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Energy trade in crosshairs as U.S. posts $39-billion deficit with Canada

Canada’s energy exporters found themselves in the spotlight Wednesday as the U.S. Department of Energy reported the United States posted a $39-billion (U.S.) energy-trade deficit with its northern neighbour last year, driven by imports of oil, natural gas and electricity.

Daniel Acker/Bloomberg

Canada's energy exporters found themselves in the spotlight Wednesday as the U.S. Department of Energy reported the United States posted a $39-billion (U.S.) energy-trade deficit with its northern neighbour last year, driven by imports of oil, natural gas and electricity.

The report from the Energy Information Administration (EIA) came a day after President Donald Trump, in an address to Congress, bemoaned America's $800-billion trade deficit. He vowed to adopt new measures to address the imbalance, and to stimulate jobs and investment in the United States.

One proposal from Republican leaders in the House of Representatives would impose a "border adjustment tax," which would essentially be a 20-per-cent levy on imported goods, including energy commodities unless they are specifically exempted. Mr. Trump has sent mixed messages about his support for a border levy, while some key Republicans in the Senate oppose it because it will raise prices for consumers.

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Federal and provincial political leaders are lobbying their American counterparts in an effort to shield Canadian companies from U.S. protectionism. Alberta Premier Rachel Notley wrapped up a visit to Washington on Wednesday, while Natural Resources Minister Jim Carr is scheduled to visit Houston next week for an energy conference that draws global executives and senior politicians from Washington. Prime Minister Justin Trudeau is also expected to appear at the Houston conference.

Mr. Carr is hoping to meet the incoming U.S. energy secretary, Rick Perry, who is expected to be confirmed this week and who would likely travel back to his home state of Texas for the IHS Markit's CERAWeek sessions.

In its report Wednesday, the EIA noted that Canada is the United States' largest partner for energy trade by far.

For 2016, energy imports from Canada totalled $53-billion (U.S.); that's down from nearly $120-billion in 2014, when crude prices were still above $100 (U.S.) a barrel. The value of U.S. energy exports to Canada last year was $14-billion. Energy accounted for roughly 20 per cent of all U.S. imports from Canada last year.

Canada posted a surplus in trade of electricity and natural gas, but the major contributor is crude oil, where this country accounted for 41 per cent of U.S. oil imports last year. Despite growing volumes, the value of Canadian oil exports fell to $36-billion (U.S.) in 2016, from $83-billion in 2014 owing to the slump in prices.

As a result, western Canadian oil producers would be hardest hit by the proposed U.S. border adjustment levy, economist Philip Verleger said Wednesday. He recently completed a study for the Canadian Association of Petroleum Producers (CAPP) that concluded crude exporters would have to cut their prices by roughly 10 per cent to maintain their sales in key U.S. markets.

"Canadian exporters would suffer more than exporters from the Middle East or other parts of the world because they supply such a large share of the oil to the U.S. Midwest, and Midwest refiners in order to remain competitive would need additional discounts from Canada," he said.

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The prospect of a border levy – which some analysts see as unlikely to pass – has unnerved the Calgary-based industry, which is still trying to recover from the steep drop in prices.

If the proposed tax change proceeds, Canadian producers will not only face pressure to discount prices, but competitors in the United States will benefit from lower corporate rates and other tax breaks the Trump administration is planning, Jon Stringham, CAPP's manager for fiscal policy, said Wednesday.

"If that goes through, we are going to be at a substantial competitive disadvantage in terms of attracting capital," he said.

Electricity producers are also watching out for Trump administration trade and budget policies that could hit their exports. U.S. power imports from Canada were worth $2.2-billion last year, the EIA said.

In key markets such as New England and New York, Canadian imports account for 12 per cent and 16 per cent of the market, respectively, said Francis Bradley, chief operating officer at the Canadian Electricity Association in Ottawa. Provincially owned utilities such as Hydro Quebec and Manitoba Hydro – as well as publicly traded companies such as Emera Inc. of Halifax – have ambitious plans to expand those sales.

"We're concerned about any potential change in this relationship if there is talk of tariffs and taxes that would negatively impact customers in the United States," Mr. Bradley said.

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It remains unclear what direction Mr. Trump will take, and whether the border-tax proposal will emerge from Congress, said Laura Dawson, director of the Canada Institute at the Woodrow Wilson Centre, a think tank in Washington.

She said there are many economic arguments against the border adjustment tax proposal in the House of Representatives, not the least of which is that it will drive up the price of gasoline and imported clothes and hurt low-income consumers.

"But it's not clear to me whether or not that economic logic would translate into the policy action that one might expect," she said.

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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