS, the differential has narrowed from more than $10/bbl at the end of 2023 to around $2.8/bbl under WTI. The bolstered value of heavy crudes relative to lighter grades is being driven by a host of factors including ongoing OPEC+ production cuts (much of which came in the form of heavier crude grades), strong shipping activity, and tighter sanctions against traditional suppliers of heavy shipping fuel like Russia and more recently Venezuela.

What tariff threat?

Finally, the most acute and volatile reason that Canadian oil prices are remarkably strong at the moment is the near elimination of US tariff-related discounting. The US imports more than half of its total foreign oil purchases from Canada and Canadian crude has long enjoyed tariff-free access to the US market. Tariff-related pricing pressure began in earnest in late-2024 as Canadian crude markets tried to build in an ever-evolving handicapping of that tariff risk following Trump’s initial tariff threats. Tariff-related discounting grew stronger from mid-January through February with the excess geographic WCS differential rising to nearly $5/bbl (see chart above and read “Canadian Crude Drops Tariff Discount” for more on the logic of this measure).

After a months-long rollercoaster of “will he/won’t he” uncertainty around the imposition of US tariffs on Canadian crude imports, USMCA-compliant exemptions and broader US official chatter regarding potential outright Canadian crude exemptions have allowed markets to reduce the (roughly) implied probability to effectively zero. This factor alone narrowed the headline WCS differential in Hardisty, Aberta, by $3–$4/bbl over the past month.

Conclusion

Canadian oil prices are so strong today because just about everything that can be going right is going right. WCS differentials are benefitting from a perfect storm of (i) unusually sufficient pipeline capacity, (ii) exceptionally strong global heavy crude markets, and (iii) a near elimination of US tariff-related discounting. Together, these factors are lifting the relative value of Canadian crude oil exports, and this is a boon for Canadian oil industry profits, provincial royalty income, income tax receipts, and employment in the sector.

Looking ahead, WCS differentials may narrow by another dollar or two as this beneficial momentum persists. However, the balance of risk is now tilted towards a reversal (i.e., widening) of differentials over the coming year as OPEC+ begins to ease production cuts and Western Canadian production continues to grow without the hope of any new near-term pipeline additions. While Canadian crude markets are as optimistic as they’ve been in months regarding US tariffs, the industry is still far from safe – given the volatility of policy coming out of the White House, there is still a chance that this near-erasure of tariff risk from Canadian crude pricing may have come too far, too fast.

If and as tariff concerns fall away, egress sufficiency (i.e., pipeline capacity) will resume its place as king of the differential determinants. At the current rates of Western Canadian production growth, Canada is set to again overrun egress capacity – after the relief provided by the start-up of TMX – over the next year or two at most. While Canada may have dodged a near-term bullet to crude exports destined for the US, this situation serves to only emphasize the continued challenges associated with current pipeline infrastructure. It would be prudent for Canadian politicians to begin shifting their current concerns towards the structural, and entirely predictable, threat of renewed egress insufficiently coming down the pipe.


About the author

Rory Johnston is a leading voice on oil market analysis, advising institutional investors, global policy makers, and corporate decision makers. His views are regularly quoted in major international media. Prior to founding Commodity Context, Johnston led commodity economics research at Scotiabank where he set the bank’s energy and metals price forecasts, advised the bank’s executives and clients, and sat on the bank’s senior credit committee for commodity-exposed sectors.

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2025 Federal Election

Canada is squandering the greatest oil opportunity on Earth

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Canada has 3X US oil reserves but less than 40% the production. Why? Anti-oil politicians like Mark Carney who say they’re protecting Earth’s coldest country from global warming.

  • Canada has 170 billion barrels of proven oil reserves—by far the largest of any free country. And its producers can profit at $44 oil, vs. >$57 for US shale.
  • Canadian oil production is also continuing to get cheaper. Oil sands operating costs have dropped 19% over the past five years, and the industry—which is still fine-tuning how to coax oil-like bitumen out of oil sands—has substantial room for further cost reductions.
  • In addition to its massive proven oil reserves, Canada also has massive unexplored oil resources. Canada’s Northwest Territories may contain up to 37% of Canada’s total oil reserves, much of it light crude, which is even cheaper to extract and transport than bitumen from oil sands.

