Oil pumps in Maracaibo, Venezuela, in July, 2024. the country's current oil output stands at just one million barrels per day.FEDERICO PARRA/AFP/Getty Images
Charles St-Arnaud is the chief economist at Servus Credit Union.
The U.S. administration’s stated goal to encourage massive investment by U.S. oil companies to revitalize Venezuela’s struggling oil infrastructure clearly shows President Donald Trump’s ambition to dramatically expand the country’s production.
For Canadian oil producers and policy makers, the reality is nuanced. Venezuela’s current output stands at a modest one million barrels a day (b/d), less than one-quarter of the volume of Canadian oil imported by the United States. The scale of investment required to restore Venezuela’s oil sector is immense, estimated at US$183-billion according to Rystad Energy.
This means that, in the short term, Canadian oil remains indispensable to U.S. refineries, especially those in the Midwest, which consume nearly 69 per cent of Canada’s total oil exports. For Venezuelan oil to reach these refineries, significant logistical changes would be required, including reversing the pipeline flow – which currently runs from the Midwest to the Gulf Coast – and expanding capacity.
On the West Coast, refineries in Washington state benefit from direct access to Canadian crude via the Trans Mountain system. Shipping Venezuelan oil by tanker to the Pacific Northwest is prohibitively expensive, further reducing the likelihood that it will displace Canadian supply in that region. As a result, only Canadian oil exported to the Gulf Coast – representing about 10 per cent of total exports, or 350,000 b/d – is vulnerable to short-term competition from Venezuelan crude.
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The risk for Canada is therefore limited. Even if Gulf Coast refiners switched entirely to Venezuelan oil, the impact would be a 10-per-cent reduction in oil exports, about US$15-billion, or a 2-per-cent decline in Canadian exports.
Nevertheless, 2 per cent can be a lot. The shock would be felt most acutely in Alberta, where such a drop could mean an 8-per-cent hit on provincial exports and a 3-per-cent reduction in GDP.
Moreover, the more immediate impact may be felt through pricing rather than direct displacement. Increased imports of Venezuelan oil to the Gulf Coast could widen the price differential between West Texas Intermediate and Canadian crude, which sells for less. Additionally, a surge in Venezuelan output would boost global supply, exerting downward pressure on oil prices worldwide.
For Canada, the lesson is clear: Trade diversification is not merely a strategic objective. It has become an urgent necessity. The country’s heavy reliance on the U.S. market, where more than 90 per cent of Canadian oil is exported, exposes it to significant risks.
The recent expansion of the Trans Mountain (TMX) pipeline has demonstrated the tangible benefits of diversification. Since its operational start in May, 2024, the share of Canadian oil exports to non-U.S. destinations has tripled, rising to 9 per cent from 3 per cent. This shift has narrowed the price differential between Canadian crude and international benchmarks, generating an estimated US$13-billion in additional oil revenues in the first year of operation, equivalent to an extra month of production at no cost.
Not all pipeline projects offer equal economic benefits. The TMX experience suggests that expanding export capacity on the West Coast yields economic returns that outweigh alternatives.
The United States and Venezuela have reached an agreement to export up to $2-billion worth of Venezuelan crude to U.S. ports, President Donald Trump said on Tuesday, a move that could redirect oil shipments meant for China and ease pressure on Venezuela’s sanctioned oil industry.
Reuters
However, the construction of a new pipeline faces significant hurdles, including opposition from the British Columbia government and some First Nations, along with high costs and a lack of private-sector proponents.
But increased capacity to move oil away from the Midwest-Gulf Coast corridor would be the most effective way to reduce or even prevent a widening discount on Canadian crude. Moreover, global oil demand growth over the next decade is expected to be concentrated in Asia, making West Coast access even more valuable. In contrast, shipping Venezuelan oil to the Pacific is costlier, reducing the likelihood of direct competition with Canadian exports.
Other alternatives, such as pipelines to the Arctic or Atlantic Oceans, offer some advantages but fall short compared with West Coast expansion. The regime change in Venezuela may also spell the end for the Keystone XL pipeline project, which by bringing more oil to the Gulf Coast would only increase competition with Venezuelan oil and widen the price differential for Canadian crude.
Ultimately, the events in Venezuela underscore a critical lesson for Canada: Trade diversification is no longer optional. It is a pressing imperative for the country’s energy sector and broader economic resilience.