The Biggest Loser: How America's Oil Deal with Venezuela Could Crash Canada's Economy
After the U.S. military operation that led to the detention of Venezuelan president Nicolás Maduro, the United States articulated plans to expand Venezuelan oil production (Jacobs). US president Donald Trump intends to use Venezuela’s vast crude oil reserves to establish control of the western hemisphere’s oil, and to undermine control of Venezuelan oil from China, which was previously the primary consumer of Venezuelan oil (Ambrose). Because Venezuelan oil is 8 to 9 US dollars cheaper per barrel than Canada’s (Calgary Herald), the operation in Venezuela will be a win for America, lowering prices for consumers and businesses, increasing profits for oil companies, and strengthening of US national security. But what will this mean for Canada’s economy? Before Trump’s plans with Venezuela, the US was receiving roughly 62 percent of their crude oil supply from Canada (Canada Energy Regulator (1)). In the past 2 decades, Canada’s economic dependence on the US has grown drastically (Canada’s Energy Regulator (2)). Approximately 97 percent of Canadian crude oil exports go to the US annually (Canada Energy Regulator (2)). When the US makes a deal with Venezuela and replaces Canadian oil imports, what will happen to the Canadian economy, and what can they do to compensate for the loss?
In 2024, Canadian oil production directly accounted for approximately 6 percent of Canada’s nominal GDP (Canada Centre for Energy Information 7), 81 percent of which is exported (Canada Energy Regulator 2). Downstream activities associated with the energy sector, including refining and engineering services, contributed an additional 1.7 percent of the GDP, 75 percent of which is related to oil production (Canadian Centre for Energy Information, 7). Taken together, the oil sector accounted for roughly 6.2 percent of Canada’s total GDP. Given that the vast majority of Canadian oil exports are destined for the United States, this implies that approximately 6.2 percent of Canada’s GDP is dependent on U.S. demand for Canadian oil. Beyond output, the energy production sector employs approximately 745,000 workers in Canada (Canadian Centre for Energy Information, 10).
To contextualize the potential economic impact, Canada’s GDP contracted by 2.9% during the 2009 global recession (Macrotrends). A disruption in GDP of this size would cause an economic shock more than two times larger than the GDP contraction experienced in 2009. Thus, if the US completely pulls its investments in Canadian oil, what exactly would a loss of this size do to Canada? A 6.2 percent drop in annual GDP would automatically cast Canada into a recession, characterized by increased unemployment, reduced business investment, and increased reliance on household savings, thereby reducing household spending. Government revenue would shrink due to lower tax collections, and consequently the percentage of the government budget spent on social welfare would increase. By analyzing trends of past recessions, the Bank of Canada would likely be forced to cut interest rates to provide accommodative support for the population, even in the presence of ongoing inflationary pressures (International Monetary Fund).
Faced with these risks of continued reliance of the US, Canada’s remaining paths for diversification in trading partners are limited, and expanded trade with China is emerging as one of the few viable alternatives. However, a realignment towards trade with China comes with several potential retaliatory costs for Canada. By taking over the majority of oil exports from Venezuela, the US was determined to decrease China’s access to discounted oil reserves. For Canada, this dynamic emphasizes the risks of attempting to redirect their oil exports to China. By doing so, Canada could provoke the US into a retaliatory trade war. Increased oil trade with China may prompt Trump to implement higher tariffs on other Canadian export sectors that are dependent on the US, like vehicles, machinery, and agricultural products. Because of Canada’s vast dependence on the US, the short-term effects of more tariffs could put approximately 500,000 more Canadian jobs at risk (Ivey Business School). A deal between Canada and China would likely result in China dropping its tariffs on Canadian canola exports in exchange for a slash in Canada’s 100% duties on Chinese manufactured electric vehicles (EV’s) (Eurasia Group). China would also likely agree to build EV assembly plants in Ontario and launch massive investment in port expansion along Canada’s west coast (Osler Hampson). By strengthening their alliance with China through more trade, Canada would be putting a further strain on the relationship with the US, which is a far too important relationship for the Canadian economy. Decreasing the 100% duties on Chinese EV’s would, in Trump’s view, break the CUSMA (Canada- US- Mexico Agreement), which is a free trade agreement between the three neighboring countries (Crawly). Currently, over 40 percent of Canada’s exports to the US enter duty-free due to the CUSMA (Global Affairs Canada). If the CUSMA trade agreement were dissolved, there would be additional negative pressures to the Canadian economy, primarily to the automotive industry (Global Affairs Canada).