Canada is squandering this opportunity, with < 40% of US production and much slower growth

  • Given Canada’s massive oil reserves and lower production costs, Canadian oil should have been growing far faster than US oil—on a path to producing even more oil than the US does.

    Instead, Canada is totally squandering its oil opportunity, with less than 40% of US production and slower growth since 2010.

The lost opportunity is costing Canadians 100s of billions of dollars a year—and undermining global security

  • In 2023, oil sands directly contributed C$38 billion to GDP—while total economic impact was 100s of billions of dollars. It could have been far, far greater.
  • Canada’s oil underproduction is undermining both Canadian prosperity and global security. E.g., Europe’s dependence on Russian oil triggered an energy crisis after Russia invaded Ukraine. By doubling its oil production, Canada could make oil dictators weaker, the free world stronger—and Canada more powerful.

The cause: False climate ideas have led Canada to senselessly strangle its oil industry

Canada is squandering its oil opportunity by preventing its abundant oil from being transported to world markets

  • With 3X US oil reserves but 1/8 the people, Canada can produce far more oil than it can use. So it needs a lot of transportation. Yet it wages war on pipelines, which are the cheapest, fastest, safest way to transport oil.
  • In 2016, the Canadian government rejected the Northern Gateway pipeline from Alberta to B.C. after nearly a decade of review, citing insufficient Indigenous consultation. The pipeline would have carried 535K barrels of oil per day to Asia-Pacific markets, generating ~C$300B in GDP over 30 years.
  • To make matters worse, several years after the cancellation of the Northern Gateway pipeline, Canadian Parliament passed Bill C-48 (the Oil Tanker Moratorium Act), banning large oil tankers from calling at northern B.C. ports and effectively shutting the door on any future pipeline to that region.
  • In 2017, TC Energy canceled their Energy East pipeline project after the Canadian government demanded they calculate all of its indirect GHG emissions. The pipeline would have carried 1.1M barrels per day of Albertan and Saskatchewan oil to Eastern Canada, generating ~C$55B in GDP over 20 years.
  • The Trans Mountain Expansion (TMX), operational in 2024, is Canada’s only new major pipeline in over a decade. Proposed in 2012, it barely survived years of political hurdles, progressing only after the federal government bought it in 2018. By completion, its costs had ballooned from the projected C$7.4B to C$34B.
  • The main government-created obstacle for pipelines in Canada is the onerous federal “environmental review” process called the Impact Assessment Act (IAA), and before that, its precursor, the Canadian Environmental Assessment Act (CEAA).
  • Under the Impact Assessment Act, the Canadian government can effectively veto a pipeline project by deeming it not in the “public interest,” as determined by factors including “sustainability,” alignment with climate goals, and impacts on Indigenous groups—but not economic benefits (!)
    • Before the Impact Assessment Act was instituted in 2019, pipelines faced similarly onerous environmental reviews under its precursor, the Canadian Environmental Assessment Act (CEAA). Under CEAA, government could veto projects it judged to cause “significant adverse environmental effects,” a vague and open-ended criteria.
    • Even if a pipeline project isn’t formally rejected by the Canadian government, the environmental review process can stretch on for years—often causing projects to collapse from escalating costs or investors withdrawing amid uncertainty. This is exactly what happened with the Energy East pipeline in 2017.
  • If Canada built ample transportation, it would have the potential to produce even more oil than the US does and sell it around the world. Instead, its production is < 40% of the US’s, and 97% of its exports are to the US—at below-market prices.

