As the rhetoric heats up surrounding the U.S. trade deficit with Canada (or lack thereof), I believe it is critical to review the role of oil in U.S.-Canadian trade. President Trump has claimed that the “U.S. has close to $100 billion a year loss with Canada.” If you look just at goods trade, the U.S. ran a $17.5 billion deficit with Canada in 2017, according to the Office of the U.S. Trade Representative, however, if you include services, the picture is very different. The agency states on its U.S.-Canada trade facts web page, “The U.S. goods and services trade surplus with Canada was $8.4 billion in 2017.”
But one thing is certain. The deficit pales in comparison to the value of oil the U.S. imports from Canada.
According to data from the Energy Information Administration (EIA), in 1990 OPEC countries supplied nearly 54% of U.S. crude oil and product imports. Saudi Arabia was the top supplier of crude to the U.S., with a 17% share of crude imports. They were followed in second place by fellow OPEC member Venezuela, with Canada in third place with a 12% share.
By the turn of the century OPEC’s share had dropped to under 46% of U.S. oil imports. Canada had become our top oil supplier even then with nearly a 16% share, but they were still followed closely by OPEC countries Saudi Arabia and Venezuela.
Fast forward to 2017, and OPEC’s share has steadily declined, while Canada’s has steadily risen:
U.S. imports have steadily fallen since about 2005, but Canada’s share of those imports has reached 40%. OPEC’s share has fallen to 33%. Among countries, Saudi Arabia is now far behind Canada with a 9.4% share.
Further, the U.S. — including the Trump Administration — has taken steps to build additional pipeline capacity to bring even more Canadian crude oil into the U.S.
What are those imports worth? Canadian crude oil has traded at a discount to West Texas Intermediate (WTI) of about $8/barrel in recent years. Last year, WTI prices averaged $50.79/bbl. If we approximate and assume an $8/bbl discount of Canadian crude, then the four million barrels per day we imported from Canada last year were worth roughly $63 billion.
Without Canada’s crude, the U.S. would likely enjoy a healthy trade surplus with Canada, but at the expense of more dependence on OPEC countries for our oil. In addition, such dependence would likely mean higher oil prices for consumers, and less energy security.
Given that the U.S. can’t (yet) supply all of our oil needs, there are perfectly rational reasons that a trade deficit with Canada exists. If oil prices rise, that deficit is likely to increase. But that’s still better than the alternatives.
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