Canada’s Energy Future Lies in Deeper North American Integration

Economic Note showing the need to strengthen Canada’s successful energy relationship with the United States rather than allowing it to deteriorate

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This Economic Note was prepared by Taylor MacPherson, Associate Researcher at the MEI, in collaboration with Gabriel Giguère, Senior Policy Analyst at the MEI. The MEI’s Energy Series aims to examine the economic impact of the development of various energy sources and to challenge the myths and unrealistic proposals related to this important field of activity.

Compressors hum, pipes hold pressure, and grids and pipelines run from desert to tundra. This system—North America’s energy advantage—is a strategic asset a century in the making, built on joining deep reserves to dense networks: Alberta crude, Appalachian gas, Gulf Coast cokers, and Quebec hydro power. Within it, Canada’s energy relationship with the U.S. has been successful: heavy oil southbound, electricity flowing both ways, and investment flowing where infrastructure allows.(1)

But in recent years, Ottawa appears set on frittering away this inheritance. Layers of regulatory delay, export restrictions, and increasingly prescriptive climate policy threaten to gum up the machinery that makes continental integration work. With energy policy today being so highly contested, North America needs a deliberate energy platform to strengthen this asset, rather than allowing it to deteriorate.

An Already-Integrated North American Energy Market

To appreciate what is at stake, consider the sheer scale of today’s cross-border energy flows. In 2024, Canadian exports of hydrocarbons (crude oil, natural gas, natural gas liquids, and refined petroleum products) to the U.S. totaled C$169.8 billion, accounting for a staggering 22% of all Canadian goods exports. Coming the other way, Canada imported C$33.4 billion in U.S. hydrocarbons (a lower but still significant 4% of goods imports).(2)

Crude oil dominates this trade, and mostly in one direction. In 2024, Canada exported C$140.8 billion of crude to the U.S., which makes up nearly all of our oil exports (see Table 1). In turn, we imported C$14.2 billion worth of mostly lighter crude from the U.S.(3) This heavy-for-light swap reflects smart market matching: Canada’s oil sands produce heavy crude ideal for America’s complex refineries, while U.S. shale fields produce light oil that eastern Canadian refineries can use.(4)

Some C$8.3 billion worth of Canadian natural gas flowed south in 2024, while roughly C$2 billion came north from U.S. fields.(5) These gas flows help regulate seasonal needs: for instance, U.S. gas backs up Ontario in winter, and Canadian gas feeds California power plants in summer. Beyond oil and gas, natural gas liquids, refined products, and electricity accounted for a total two-way trade value of C$42.3 billion, bringing overall two-way energy trade above C$200 billion annually.(6) To put that in perspective, that’s larger than Canada’s entire two-way merchandise trade with China in 2024 (C$118.7 billion),(7) and equal to about 13% of all Canadian merchandise trade worldwide (C$1.56 trillion).(8)

The upshot is a continental energy ballet: pipelines and power lines criss-cross the 49th parallel, moving molecules and megawatts to their highest-value use across this sprawling network of infrastructure.(9) In many ways, the border is an afterthought for this integrated North American energy machine, which has kept churning for a century, regardless of political winds.

Our deep continental integration allows each country to play to its relative strengths—its comparative advantages. Canada has thus specialized to become the world’s fourth-largest oil producer, its fifth-largest natural gas producer, and its third-largest hydroelectric generator.(10)

Such specialization has paid enormous dividends. Energy is Canada’s productivity engine, accounting for 10.3% of GDP in 2023 and employing 697,000 Canadians (about 3.4% of all jobs).(11) With the sector’s share of output nearly triple its share of employment, energy sector jobs are among the best paid in the country, as can be seen in Figure 1.

The public ledger tells the same story. Through royalties, corporate taxes, and property taxes, energy mints fiscal capacity, with tens of billions of dollars collected in 2024-2025, including close to C$22 billion by Alberta alone.(12) When continental trade is open, the dividends show up in schools, hospitals, and infrastructure.

Continental energy arteries also provide insurance against volatility. When global energy markets are thrown into chaos, with countries suddenly needing emergency gas shipments or bidding for oil tankers at the last minute, Canada need not scramble. In our near-frictionless North American market, we trade energy through stable pipelines and shared power grids, not on unpredictable global spot markets. And because this trade has until now been protected by strong rules under the Canada-United States-Mexico Agreement (CUSMA), the chances of being suddenly cut off or priced out are low.

Energy is Canada’s productivity engine, accounting for 10.3% of GDP in 2023 and employing 697,000 Canadians.

For example, in early 2023, when winter demand spiked across Ontario, surging U.S. natural gas exports flowed north to keep homes heated and industry running,(13) with no need for bidding wars, just cross-border energy flowing as designed. That same year, during extreme summer heat in the U.S. Northeast, Canadian hydroelectric power was exported southward to stabilize grids stretched by high air-conditioning demand.(14)

Policy and Regulatory Challenges

While North American energy integration is a source of shared prosperity, Canada has in recent years imposed delays and restrictive rules—if not outright prohibitions—that have undermined the development of its energy sector.