Canada is also strangling oil investment, production, and refining

  • Canada isn’t just strangling oil transport, it’s sabotaging oil at every stage—from Mark Carney’s proposed emissions cap to “Clean Fuel Regulations” to EV mandates to drilling bans to refinery restrictions.
  • Investment in Canadian oil plunged over 50% (C$76B to C$35B) between 2014-2023—with investors pointing to regulatory uncertainty, inconsistencies, and compliance costs as major barriers to investments.
  • A further looming threat to oil investment is the proposed cap on oil and gas sector GHG emissions. If implemented, as promised by Mark Carney’s government, this proposal will require the oil industry to reduce its GHG emissions to 35% of the 2019 level, which would significantly discourage investment and production.
  • The Clean Fuel Regulations (CFRs), which mandate that Canadian fossil fuel producers reduce the emissions from fuels to 15% lower than 2016 levels by 2030, harms Canadian oil production by significantly increasing the cost of production and thus decreasing the domestic demand for gasoline and diesel.
  • Canada’s EV mandate, which requires that 20% of vehicles sold in 2026, at least 60% of vehicles sold in 2030, and all new vehicles sold in 2035 are electric, harms Canadian oil production by greatly reducing the demand for gasoline and diesel.
  • Canada’s consumer carbon tax, which until earlier this month imposed a fee of C$80 per ton of CO2, harmed Canadian oil production by raising gasoline prices by 17.6 cents per litre, thereby decreasing demand. Though this tax has been repealed, gasoline and diesel remain subject to the industrial carbon tax.
  • In addition to measures that heavily disincentivize oil production, the federal government also directly limits production through moratoria on oil development on Canada’s Pacific and Arctic coasts, blocking access to hundreds of billions of barrels of oil.
  • On top of Canada’s oil underinvestment and underproduction, Canadian oil refining has stagnated, with Canada’s refineries able to process less than half of the oil it produces and only one new refinery built since the 1980s.

The leading stranglers of Canadian oil, such as Trudeau and Carney, say they are protecting Canada and the world from a climate crisis

  • The root cause of Canada’s squandered oil opportunity is leaders’ belief that world’s coldest country must stop global warming at all costs.

    That’s why they advocate pursuing “net zero” by 2050—which necessarily means destroying Canada’s domestic oil industry.

  • Canada has embraced climate catastrophism for over 3 decades now. For example, it was one of the original signatories of the UN Framework Convention on Climate Change (UNFCCC) in 1992. The UNFCCC has been the driving force behind “net zero” policies.
  • Justin Trudeau took Canadian anti-oil policy to a new level, making the destruction of Canada’s oil opportunity a central focus: “We need to phase [oil sands] out,” he said in 2017, “We need to manage the transition off of our dependence on fossil fuels.”
  • While Trudeau’s opposition to Canadian oil and therefore its economy is well-known, most Canadians do not know that Mark Carney is a far more committed opponent of Canadian oil than Justin Trudeau ever was. Indeed, Carney is one of the world’s leading “net zero” advocates.
  • The last several decades of Mark Carney’s career have been focused on pressuring countries like Canada to adopt “net zero” policies that have proved ruinous. He did this as the head of the Bank of Canada and the Bank of England, and as the UN Special Envoy for Climate Action.
  • Mark Carney’s past statements on climate include:

    “investing for a net-zero world must go mainstream” (2019)

    “those that fail to adapt [to net-zero] will cease to exist”​ (2019)

    “build a financial system in which every decision takes climate change into account” (2021)

  • Myth: Mark Carney used to be for carbon taxes but has changed his mind, as shown by his elimination of Canada’s carbon tax.

    Truth: Carney is still for carbon taxes—because he is still for the net-zero agenda that requires taxing CO2 along with all other means to eliminate fossil fuels.

But while climate change is real, it is not a crisis—thanks to increasing resilience—nor is it addressed by unilateral Canadian sacrifice

  • Far from facing a catastrophic climate crisis, Canada and the world are safer than ever from climate.

    The global rate of climate disaster-related deaths has fallen 98% in the last 100 years—thanks to increasing climate resilience from reliable, affordable energy, including oil.

  • Myth: Even if climate-related disaster deaths are down, climate-related damages are way up, pointing to a bankrupting climate future.

    Truth: Even though there are many incentives for climate damages to go up—preferences for riskier areas, government bailouts—GDP-adjusted damages are flat.

  • Sacrificing Canadian oil won’t make the coldest country in an increasingly climate-resilient world safer from global warming—since countries like China and India will never follow suit. What it will do is leave Canada far poorer, weaker, and more endangered from lack of energy.

The solution: Unleashing responsible oil development will make Canada rich, resilient, and secure

The rational path forward on climate is to embrace prosperity, which drives resilience and energy innovation

  • Canada is safer than ever from climate, and other countries won’t cut emissions until it’s truly cost-effective to do so. The path forward is to embrace prosperity.
  • The more prosperous Canada is, the more it can make itself more and more resilient to all manner of climate dangers. And the more prosperous Canada is, the more it can innovate new forms of energy that have the long-term prospect of outcompeting fossil fuels.

