The Twenty-Four
In this week’s The Seven…
- More tariffs - Trade war heats up
- Oil update - Riding the geopolitical waves
- Next week - Inflation in August
- Also next week - U.S. Fed has a tough decision to make
- Interesting Fact - Alberta’s newest DIZ
- Chart of the Week - Honey exports before tariffs
I remember exactly where I was and what I was doing when the South Tower of the World Trade Center collapsed 25 years ago. It was heartbreaking and the day only got worse. I also remember feeling a deep connection to friends and family living in the U.S. as well as the millions of others who I’d never met, but thought of as neighbours.
The trade war has raised our hackles, and for good reason. But we shouldn’t let it get in the way of our common bonds and our common humanity.
More bark than bite - Trump responds to Canada’s counter-tariffs
As we reported on Tuesday, Canadian counter-tariffs of 15 to 50% on approximately $28 billion of imports from the U.S., including steel, dairy, and agricultural equipment, are now in effect. In response, President Trump posted on social media that he wants to exclude Canadian products from a key government procurement program and referred to Canada's approach to procurement as a “Trade Scam.” He also signed new executive orders that will change the 50% tariff on U.S. imports of a subset of Canadian motorcycles, dairy products, and alcohol into an outright ban.
That sounds ominous, and to the degree that it highlights the tattered state of Canada-U.S. relations, it is.
The immediate impact on actual trade is, however, muted by the fact that some Canadian products, such as cement, toilet paper, and sugar, were removed from the list. The changes will have a major effect on the producers of the specific products involved, but the overall hit to the economy is not expected to be much different from before this latest round of rhetoric and adjustments.
Where does this leave us? At the moment, the trade war is making life difficult for specific sectors on both sides of the border. However, because the blanket U.S. tariff of 35% on all Canadian goods (10% on energy and potash) does not apply to goods compliant with CUSMA, most of our exports are making it into the U.S. duty free. As a result, the recession that the original tariff threats implied has not materialized.
Oil update - Five things to watch
There are always interesting things going on in the world of oil production and prices, but the current list is particularly relevant to this key component of both Alberta’s and Canada’s economic performance. Here are five evolving developments to watch:
1) Production is up - The amount of oil being extracted in Alberta has been on the rise for many years as major oil sands projects were developed. Getting the oil to market has been a challenge, but the pipeline system has expanded enough that output has been able to go from around 3 million barrels per day 10 years ago to well over 4 million today. The completion of the Trans Mountain Expansion Project in 2024 that tripled the pipeline's capacity from 300,000 barrels per day to 890,000 was key to this growth.
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2) More pipelines coming? - Brownfield enhancements to the oil transportation system should allow for production to keep rising, but another major burst of growth will require something like the proposed West Coast Pipeline.
Also in play is the resurrection of the Keystone XL pipeline project. Proposed back in 2008, the pipeline was meant to carry oil from Alberta to the U.S. Construction started in 2020, but President Biden revoked a key permit in January 2021 and the project was cancelled. Then in 2025, both President Trump and Prime Minister Carney expressed interest in a revived Keystone XL. We’ve since learned that a Canadian company (South Bow) is partnering with a U.S. company (Bridger Pipeline) on a proposal to build a pipeline from Alberta to Wyoming called the Prairie Connector. A decision from South Bow about whether to proceed is slated for mid-2027.
3) Prices are up - As I write this, the price of a barrel of West Texas Intermediate crude oil was sitting at just under US$100, with the escalation of conflict in the Middle East acting as the main driver of the elevated price. This cuts both ways for Canada and Alberta. The increase will hurt as it flows through to gasoline prices and overall inflation. As a major exporter of oil, the higher prices means more nominal income for producers and more tax and royalty revenue for governments.
When Israel and the U.S. attacked Iran at the end of February, the fear was that oil prices were going to rise above US$100 and stay there as long as the conflict continued. The drawdown of strategic reserves, some oil still getting out of the Persian Gulf, and reduced demand from China are three key reasons why this didn’t happen, but the longer the conflict lasts, the greater the risk that higher prices will get stickier. If that happens, inflation will get worse and central banks will be under pressure to raise borrowing costs.
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4) The return of Venezuela? - The idea that production from Venezuela’s vast oil reserves would return to levels seen before it collapsed a decade ago resurfaced in the wake of the capture of Nicolás Maduro by the U.S. in early January. Reality soon set in regarding the sorry state of Venezuela’s oil industry and the risk associated with investing in its revival. Could Venezuelan oil become a major competitor to Canadian oil in the U.S. market? Potentially, but it would take years for this to happen.
Then, at the end of August, President Trump posted on social media that he had made "THE BIGGEST OIL DEAL IN WORLD HISTORY" in Venezuela. This has, once again, raised the possibility that Canada will soon be having to deal with competition from large amounts of Venezuelan oil flowing into the U.S. So far, however, details of the agreement reached between the U.S. and Venezuela have not been released and the same challenges remain in place.
With that said, the idea is clearly not going away and Canada needs to be proactive in terms of preparing for a day when Venezuela is truly back in the game.
5) Tariff exempt - As discussed above, the trade war with the U.S. has heated up. This has led to renewed calls by some to use U.S. reliance on Canadian energy as leverage. Whether or not this is a good or bad tactical move, it highlights one of the most important aspects of the trade war so far: Canadian energy has not been a major target of the Trump administration. As Alberta’s and Canada’s largest export category, energy is something we will want to keep that way.
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Next week - Inflation in August
On Monday, Statistics Canada will release the inflation numbers for August). As of July, the national inflation rate was running at 3%, or right at the top of the Bank of Canada’s target range of 1-3%. The goal, of course, is for the rate to average 2%, so another reading at the upper end of the range will add to the case for an interest rate hike by the Bank of Canada to keep price growth from rising even higher.
Our expectation is that the inflation rate will come in around 3%. Perhaps the bigger question from a monetary policy standpoint is whether or not core inflation will creep up. This is key because the Bank has indicated that it is watching to see higher energy prices spread to other components of inflation and cause the core numbers to rise.
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Interesting Fact: Designated Industrial Zones in Alberta
Alberta is currently the only province in Canada that utilizes a Designated Industrial Zone (DIZ) regulatory model. DIZs are specific geographic areas targeted by governments for strategic investment, development of clustered industrial activity and economic diversification. DIZs feature consistent rules and standard environmental conditions across facilities in the zone to speed up approvals. Alberta’s Industrial Heartland, northeast of Edmonton, was the first DIZ in Alberta. As of last month, the Greenview Industrial Gateway (GIG) near Grande Prairie has become the second site in Alberta to earn the DIZ status.
Chart of the Week: Honey exports
We’ve highlighted how the macroeconomic impact of U.S. tariffs and Canadian counter-tariffs are expected to have a negative, but not catastrophic, impact on Canada’s and Alberta’s GDP growth (assuming the trade war does not get even worse). We’ve also stressed that the micro effects are potentially devastating to the businesses that are dealing with the specific tariffs.
Alberta’s honey producers fall into this category. Out of total international exports of $11.6 million last year, $5.3 million (46%) went to U.S. customers. These numbers are a small slice of Alberta’s $178.6 billion-international export pie, but they are very important to honey producers who now face a 50% U.S. tariff. They can try to sell more to Japan and other non-U.S. buyers, but that may not be easy. The same goes for selling more here in Canada.
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Answer to the previous trivia question: Sturgeon County is named after the Sturgeon River, which flows directly through the municipality.
Today’s trivia question: Who is currently serving as Secretary of the Treasury of the United States?