Ultimately the US’s newfound engagement with Venezuela’s oil sector emphasizes the fragility of Canada’s current economic position. This deal exposes the extent to which Canada’s growth, employment, and fiscal stability depend on the US. Canada’s concentration in oil exports to a single market has turned from a reliable trade relationship into a structural vulnerability, leaving Canada with few options to choose from. Diversifying energy exports to China may mitigate immediate losses, but doing so risks provoking US retaliation that could extend far beyond the energy sector. As global energy markets become more politicized, Canada’s heavy reliance on a single dominant trading partner increases the possibility that, in a reshuffling of global oil alliances, Canada may emerge with significant economic loss.
Citations
Ambrose, Jillian, “Trump plans to use Venezuela’s huge crude reserves to cut US oil price ‘to $50 a barrel’” The Guardian, January 8, 2026, https://www.theguardian.com/business/2026/jan/08/trump-plans-use-venezuela-huge-oil-reserves-to-cut-us-consumer-price-to-50-a-barrel
Calgary Herald “Trump’s Venezuela Oil Grab Is Pushing Chinese Refiners to Canada.” Calgary Herald, 8 Jan. 2026, calgaryherald.com/business/trumps-venezuela-oil-grab-is-pushing-chinese-refiners-to-canada.
Canadian Centre for Energy Information. Energy Fact Book, 2025-2026. Government of Canada, November 12, 2025, https://energy-information.canada.ca/sites/default/files/2025-11/energy-fact-book-2025-2026.pdf
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Crawly, Mike. “U.S. businesses love CUSMA. Why is Donald Trump threatening to pull out?” CBC News, December 6 2025, https://www.cbc.ca/news/world/trump-tariffs-canada-us-mexico-agreement-cusma-usmca-trade-9.7004814
Eurasia Group. “Top Risks 2026: Implications for Canada.” Eurasia Group, https://www.eurasiagroup.net/issues/Top-Risks-2026-Implications-for-Canada#:~:text=Top%20Risk%20%237%20(China's%20deflation,fuel%20export%20and%20consumption%20model
Global Affairs Canada. “The Canada-United States-Mexico Agreement: Economic Impact Assessment.” Global Affairs Canada, February 2020, international.canada.ca/en/global-affairs/corporate/reports/chief-economist/impacts/2020-02-cusma-economic-impact.
International Monetary Fund. “Canada: Staff Concluding Statement of the 2025 Article IV Mission.” International Monetary Fund, December 5, 2025, https://www.imf.org/en/news/articles/2025/12/05/cs-canada-staff-concluding-statement-of-the-2025-article-iv-mission?utm_
Ivey Business School. “Ask the Experts: Trumps 25% Tariff Plan.” Ivey Business School, November 5 2024, https://www.ivey.uwo.ca/impact/read/2024/11/ask-the-experts-trumps-25-tariff-plan/#:~:text=What%20are%20the%20economic%20implications,significantly%20exceeding%202.4%20per%20cent
Jacobs, Jennifer, et al. “Trump says U.S. is "in charge" of Venezuela, Maduro jailed in New York after U.S. military operation” CBS News, January 5, 2026 https://www.cbsnews.com/live-updates/venezuela-us-military-strikes-maduro-trump/?
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Osler Hampson, Fen. “Canada’s China Policy Will Be Decided in Washington.” Maclean’s, January 7 2025, https://macleans.ca/the-year-ahead/canadas-china-policy-will-be-decided-in-washington/