Heavy Oil, Heavy Dependence: How US Refineries Anchor Canada’s Oil Industry

As tensions between the US and Canada come to a head, how will the American leverage over the Canadian oil industry give Washington an edge in the rivalry?

The bilateral relationship between Canada and the United States has recently come under pressure as President Trump attempts to reshape global trade with new tariffs and trade deals. A renegotiation of their trade relationship, however, is occurring against the backdrop of Canada’s oil industry – and, therefore, the Canadian economy – being greatly dependent on the US as its primary export market, creating huge leverage for the US in these negotiations and leaving Canada exposed to the unpredictable political climate of the US in the long term.

Root Causes

Limited Domestic Refining Capacity

Canada has limited domestic refining capacity at a total of 1.93 MMb/d [million barrels per day] from 17 refineries as of 2024 (CER, 2024). Meanwhile Canada produces 5.8 MMb/d (CAPP, no date). That gap compels Canada to export the majority of its oil as unrefined crude.

Additionally, Canadian crude oil is predominantly heavy sour grade, meaning that such oil has high viscosity and density (heavy) and it also contains a high amount of sulphur (sour), making refining it difficult and expensive.

Long-term US Strategy

US refineries have invested billions to specialise in handling heavy sour crude oil. Some US refineries, like the BP Whiting Refinery (capacity of 430,000 b/d), were specially modernised with Canadian crude in mind (BP, 2013). The US, then, is the natural export destination for Canadian Crude.

Pipeline Infrastructure

Canadian pipelines are predominantly oriented southward, toward the US, rather than toward coastal export terminals. This makes Canadian export capacity, anywhere beyond the US, contingent on the pipeline capacity to coastal facilities. This state of affairs cements the US as the primary destination for Canadian oil.

While some of this is a result of historical decisions and geography, the US has also specifically designed, reversed or expanded its pipelines to encourage and enable a more efficient flow of Canadian crude to American refineries. The Keystone XL pipeline expansion – though currently still cancelled – is perhaps the clearest example of a deliberate US effort to anchor Canada’s oil production to US refineries.

Canada is unable to refine the majority of its oil; therefore, they must export unrefined heavy sour crude oil, but only a limited number of countries are able to handle such oil. With limited destinations, limited capacity to export elsewhere and the existing cross-border pipeline infrastructure, the US naturally becomes the primary export market.

The Costs and Risks of Dependency

The limited domestic refining capacity results in a significant loss of potential revenue as refined petroleum products command higher prices than unrefined crude oil. The US is able to buy relatively cheap heavy sour crude oil from Canada, refine it and then export expensive refined petroleum products.

Canada’s oil sector – and by extension, its economy – depends on the US as an export market, which exposes them to the everchanging US political landscape. Should the US decide to leverage this in trade negotiations, Canada would have no alternative but to accept US demands.

This exposure is not limited to the current trade negotiations; without steps to reduce its dependence, Canada will face serious ongoing exposure to fluctuations in US policy for the foreseeable future. Further compounding this dependency, provinces like Quebec and Ontario lack direct access to operational pipelines crossing Canada, and therefore depend on pipelines from the US (Jarmenko, 2025). This further enhances US leverage over Canada.

Creating Resiliency, Leveraging Interdependence

Canadian attempts to reduce their dependence have so far yielded mixed results.

The Trans-Mountain Expansion Project was successfully completed in 2024 and has expanded export capacity to 890,000 b/d and is estimated to add $9.2 billion in GDP and $2.8 billion in tax revenue between 2024 and 2043 (Government of Canada, 2025). Projects like this allow Canada to diversify by supplying Asia with greater amounts of crude oil, thereby reducing their dependence on the US market.
In contrast, projects like the Energy East Pipeline – which would have taken 1.1 MMb/d of oil from Western Canada through Quebec to export terminals in Cacouna and Saint John – was cancelled, due to economic, political and regulatory challenges. Energy East demonstrates the many difficulties new projects can face, even if they would substantially reduce risk.

Regarding refineries, building specialised refineries and their supporting infrastructure requires substantial capital, they have long lead times and the Canadian environmental and regulatory hurdles can be difficult to overcome. Without any serious political support for such projects, new refineries are unlikely to come online in the short or medium term.

Nevertheless, as one of the largest suppliers of crude oil to the US – accounting for over half of US oil imports – Canada plays a crucial role in supporting US energy markets and energy security (Arnal, 2024). If the US were to exert its leverage aggressively over Canada, it would be inadvertently risking negatively affecting domestic gasoline prices and industrial production. While Canada is unlikely to overtly threaten to reduce its exports, due to economic and political fallout, it can leverage this interdependence to influence trade negotiations, pipeline development or cross-border infrastructure projects.

Takeaways

• Limited domestic refining capacity and its heavy sour grade means Canada must export its oil unrefined.
• Established pipeline infrastructure cements the US as the primary export market (CAPP, 2025).
• The oil industry is a significant part of the Canadian economy and its dependence on the US market exposes Canada to tremendous political risk.
• Environmental, regulatory, political and public pressure makes new pipelines projects difficult.
• New domestic refineries are capital-intensive with long lead times.
• Canada’s dependence creates massive leverage for the US in ongoing trade negotiations.
• Canada can leverage the interdependence between the two to its advantage, if applied cautiously.
• Risk reduction in the short and medium term is highly unlikely.
• Long-term risk reduction requires substantial capital investments and consistent political and public support.

Bibliography

• Arnal, M. (2024) “Canada’s crude oil has an increasingly significant role in U.S. refineries.” U.S. Energy Information Administration. Published 1st August 2024. Available From: https://www.eia.gov/todayinenergy/detail.php?id=62664#
• BP. (2013) “BP completes commissioning of Whiting refinery units.” British Petroleum. Published 18th December 2013. Available at: https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bp-completes-commissioning-of-whiting-refinery-units.html
• CAPP. (no date) Oil and Natural Gas in Canada. Canadian Association of Petroleum Producers. Available From: https://www.capp.ca/en/oil-natural-gas-you/oil-natural-gas-canada/
• CAPP. (2025) “Canadian Exports of Crude Oil and Natural Gas.” Canadian Association of Petroleum Producers. Published 2nd March 2025. Available at: https://www.capp.ca/wp-content/uploads/2025/02/Canadian-Exports-of-Crude-Oil-and-Natural-Gas.pdf
• CER. (2024) Provincial and Territorial Energy Profiles – Canada. Canadian Energy Regulator. Last Modified 10th September 2024. Available at: https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/provincial-territorial-energy-profiles/provincial-territorial-energy-profiles-canada.html
• Government of Canada. (2025) Trans Mountain Expansion Project. Government of Canada. Last Modified 23rd March 2025. Available at: https://www.canada.ca/en/campaign/trans-mountain.html
• Jaremko, D. (2025) “‘Big vulnerability’: How Ontario and Quebec became reliant on the U.S. for oil and gas.” Canadian Energy Centre. Published 28th February 2025. Available at: https://www.canadianenergycentre.ca/big-vulnerability-how-ontario-and-quebec-became-reliant-on-u-s-oil-and-gas/