By Michael O’Neill

Canada has a robust oil industry. Alberta’s oil sands are home to the world’s third largest proven crude reserves, just behind Venezuela and Saudi Arabia and that sector has been a cash-cow for provincial and federal governments. That bovine may soon be suffering from “mad-cow” disease.
To put it in perspective, Natural Resources Canada and Statistics Canada data show that oil and gas activity directly accounts for roughly 3–4% of Canada’s GDP in a typical year, and closer to 7–8% once broader energy-related activity is included.

That translates into barrels of cash that are mined or drilled in Wild Rose Country. The Canadian Energy Center estimated that between 2000 and 2021, the federal government collected $99 billion in taxes and royalties. Alberta’s 2024-2025 budget shows non-renewal resource revenue (overwhelmingly gas and oil royalties) at about $22.0 billion in 2023–24, $17.1 billion in 2024–25, and $15.4 billion in 2025–26 (forecast).

Alberta is land locked. Canada’s energy wealth flows through to main pipelines, one to the US and another to the Pacific. Since the 1950s, pipelines like the Enbridge Mainline and Keystone System have carried millions of barrels of Alberta crude each day to refineries in the U.S. Midwest and Gulf Coast, effectively tying Canada’s energy economy to American demand.

Alberta’s reliance on the US market is a massive boon to American consumer because Alberta’s benchmark crude, Western Canada Select (WCS) is sold at a discount to West Texas Intermediate (WTI). The stated reasons are WCS is heavier, more sulfurous and costlier to refine and transport.

The need for a discount has some truth behind it. The WCS–WTI price differential has usually been around US $10–20 per barrel and it is $13.2/barrel today. The problem is that the differential often balloons far beyond cost fundamentals, reflecting bottlenecks, U.S. refinery leverage, and Canada’s landlocked vulnerability. That discount may become more pronounced.

El Libertador

President Trump sent his military into Venezuela with the goal of liberating the country’s oil assets from the clutches of the “narco-terrorist” government and placing them under U.S. control. Washington now effectively controls access to the world’s largest proven oil reserves, placing Venezuelan heavy crude back into circulation under U.S. regulatory management.

For Canada, it’s a reordering of the heavy-oil market. Venezuelan crude is very similar to Alberta’s Western Canadian Select which means it will compete directly for space in the same U.S. Gulf Coast refineries that anchor Canadian exports.

The big difference is that although WCS trades at a discount, Trump believes Venezuelan crude is “free.” Last week he said, “Venezuela unilaterally seized and sold American oil, American assets and American platforms, costing us billions and billions of dollars. This constituted one of the largest thefts of American property in the history of our country.

Kicking the Oilcan Down the Road

Canadians can take a deep breath. There is virtually zero chance that Venezuelan crude will supplant WCS in the next two or three years. Trump’s plan to get American oil giants to invest upwards of $100 billion to repair broken infrastructure met resistance from the CEOs of some of those companies Exxon-Mobil boss Darren Woods declared Venezuela “un-investable,” noting the country seized Exxon assets twice. ConocoPhillips is also reluctant claiming the country still owes the company $10 billion.

Despite that, analysts estimate that the break-even cost to extract Venezuela’s oil wealth is around $80/barrel and that it would take decades to fully restore production.

Loonie Looks to the Fed

Oil prices may be a big deal for the Canadian dollar, but Fed Chair Jerome Powell and the FOMC are far more important in the near term. Mr. Powell pushed back aggressively in response to Trump’s Justice Department subpoena which is tied to Fed renovation overruns and accused Trump of attempting to usurp the Fed’s independence.

 “The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president,”

The White House went into back-pedalling overdrive after Powell rallied former Fed chairs, Treasury secretaries, and key Republicans against the move.

The Loonie retreated from its post-subpoena low but remains on the defensive in the near term. Longer term, USDCAD remains stuck in a wide 1.3650–1.4000 range.

Petrocurrency dreams die hard, but for the loonie, reality is still priced in Washington, not in the oil sands.