The Energy Pipeline

Somewhere beneath the wheatfields of Saskatchewan, the prairies of North Dakota, and the forests of Minnesota, a network of steel pipes carries the lifeblood of the U.S.-Canada trade relationship. Four million barrels of Canadian crude oil flow south every day — enough to fill 250 Olympic swimming pools — through a pipeline system that took decades to build and has become politically impossible to expand. The Keystone Pipeline, operated by TC Energy, carries 590,000 barrels per day from Hardisty, Alberta, to refineries in Patoka, Illinois, and Cushing, Oklahoma. The Enbridge Mainline — the largest crude oil pipeline system in the world — pushes 3 million barrels per day through a network of parallel lines running from Edmonton to Superior, Wisconsin, and onward to Chicago, Detroit, and Sarnia, Ontario.

These pipelines are the reason Canada’s trade deficit with the U.S. swings by $100 billion with the price of oil. In the BEA data, the story shows up in one category: industrial supplies and materials (ISM), which includes crude oil, refined petroleum, natural gas, metals, chemicals, and lumber. In 2024, Canada shipped $220 billion in industrial supplies to the United States — 56% of everything it exported. The U.S. sent $101 billion in ISM back to Canada. The resulting $119 billion deficit is the single largest category imbalance in the entire NAFTA system, bigger than Mexico’s auto deficit, bigger than the food gap, bigger than anything else in the BEA dataset.

But here’s what makes the energy relationship unique: the deficit is almost entirely a function of price, not volume. Canada has been sending roughly 4 million barrels per day to the U.S. since 2015. The volume barely changes. What changes is the price per barrel. When Brent crude hit $147 in July 2008, the ISM deficit reached $117 billion. When oil crashed to $27 per barrel in early 2016, the deficit shrank to $50 billion. When Russia invaded Ukraine in February 2022 and oil spiked to $130, the deficit ballooned to $151 billion — its all-time peak. The same barrels, through the same pipelines, to the same refineries. Only the dollar signs changed.

This price sensitivity creates a trade relationship unlike any other in American commerce. With Mexico, the deficit grows because the volume of goods keeps increasing — more cars, more food, more consumer goods flowing north year after year. With Canada, the deficit can double or halve in two years without a single additional product crossing the border. It’s an oil trade dressed up as a trade deficit, and it makes most political commentary about the U.S.-Canada balance economically illiterate.

Subtract industrial supplies from the U.S.-Canada trade ledger and something remarkable emerges: the United States runs a surplus. In 2024, the total goods deficit with Canada was $69 billion. The ISM deficit was $119 billion. Simple arithmetic: the non-ISM balance was a +$50 billion surplus. America sells more cars, food, capital goods, and consumer products to Canada than it receives in return. The “trade deficit with Canada” that politicians rail against is entirely an energy phenomenon.

This has been true for most of the last two decades. In 2008, the total goods deficit was $80 billion, but the ISM deficit was $117 billion — meaning the non-ISM surplus was $37 billion. In 2016, when oil prices collapsed, the total goods deficit shrank to just $16 billion (ISM deficit $50 billion, non-ISM surplus $34 billion). Even in the commodity-price-inflated year of 2022, when the total goods deficit hit $87 billion, the non-ISM surplus held firm at $64 billion. The pattern never breaks: America imports Canadian energy, and in everything else, America is the dominant exporter.

Why does this matter? Because it means the U.S.-Canada trade relationship is fundamentally different from the U.S.-Mexico or U.S.-China relationships. With Mexico, the deficit reflects a structural manufacturing shift — cars and consumer goods that used to be made in America are now made in Mexico, and no amount of price fluctuation changes that. With China, the deficit reflects a consumer goods tidal wave — electronics, clothing, furniture, toys. With Canada, the deficit is buying energy from a friendly neighbor with the world’s third-largest oil reserves. It’s not a sign of competitive weakness. It’s a strategic choice.

If the energy trade is the heart of U.S.-Canada commerce, the pipelines are its arteries — and for a decade, those arteries have been the most politically contested infrastructure in North America. The saga of Keystone XL is the most famous. Proposed in 2008, the pipeline would have carried 830,000 barrels per day of Alberta oil sands crude to refineries in Nebraska and onward to the Gulf Coast. It was approved by the Canadian government, approved by the Nebraska Public Service Commission, rejected by President Obama in 2015, approved by President Trump in 2017 via executive order, blocked by a federal judge in 2018, and finally killed by President Biden on his first day in office in January 2021. Thirteen years, three presidents, dozens of lawsuits, and billions of dollars in sunk costs — for a pipeline that was never built.

The environmental objections were real. Alberta’s oil sands — the world’s third-largest proven oil reserves after Venezuela and Saudi Arabia — produce some of the most carbon-intensive crude on the planet. Extracting bitumen from sand requires enormous energy inputs: heating, diluting, and processing heavy crude that is more like tar than the light, sweet crude that flows from Permian Basin wells. Climate activists argued that enabling more oil sands production would lock in decades of carbon emissions. Indigenous groups along the proposed route opposed the pipeline on treaty and environmental grounds. The political symbolism outgrew the economic significance: Keystone XL became the stand-in for every argument about fossil fuels versus climate action.