The number one path to Canadian prosperity is unleashing responsible development in the oil industry and other energy industries

  • Canada must finally seize its enormous oil opportunity, unleashing investment, production, refining, and transport from irrational restrictions. Only then can Canada can deliver oil to eager markets worldwide.
  • Canada should renounce its pledge to achieve “net zero by 2050” by repealing the Net-Zero Emissions Accountability Act where it is enshrined and withdrawing from the Paris Agreement. This will massively increase investor certainty about the future viability of the oil industry.
  • Canada should reject the proposed GHG emissions cap for the oil industry. Canadian provinces that have their own carbon taxes and emission credit trading schemes should eliminate them too. This will improve investor expectations about the oil industry’s future viability.
  • Canada should repeal the Impact Assessment Act (IAA) and replace it with a framework that minimizes the cost and duration of reviews and enshrines clear and narrow criteria for rejecting projects. This will help build more oil pipelines and reduce investor uncertainty about environmental regulations.
  • Canada should revise the Canadian Energy Regulator Act (CERA) by limiting the certification review of the covered oil pipeline projects to the question of whether there is sufficient proven demand for the oil they are planning to transport. This will expedite pipeline approval.
  • Canada should repeal the Oil Tanker Moratorium Act (Bill C-48), which bans large oil tankers off the northern and central coast of British Columbia. This will open the door to building pipelines to B.C. that can transfer oil to crucial Asian markets.
  • Canada should repeal the Clean Fuel Regulations (CFR) and the EV mandate. This will boost investor confidence in oil by increasing both current and anticipated domestic demand for oil-derived fuels.
  • Canada should repeal the federal moratoria on offshore oil drilling on the Pacific Coast and in the Canadian Arctic. This will unlock up to hundreds of billions of barrels of Canadian oil.
  • To stop squandering the world’s greatest energy opportunity, Canada must start electing leaders who value Canadian energy, and stop electing leaders with a proven track record of destroying it.

Daniil Gorbatenko, Steffen Henne, and Michelle Hung contributed to this piece.

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Alberta

Low oil prices could have big consequences for Alberta’s finances

Published on

From the Fraser Institute

By Tegan Hill

Amid the tariff war, the price of West Texas Intermediate oil—a common benchmark—recently dropped below US$60 per barrel. Given every $1 drop in oil prices is an estimated $750 million hit to provincial revenues, if oil prices remain low for long, there could be big implications for Alberta’s budget.

The Smith government already projects a $5.2 billion budget deficit in 2025/26 with continued deficits over the following two years. This year’s deficit is based on oil prices averaging US$68.00 per barrel. While the budget does include a $4 billion “contingency” for unforeseen events, given the economic and fiscal impact of Trump’s tariffs, it could quickly be eaten up.

Budget deficits come with costs for Albertans, who will already pay a projected $600 each in provincial government debt interest in 2025/26. That’s money that could have gone towards health care and education, or even tax relief.

Unfortunately, this is all part of the resource revenue rollercoaster that’s are all too familiar to Albertans.

Resource revenue (including oil and gas royalties) is inherently volatile. In the last 10 years alone, it has been as high as $25.2 billion in 2022/23 and as low as $2.8 billion in 2015/16. The provincial government typically enjoys budget surpluses—and increases government spending—when oil prices and resource revenue is relatively high, but is thrown into deficits when resource revenues inevitably fall.

Fortunately, the Smith government can mitigate this volatility.

The key is limiting the level of resource revenue included in the budget to a set stable amount. Any resource revenue above that stable amount is automatically saved in a rainy-day fund to be withdrawn to maintain that stable amount in the budget during years of relatively low resource revenue. The logic is simple: save during the good times so you can weather the storm during bad times.

Indeed, if the Smith government had created a rainy-day account in 2023, for example, it could have already built up a sizeable fund to help stabilize the budget when resource revenue declines. While the Smith government has deposited some money in the Heritage Fund in recent years, it has not created a dedicated rainy-day account or introduced a similar mechanism to help stabilize provincial finances.

Limiting the amount of resource revenue in the budget, particularly during times of relatively high resource revenue, also tempers demand for higher spending, which is only fiscally sustainable with permanently high resource revenues. In other words, if the government creates a rainy-day account, spending would become more closely align with stable ongoing levels of revenue.

And it’s not too late. To end the boom-bust cycle and finally help stabilize provincial finances, the Smith government should create a rainy-day account.

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