For one thing, Ottawa’s 2019 Impact Assessment Act (IAA) has widened the scope of project reviews—incorporating elements like “social” and “gender” impacts and downstream emissions.(15) This stretches timelines seemingly indefinitely, in addition to duplicating provincial processes and opening the door for more litigation.(16)

Predictably, pipelines and LNG proposals have slowed,(17) keeping export capacity capped, widening price differentials, and forgoing revenue for producers and governments.(18) Some projects have been cancelled outright. In 2023, the Supreme Court found that large parts of the IAA were outside federal jurisdiction, deepening uncertainty, even though Parliament did amend the statute last year.(19)

Another, emerging threat has been the federal government’s proposed oil and gas emissions cap—widely seen as a de facto production cap.(20) In a hopeful turn, the recent 2025 budget signals a pivot, stating that strengthened industrial carbon pricing, tougher methane regulations, and scaled carbon capture, utilization, and storage “would create the circumstances whereby the oil and gas emissions cap would no longer be required.”(21)

Canada has in recent years imposed delays and restrictive rules that have undermined the development of its energy sector.

In short, Ottawa appears to be trading a blunt cap for sharper tools. The cap would impose a sector-wide cut to approximately 35% below 2019 emissions levels by 2030, faster than technology could credibly deliver, meaning that our energy sector would be forced to lower output, not just emissions.(22)

With the cap seemingly sidelined, the near-term risk of cap-driven cuts to Canadian supply—and the attendant tighter North American balances and sharper price spikes in stress periods—has declined. The emphasis now is to reduce emissions per barrel, not output, which is less damaging to jobs, royalties, and reinvestment in Canada. The risk of carbon leakage (Canadian barrels displaced by higher-emitting supply elsewhere) is also reduced.

Meanwhile, Canada’s 2019 Oil Tanker Moratorium Act bans tankers carrying more than 12,500 metric tonnes of crude or “persistent” oil from calling at ports along B.C.’s north coast, from the Alaska border to the northern tip of Vancouver Island.(23) While wanting to protect a sensitive coastline is understandable, the effect is to foreclose any major export terminal at Prince Rupert, Kitimat, or nearby ports. By removing the most direct Pacific outlet for Alberta barrels, the moratorium entrenches dependence on a single corridor (Trans Mountain to Vancouver) plus a small trickle to the U.S. West Coast.

Fewer routes mean more frequent bottlenecks, wider price discounts when pipelines are tight or disrupted, and enduring monopsony power for U.S. refiners.(24) Furthermore, it is difficult to sell LNG ambition abroad with the uncertainty caused by strict, blanket measures like banning tankers in Kitimat.

Deeper Integration Plus Diversification

Deeper continental integration is Canada’s best path forward. In terms of the difficulty getting major projects approved under the IAA, the practical remedies are simple: one project, one integrated review; firm deadlines for decisions; and clear, non-overlapping responsibilities.(25)

With regard to the oil and gas emissions cap, it thankfully seems to be off the table. Ottawa must follow through on this and focus on reducing emissions per barrel, not number of barrels produced, thereby keeping Canadian supply in the market while emissions fall.

As for protecting sensitive coastline, a more sensible approach is not hard to define. The government could simply require the use of appropriate safety measures (escorts, double-hulls, routing restrictions) rather than imposing an outright ban. Prudence demands diversification in addition to deeper integration, even if the threat of U.S. protectionism recedes.

Other routes to diversification include opening more oil routes to tidewater beyond Trans Mountain. An eastbound link to the St. Lawrence or the Atlantic would reconnect Western Canadian barrels to European refineries, reduce single-corridor risk, and sharpen price competition for our crude.(26)

Deeper continental integration is Canada’s best path forward.

Building LNG capacity on both coasts is also worthwhile. Upcoming West Coast projects like phase two of LNG Canada should be matched with the pipelines needed to feed them; on the East Coast, import-to-export LNG conversions to serve Europe can be justified given firm feed-gas and new Northeast pipeline capacity.(27)

Finally, we need to upgrade our energy diplomacy, turning interest into firm 10- to 20-year contracts with European and Asian partners, and avoid ad hoc energy export restrictions as CUSMA is reviewed in the coming months.

North American energy integration is a marvel of pipelines and power lines. If Canada wants to remain an energy leader and build a path to “energy superpower,”(28) as Prime Minister Carney pledged, the steps are laid out in front of us. We need to make sure value can move, and if it doesn’t want to move south, carry a sensible insurance policy with diversification. As North America’s share of global oil and gas trade grows,(29) every extra barrel or cubic foot we move strengthens our allies, thins our adversaries’ leverage, and maximizes value for the benefit of all Canadians.