The infrastructure that does exist is equally contested. Enbridge’s Line 5, a 645-mile pipeline built in 1953, carries 540,000 barrels per day of light crude oil and natural gas liquids from Superior, Wisconsin, to Sarnia, Ontario. The pipeline runs along the bed of the Strait of Mackinac, the narrow waterway connecting Lake Michigan and Lake Huron. Michigan’s governor issued an order in 2020 to shut it down, arguing that a rupture beneath the straits would be an ecological catastrophe. Enbridge refused. Canada invoked a 1977 transit pipelines treaty. The dispute went to federal court. As of 2026, the pipeline still operates, but a $500 million tunnel project is underway to encase the underwater section in concrete — a compromise born of the realization that neither shutting down 540,000 barrels per day nor risking a Great Lakes oil spill is acceptable.

Canada responded to the pipeline paralysis by looking west. The Trans Mountain Pipeline expansion, completed in 2024 after years of delays and cost overruns (C$34 billion, up from an original estimate of C$7 billion), tripled the pipeline’s capacity to 890,000 barrels per day from Edmonton to a marine terminal in Burnaby, British Columbia. For the first time, Canada can now export significant volumes of crude to Asian markets — China, India, South Korea, Japan — rather than relying solely on the U.S. as a buyer. The geopolitical implications are profound: if Canada can sell its oil to Asia, the leverage that comes with being America’s sole customer diminishes. The pipeline politics of the last decade may have inadvertently weakened America’s negotiating position with its most important energy supplier.

While Canada sends energy south, Mexico’s industrial supplies trade with the U.S. runs in the opposite direction. In 2024, the United States exported $120 billion in industrial supplies to Mexico and imported only $52 billion — a +$68 billion surplus. This is the mirror image of the Canada relationship and the largest category surplus the U.S. runs with any NAFTA partner.

What goes south is a catalog of American industrial strength. Refined petroleum products (gasoline, diesel, jet fuel), plastics and resins, industrial chemicals, steel, copper, aluminum, and synthetic materials. Mexico has oil — it’s the world’s 12th-largest producer — but its refineries are old and underinvested, processing only a fraction of the crude that state-owned Pemex extracts. The result is a paradox: Mexico exports crude oil and imports refined fuel. America’s Gulf Coast refineries, the most efficient in the world, buy Mexican heavy crude, crack it into gasoline and diesel, and sell the products back to Mexico at a markup.

The ISM surplus with Mexico grew from $9 billion in 1999 to $68 billion in 2024 — a sevenfold increase that receives almost no political attention. Nobody holds rallies about America’s $68 billion industrial supplies surplus with Mexico. Nobody campaigns on the fact that U.S. chemical and refining exports to Mexico have nearly quintupled. The surplus is invisible precisely because it doesn’t fit the narrative of American manufacturing decline. But it’s there in the data, a quiet reminder that the NAFTA trade relationship is more balanced than headlines suggest — once you look beyond the auto deficit that dominates the conversation.

To understand how completely energy dominates the U.S.-Canada trade, look at what Canada shipped to the United States in 2024. Of the roughly $393 billion in goods imports from Canada, $220 billion — 56% — was industrial supplies and materials. The majority of that $220 billion was crude oil, natural gas, and refined petroleum products, with smaller but significant amounts of lumber, aluminum, potash, nickel, and uranium. The remaining 44% was spread across autos ($57 billion), capital goods ($54 billion), food ($41 billion), and consumer goods ($21 billion).

No other major trading partner has this kind of concentration. Mexico’s exports to the U.S. are diversified across autos (38%), consumer goods, food, and capital goods. China’s are spread across electronics, consumer goods, and industrial inputs. Even Saudi Arabia, America’s other major oil supplier, has a more diversified trade relationship (petrochemicals, fertilizers). Canada’s single-commodity dependence means that the bilateral trade balance is essentially a thermometer for global oil markets. Want to know where crude prices are heading? Watch the U.S.-Canada goods deficit.

The corollary is equally important: in every non-energy category, the United States is the dominant partner. In 2024, the U.S. exported $66 billion in auto goods to Canada while importing $57 billion — a $9 billion surplus (as we detailed in Episode 2). In food, the gap is modest ($32 billion exports vs. $41 billion imports). In capital goods, the U.S. exports more than it imports. In consumer goods, the U.S. exports more than it imports. Add these surpluses together and they total $50 billion — but they’re completely overwhelmed by the $119 billion ISM deficit that is, at its core, paying Canada for the oil that keeps America’s cars, trucks, refineries, and petrochemical plants running.

The great unknown hanging over the U.S.-Canada trade relationship is the energy transition. If the world moves away from petroleum — electric vehicles replacing internal combustion engines, heat pumps replacing gas furnaces, renewable electricity replacing natural gas generation — then the $119 billion ISM deficit will shrink not because of trade policy, but because of physics. Fewer barrels consumed means fewer barrels imported means a smaller trade deficit. By some estimates, if EV adoption reaches 50% of new car sales by 2035, U.S. gasoline consumption could fall 25%, reducing crude oil demand by 2–3 million barrels per day. That alone would cut the ISM deficit with Canada by $30–50 billion.

But the energy transition creates new trade flows too. Canada has the world’s largest reserves of potash (essential for fertilizers), cobalt, nickel, lithium, and uranium — minerals that the clean energy economy devours. Electric vehicle batteries need nickel and lithium. Nuclear power needs uranium. Wind turbines need rare earths. Canada is already the largest supplier of uranium to U.S. nuclear plants. If America’s energy future is nuclear and electric rather than petroleum, the trade might shift from oil to minerals — but it would still flow through the same border crossings, still be dominated by industrial supplies, and still depend on the same fundamental geography: Canada has the resources, America has the demand.

For now, though, oil is king. The four million barrels flowing south every day represent the most consequential trade flow in North America — larger in dollar terms than the auto trade, more stable than the food trade, more strategically important than anything else in the $1.86 trillion NAFTA corridor. The pipeline is the partnership.